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Getting Long Volatility by Selling Puts in VXX?

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We are in a low implied volatility (IV) environment, and the “smart” play would seem to be to short puts in the volatility products such as VXX, the VIX short-term ETF. Does this strategy work?

The first study was conducted in VXX and the time frame was from 2010 to present. On every business day we sold the 16 Delta (1 Standard Deviation) put and compared the strategy when the VIX was at levels below 15. We held all positions through expiration. A table of the results was displayed. The table included the number of occurrences, average P/L and probability of profit (POP). Although all the short puts had a high POP, In almost all situations the short puts didn't make a profit. The same study was run with managing winners at 25% and 50% of max profit. It was still a losing strategy.

So why doesn’t this work? VXX is based on the VIX Futures (/VX). VIX Futures are in Contango 88% of the time which creates a drag. This has created a slow decay in the product. As VXX declines so does its IV. That makes it difficult to sell option premium when the product is at "low" prices.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and an understanding of why shorting puts in the VXX doesn’t work.

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