When the VIX complex is in contango (futures prices are higher than spot prices), holding VXX is a loser.
This is the current VIX curve:
It is in a HUGE contango, with March trading 3.25 points above the VIX index.
What’s more, April futures are a monster 6.15 premium to the VIX index.
(A quick note for your visual learners: The above chart is a classic example of an especially large contango. … A contango unchained, if you will.)
Last Thursday, Feb. 11, the VIX index closed 21.25. Yesterday, it closed 22.49.
So VIX is up on the week …
Let’s take a look at the VIX over the VXX. How did the VXX fair in a rising environment:
What do we see above?
VIX is up … and in the last five days VXX has dropped over 1.00!
If you want to buy VXX because you think the VIX is going to go up, that’s fine.
BUT … wait for the VIX to start moving higher, instead of buying calls a week or two out in anticipation.
It is entirely possible that you can be right and the VIX runs higher — and you still lose money on your VXX puts. (The charts above illustrate such a scenario.)
Now, when we have a crazy contango (contango unchained!), as we do now, VXX puts are going to pay.
At noon on Wednesday, we bought VXX puts and hedged them with a small amount of call spreads …
The trade was up nicely by close — and continued to climb on Thursday.
That’s why we’ll be putting on ANOTHER contango trade at noon tomorrow in our Volatility Edge trading service
Now here’s a little something different, just because it takes two to, ahem, contango …
I will give you this trade for free!
All you have to do is pick up the phone starting at 12:30 p.m. today (Friday, Feb. 19) and call Option Pit Head of Customer Care Teddy Trapuzzano who will give you all the details — for free!
The Option Pit VIX Light Is Red, and we like short volatility plays.
Your Only Option,