FYI - Tried a few combinations on $VXX

For other's interested in futures derived ETNs: here's how VXX works. I haven't personally traded the VXX, but my understanding is that it's value is almost always decaying. So its a fairly safe bet to short the VXX... until it isn't :). The problem (in my opinion) with shorting VXX is that it has a tendency to rise by multiples in almost over night. Here's some analysis on shorting the VXX. Maybe you could integrate some rules as to when is a good time to short (stable to bullish general market conditions) vs when is a good time to sit on the sidelines (market crash/fear issues). You may find correlations with the fear and greed index.

Thanks, I'll take a look, good thought on multiple rules driving the short. The other issue is to be able to execute this strategy in IRA which means, can't short. I've tried short put spreads but need help on optimal strike/expiration picks

Sorry the msg got clipped. Ive also tried short call spreads but again need to play with the strike/exp combinations. If anyone has run into this IRA bottleneck , i'd be happy to hear

VXX is a bit of a crazy instrument since it's constantly rolling the front and back month /VX futures. When the /vx futures are in contango (front month is below the back month) the VXX etn is constantly selling the cheaper front month and buying the more expensive back month. The /vx futures are almost always in contango during bull markets, which is why you see vxx basically drop relentlessly since mid 2009. The /vx front month must converge on the cash VIX at expiration, so as long as VIX is below the /vx, vxx will be a great short. Check out vixcentral.com. The flip side is that when the market freaks out, /vx front month can expand VERY quickly. Even a moderate amount of vol expansion can 2x the VXX (Apr-May 2010). In a real crash scenario, VXX could quickly become a disastrous position if you're short it.

Thanks, I'm intimately familiar with VXX and UVXY. Was just looking for short alternatives in options thats all.

Oh, and you'd want to look at shorting call spreads out-of-the money or long a put spread at-the-money, both of these being short positions. (shorting a put spread would make you have a long position)

:) thanks again. As I mentioned I have tried those as an options trader, just looking to see if someone has specific experience in the optimal strikes and expirations. Borrowing/Shorting is the best strategy but can't obviously do in IRA

Project attached. The way I've been playing the vol decay (and more so the broken instrument VXX) and the contango is by being long on $ZIV, $XIV with some stops based on ratios, but with algos I'm hoping the emotions can be taken out if a trade on the $VXX can be made more mechanical based on rules.

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re: strike selection and expiration, i would go with the "tastytrade" way. if you're looking for short delta on vxx, then short a call spread OTM where you collect 1/3 the width of the strikes. In terms of expiration, they recommend doing it 45-60 days out. This is quite difficult to do on vxx at the moment, mainly because of the massive volatility skew in the options. For instance, if you short the 16-17 call spread in Sept 15, you only get $0.30 (and vxx is trading at 16). The probability of profit for that trade is ~60%, which isn't great for getting .30 and risking .70.

Thanks:) i guess for algo trades, i'd consider probability of profit more important than ROC, need to play around in combination with extra triggers as Michael mentions. The 10/5 cross is theoretically a good one with great profits and factors in the spikes. Btw, the 1/3 philosophy doesn't work with (any) Vol instruments, but thats a general rule of thumb that they reinforce in dough for any debit spread, which I like and try to use for other instruments