However, with FOMC next week, I thought I would at least consider taking a VXX short position that takes advantage of any spike in that occurs, since this is basically a one-off event. I mean when is the next time we're likely to see the Fed raising interest rates after six years of , TARP, and ZIRP? Well, hopefully never, but quite possibly not again for a couple of decades, at least.
So, let's get to it. I actually looked at a wide variety of setups that take into account the fact that I am not going to be hovering over my keyboard in the days and hours leading up to FOMC and the days and hours thereafter waiting to pull the trigger on a VXX short when I "think" it has peaked ... . This "peak" can be incredibly fleeting, not to mention that my luck with "calling tops" is about the same as that of everyone else -- pretty darn poor.
In any event, I want to attempt to take advantage of a VXX spike (1) without knowing in particular how high it will potentially go; (2) knowing that will inevitably contract at some point in the future to a point below 20; and (3) all while defining my maximum risk.
Here's the setup to do just that -- a long put vertical. As an example: Jan 15 VXX 19/21 Long Put Vertical (The 19 is the short; the 21 the long).
Currently, the mid price for this setup is a .79 debit, and that is with the price of the underlying at 23.32, but I do not want a fill at this price. When and if price spikes, the cost to fill this particular spread will decrease and the spread will become cheaper to put on. The kind of "cheap" I am looking for is something in the vicinity of .07-.13 for the spread, but for simplicity's sake, I am going to put on a GTC order for the spread to be filled if VXX spikes, resulting in the spread's costing .10 to fill. If I do get a fill for .10, the break-even price of the setup becomes 20.90 (the price of the long strike minus the .10 debit) with a maximum profit potential of $190.00 (i.e., risking $10 to make $190).
You can also naturally consider more accommodative setups that have a higher break even by moving the strikes up or use more than just one setup at different expiries that take advantage of a potential spike that is more and more profound (e.g., a Jan 15th 19/21 long put vertical for a .10 fill, a Jan 22nd 21/23 long put vertical for a .10 fill, a Jan 29th 23/25 long put vertical for a .10 fill, etc.). If you do multiple setups at different expiries, keep in mind the possibility that you may want to roll one or more of those setups if doesn't contract in fairly short order (2-4 weeks), so you naturally don't want to go hog wild either with respect to the number of setups or the size of the number of contracts used in those setups ... .