Last week was the slowest week of closeouts since we started publishing the Weekly Income Report in early November. We closed just one position across all of our services: a bear call spread on the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) from the Millionaire’s Trading Club VIP program.
This was a marked slowdown from the previous three weeks, where we netted an average of nearly $4,000 per week in the live account, mostly by playing the bearish side.
The VXX trade was the final position from Millionaire’s Trading Club VIP April Live Trading Session, which was held on April 4.
If you’ll recall, last week, we reviewed another trade from that group: the straddle trade on the Invesco QQQ Trust (QQQ).
As a quick recap, a straddle is a neutral options strategy that benefits from a substantial move in either direction. The strategy takes advantage of volatility, which is something we’ve had plenty of lately.
The CBOE Volatility Index (VIX) has pulled back from its peak near 60, made on April 7, but it remains elevated.
Straddles are positively correlated with volatility and allow traders to profit from a large move in either direction, removing the need to correctly guess where a stock or ETF might be headed next.
In a news-driven market where we’re seeing multiple-percentage-point moves in both directions, the straddle is certainly an appealing strategy.
Our QQQ straddle hit its target exit price in less than five hours, yielding a $434 profit on two contracts and a 10% return.
That was by far our fastest closeout from the latest Millionaire’s Trading Club VIP session. But the other trades didn’t take much longer to fill. In fact, it took just four days for us to exit the four positions we put on and book nearly $800 in profits.
That beat our previous record of six days from the January session, and it rivaled our October session in terms of cash generated.
As we mentioned last week, our decision to only trade ETFs in the April session was a conscious one. With uncertainty running high, ETFs’ diversification and liquidity are appealing.
In addition to the straddle, we put on three bear call spread trades.
The Technology Select Sector SPDR Fund (XLK) and iShares Russell 2000 ETF (IWM) bear call spread were more “traditional,” in that they sought to take advantage of neutral-to-bearish moves in the tech sector and small caps, respectively. However, the VXX trade was a little different.
The iPath Series B S&P 500 VIX Short-Term Futures ETN is designed to provide exposure to short-term volatility in the U.S. stock market, as measured by the CBOE VIX Short-Term Futures Index.
VXX doesn’t directly track the VIX index itself. Instead, it tracks the performance of the first and second month VIX futures contracts. It holds a weighted average of these two contracts, constantly rolling its exposure from the near-term contract to the next month’s contract to maintain its short-term focus.
So, while the VIX index reflects the market’s expectation of 30-day volatility in the S&P 500, VXX aims to capture the changes in these expectations as reflected in the prices of short-term VIX futures.
Since VIX futures themselves can be highly volatile, this can lead to significant price swings in VXX. That can make it an attractive play for volatility traders.
At the time we placed the trade on April 4, the VIX was trading near 41, off its recent highs but quite elevated from a historical perspective. Before placing the trade, Jeff Wood showed a 10-year chart of VIX, noting that the gauge rarely crosses above the 37 level.
He went on to say that on Aug. 5, when the VIX spiked to a high above 65, VXX traded up to 91. At the time we put on our trade, VXX was around 71-72.
Jeff’s thesis was that it was unlikely that VXX would trade back up to and stay above the 90 level, making a short-term bear call spread at that level attractive.
We sold to open the VXX 11 Apr 90 call and bought to open the VXX 11 Apr 100 call for a net credit of $0.90. The trade would be profitable at expiration provided VXX was below the short 90 strike, menaing we didn’t actually need VXX to trade lower to make money. We simply neeeded it not to move beyond a level that it rarely got to.
Even though history was on our side, we wanted to be cautious given that these are not normal times. Therefore, we set a target exit price at 50% of max profit and we only traded one contract, keeping our capital commitment small.
As you can see below, VXX did continue higher, even briefly crossing above the 90 level on April 8 before closing at 85.42.
However, we were already out of the trade, as our good ‘til canceled (GTC) order filled that morning, allowing us to exit the trade with a $45 profit and a 4.9% return in just four days.
Now, $45 won’t get you much these days. But the real value of this trade may be in what can be learned from it. If you’re looking for an alternative way to trade volatility, a mean-reversion trade on VXX might be worth considering.
