If the market is headed higher then we can expect volatility to fade in Q4. Typically the market rallies in the last half of October and into Thanksgiving. The market could be headed for new highs over that period and the volatility ETF should shrink significantly.
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VXX - VIX Futures ETF - Company Profile
The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.
This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.
The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.
I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.
Buy Dec $33 Put, currently $3.90. No stop loss.