So with this morning's rout and VXX hitting fresh highs, I decided to square up the remainder of my calls.
As the naked calls purchased early this week expire today, I'm finding it difficult to replace it with more outright calls as IVs have gone way through the roof. Moreover, I see a strong potential for significant mean reversion in VIX futures on any positive news. With that in mind, I will likely purchase the $25/$28 call spread for about $0.75 expiring 5 August to hedge my position on the upside over the next week.
In addition, VXX option premiums have gone crazy, with the 19 August $25 straddles going for about $4.75. This is way too high in my opinion and presents a compelling opportunity. With a breakeven close to $30 on the upside, I'm pretty content as I don't see VXX rocketing another 20% higher, unless of course the US defaults (a downgrade is pretty much priced in by now). Even if such a scenario were to materialize, I don't think think VXX will end up much higher taking into consideration VIX spot and future levels. Now on the downside, $20 does seem to me like a more probable target. However, considering I am short VXX as my core position, I am happy to take this risk. Furthermore, I intend to hedge this position by going short on more spot if a successful agreement is reached, although VXX would probably have gapped quite abit lower by then. Also, IVs are likely to die down as spot VXX moves lower.
Finally, I do still think an agreement will be reached but am now more pessimistic that it'll be completed over the weekend. Perhaps an eleventh hour deal on Monday?
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