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February 28, 2013  Thu 9:54 AM CT

VXX: SEE CHART GET CHAIN FIND STRATEGIES
A large trader is looking for the iPath S&P 500 VIX Short-Term Futures Note to continue its descent.

The VXX, which is based on CBOE Volatility Index futures, has been both very popular and a very poor performer over the long term. optionMONSTER systems show that the biggest options trade so far in the fund is a May put spread.

A trader bought 5,000 May 19 puts for the ask price of $0.87 and sold the same number of the May 17 puts for their bid price of $0.32. The volume was multiples of the previous open interest at each strike, clearly showing that this is new activity.

This vertical spread cost $0.55 to open, which is the most that can be lost if the VXX remains above $19 through mid-May. The position is betting that the exchange-traded fund will continue its long-term decline, which is caused largely by the VIX futures staying above the spot reading of the volatility index. (See our Education section)

The VXX is up 1.42 percent to $23.60 this morning but well off its high of $26.81 on Monday when the stock market was plunging, its highest level since Jan. 9. The fund was an all-time low of $20.97 last week.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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