In order to understand the fundamentals of this options strategy, you need to understand what VXX is. This is not an ETF nor a stock. This is an asset that captures the movements of the VIX Short-Term Futures ETN (Exchange Traded Note). You can read a detailed description of it in my blog post here.

This ETN is one of the most traded volatility products.

If you do not want to read it, here you have a brief on it, before entering into the descriptions of this "easiest" VXX options strategy. If you are reading this post is because you are interested in volatility trading. And when we speak about volatility trading, we think, at first, of VIX that tracks the volatility of SPX! At first, you should understand that VXX does not track exactly the VIX, although it tries to give traders exposure to changes in the VIX Index through near-term VIX futures contracts. 

In fact, they are positively correlated; but its correlation is not 100%... and this is because it uses the VIX instruments that are tradeable: its futures.  And not the VIX itself.

 

Traders who buy VXX are anticipating an increase in the VIX Index or futures, while trades who sell VXX are anticipating a decrease in the VIX Index futures! But, it is not exactly like this. Let’s check both charts side-by-side. It illustrates that, although they are highly correlated, VXX does not mirror the VIX index.

As it can be easily seen, VXX will lose value as time passes. Like an option, it has some "time decay". It can be easily noted in this small chart period of 4 months. Check for yourself the chart for the past 3 years… 

 

This “price erosion” comes because VXX is composed of the front 2 months VIX futures and there is a daily roll. Barclays buys constantly every day a portion of the second future and sells the front month.

Under "normal" market conditions, the VIX futures structure is in Contango as the above chart illustrates. This is the “normal” market condition which is present around 80% of the time. So, if Barclays buys the second month (Aug) and sells the front month (Jul) (before they were bought and they are in their possession) will make the VXX value lose. Under this situation, it is buying at a higher price than the front future that is lower. Additionally, as time passes, the futures will lose time until they settle at spot VIX price. In the example above, if VIX does not move on Jul 20th (expiry date of the future), its value will be 16.18. Currently is at 17.89… if you are long the future, you will lose the difference.  

  

 

How to profit from VXX price decay? There are several strategies that we can use that try to capture this effect. As you know I mainly trade and develop options strategies. VXX options are highly liquid and have available 1 unit (and even lower 0.5) strike price intervals. Another options strategy that I developed is a short-term strategy (VXX Short Call Vertical). Although it is also easy to trade (even for beginners), it involved selling on Call and buying another to open a Call vertical spread. But here I am disclosing the easiest of them all. It only involves buying a simple VXX option and waiting for decay to do its job. The VXX Put Buying options strategy course is free if you register for it on the button below (you will have access to a video course and pdf file with all details).

In resume, this VXX options strategy buys a Put at a certain expiration date (option chains selection is key) and at a certain strike given the VXX current price. The option's strike price selection is optimal at a certain Delta. No adjustments are needed. Just waiting for VXX to decrease its price as time passes… at a certain point in time, we should exit and keep profits (expectedly); or exit, if there is a huge volatility spike (or market correction) and/or VIX futures contango is not present. Does it work all the time? No, like any other strategy, there are trades that are losers and others winners. But, in the long term, it proved to be profitable! You can check in the trading history stated in the free course here its profitability and the best environment to open this trade.

But you guess it, in a VXX price spike you can open this trade and expect the market to recover and VXX comes down. In the majority of small peaks, it works great.

This is why I called this the easiest VXX option strategy! 

 

To illustrate how this trade works, here is a real trade I took.

On 11th May 21, VXX started to trade a bit higher (closed at a stock price of 41.21) and I looked at its options chain and decided to buy a 50 Put for the 16JUL expiration date (66DTE) at a contract premium of 13.60 - which meant total cash out of $1360. The chosen price and options expiration was based on the optimization outcome of this strategy that is available to you if you subscribe for free.

The following day, VXX continued to move higher and the trade was losing (-$300). But, we continue to have plenty of time until the expiration date (65 DTE). Additionally, front VIX futures (first 2 months) were still at Contango (although only 2%). So, I decided to keep the trade on.

On 17th May, VXX closed at 39.88 and the trade recovered and was at profit ($180). With some more choppy days, the trade had a few more days with small losses but VXX started to move down and it became profitable.

One month later, on 16th June I decided to close the trade and cash in a nice profit ($535). I decided to close because VXX started to climb (although it was at 32). It would be better to cash in this profit than have the risk to have a volatility explosion and lose everything. This is also part of the trade management in a conservative way. 

As you can conclude, VXX is a volatile instrument and we should always keep profits as they are presented. We should not be too greedy… In fact, if we waited 2 more weeks (29th June, where VXX price was at 29), the trade would have gained $750. But, as I know we never know the future and it is very difficult to predict with accuracy… 

You can access the most straightforward VXX options strategy for free. You can sign up at the button below.

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