NaughtyPines
Long

TRADE IDEA: VXX SYNTHETIC/POOR MAN'S COVERED CALL

AMEX:VXX   IPATH S&P 500 VIX SHORT-TERM FUTURES ETN
9 months ago
Synthetic covered calls using options are a good way to utilize capital efficiently as compared to buying the underlying outright and initiating, for example, a covered call. Were you to buy 100 shares of VXX             at $14, it would cost $1400, with the current value of the short call reducing that cost basis by about $160, so it would cost around $1240 to put on, as compared to the $585 or so per contract to initiate this position. Moreover, you'd naturally have to wait until VXX             struck $14 to get in at $14/share, so a synthetic gives you the added advantage of your being able to kind of "pick your price" and/or cost basis for the underlying, even though it's just a "synthetic" price.

Here, the September 16th 14 long call stands in for the stock (since it's mostly made up of intrinsic value), against which I sell calls to reduce my cost basis in the long option over time, the goal being to take off the entire setup in profit when the total credits collected for the short call (and any rolls) + the current price of the long option exceeds what I paid for the original setup.

Here are the metrics:

Sep 16th Long Call/April 15th 21 Short Call
Probability of Profit: Unknown            
Max Profit: Unknown            
Buying Power Effect: $585/contract (debit)

Unfortunately, the probability of profit and the max profit are unknown             for this setup from the get go, since exactly how much credit you can collect for the rolling of the 21 short call in the months after setup is unknown             and will vary over time. It is also possible that, depending on the price movement in the underlying.

I would also note that VXX             , by nature, generally suffers from contango, so its price will naturally decline over time in the absence of backwardation. Consequently, it's entirely possible that price could break 14 at some point going forward. Naturally, that's okay as long as the amount of credit you receive for the rolls of the short call exceeds what you paid for the long call (currently, $745) and, of course, I'm assuming that price in VXX             will be somewhat above 14 for the duration of the trade.
8 months ago
Comment: Chased price a touch; filled for a 5.93 debit ($593). Immediately rolled the April 15 short call out to the May 20th for an additional .77 ($77) credit.
codypd
9 months ago
a most excellent post. volatility nerds always need more advice on options strategy from people who've done it.
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NaughtyPines codypd
9 months ago
Thanks. As a premium seller, I'm kind of scrambling around a bit looking for things to keep buying power engaged and am not big on low vol strategies like calendars. Seems like some kind of long vol setup is the way to go here (even though VIX might trundle a bit lower going forward).
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