Options Trading News

October 10, 2011  Mon 9:27 AM CT

The VXX volatility exchange-traded fund is dropping again today, and the options are looking for further but limited losses.

The iPath S&P 500 VIX Short-Term Futures Fund is down another 5 percent this morning to trade at $47.68. It is down 20 percent from last week when it neared $60, its highest level since October 2010.

The big trade in VXX so far this morning in a put ratio spread. A trader bought 2,500 October 46 puts for $1.89 and sold 5,000 October 44 puts for the bid price of $1.07 at the same time. The volume at both strikes was more than open interest, so this is a new postion.

The trade takes a maximum profit if VXX drops to $44 by expiration. Given the strikes used, the position will still be profitable if the VXX remains above $46, though it will stand to make just the $0.25 credit.

If the VXX drops below $44, the trader faces assignment and the obligation to buy shares. The VXX was below $44 on Sept. 21 and was down at a low of $42.12 that day.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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