Easy Option Strategies

Easy option strategies. What are they? What’s the quickest way to learn. Well, you’ve come to the right place. Let’s take a look.

What Stock To Choose?

Options are derivatives.

They are linked to a tradeable asset. There are thousands of tradeable assets that can be stocks, indexes and ETFs…

So, the first problem is to choose one to trade, even before selecting which options strategy.

The asset that I will use is not yet simple, but behaves with some expectancy that will give the trader some room to explore. This will avoid complex stock screeners and definition of multiple criteria that would add more steps to take.

The asset I had implement the easiest options strategy is the VXX. This is not a stock or an ETF. It is an ETN – Exchange Trading Note. This is a special vehicle that uses futures and is issued by Barclays.

But, What Is VXX?

To understand the fundamentals of this options strategy, you need to understand what VXX is.

You can read a detailed description of it here. Nevertheless, I will make a brief on it below, before entering into the description of the easiest options strategy. Without understanding what is it, you would not understand correctly the basics of the strategy.

If you are reading this post is also because you may be interested in volatility trading.

When everyone thinks on Volatility trading, the first to come into our mind is VIX. VIX tracks the volatility of SPX! But VIX is not a tradeable asset.

We can only trade its futures.

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, both VIX and VXX are positively correlated; but its correlation is not 100%… VXX has on its composition the VIX 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!

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. It is like an option; it has some “time decay”.

This “price erosion” comes because VXX is composed of the front 2 months VIX futures and there is a daily roll under normal market conditions.

Barclays buys constantly every day a portion of the second future and sells the front month, rolling everyday its position and composition.

In the long term VXX loses value due to that negative effect derived from “contango” in the VIX futures curve.

This occurs under “normal” market conditions which is present around 80% of the time.

So, we must find an easy options strategy that will produce profits as VXX price decreases, which is its normal price movement…

The Easiest Options Strategy

There are several strategies that we can use that try to capture this effect.

As majority of 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.

Although there several options strategies that can capture this price movement on VXX, I am disclosing the easiest of them all.

It only involves buying a simple VXX Put option and wait for price decay to do its job.

The VXX Put Buying options strategy is the easiest strategy available for any option trader as it involves simply buying a Put.

No need to sell options, no undefined risk, no margin requirements, etc. Just simply buying a Put. But, now we have to choose which Put to buy.

This VXX options strategy buys a Put in a mid-long expiration date at a certain strike.

The options 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, the best time to open this trade is at a volatility spike.

After, you can expect the market to recover, volatility to come down and VXX starts to move down fast enough to deliver profits in the PUT bought.

In the majority of small peaks, it works great.

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

How did you like this article? Let us know so we can better customize your reading experience.