Firing Line: Bullish Options Trade on Volatility
NEW YORK (Top Gun Options) --
Strategic Mindset: In the Top Gun Options Advanced Model Portfolio, we are market-neutral but see possible surges in volatility.
Target: iPath ETN S&P 500 VIX(VXX) trading at $16.49.
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Commit Criteria: The VXX, an exchange-traded note that tracks the VIX volatility index, is very unlikely to drop to less than $14, especially given current chaotic market conditions. VXX implied volatility is overpriced relative to its forecast volatility of 19.03% over the trade period. We are looking for possible price movement but for it to stay at more than $14.00 until the exit of this trade.
Tactic: Opening 50 VXX July 2012 bull put spreads (strikes
Tactical employment of bull put spread:
- Selling to Open 50 VXX Jul 2012 $14.00 Puts
- Buying to Open 50 VXX Jul 2012 $13.00 Puts
- Net Credit: $23.00 per bull put spread for a total of $1,150.00
- Max Gain: $1,150.00
- Max Risk: -$77.00 per bull put spread for a total risk of -$3,850.00
Mid-Course Guidance: We will be watching for a price movement near the short 14 strike. As the short strike is threatened we will adjust the bull put spread as necessary.
Profitability Target: We will wait for this bull put spread to expire worthless and take the $1,150.00 credit as profit. If the VXX surges in the near term, we may choose to close this trade early in the Advanced Model Portfolio, taking a smaller, but faster, profit.
Exit Tactic: We will wait for this bull put spread to expire worthless, adjusting as necessary.
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