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Saturday
Feb162013

Outperforming the S&P: SK Options Trading Speciality in January

SK OptionTrader outperformed the S&P twice in January, first with our short VXX trade that outperformed more equities by more than 5 times, and then again with our long SSO trade that had more than double the performance of the S&P.

In this article we will explain how we used the VXX ETN to outperform the S&P in the midst of the fiscal cliff negotiations.

For those of you who are not familiar, the VIX index measures the implied volatility of the S&P. The VXX is an ETN that holds short term VIX futures to try to track the performance of the index. Being short VXX therefore performs similarly to a short position on the VIX index.

We believed that the fiscal cliff negotiations be resolved and the market was getting overly nervous about a lack of progress. Everyday up to that decision we believed that the implied volatility of the S&P 500 would rise. Then once a decision was reached the risk of a drastic decline in equities due to no agreement would dissipate; therefore implied volatility would fall. To take advantage of this we waited until we believed that volatility had peaked, just 2 trading days before the Bush tax cuts were due to expire. At this point we took a short position on the VXX by selling short the stock whilst still limiting our potential losses through the purchase of a $70 call.

As the graph above shows, SK Options Trading did in fact open the position on the very day that implied volatility in the S&P 500 peaked, with the VIX index closing at 21.79. As expected VXX also reached its peak through the crisis; providing SK OptionTrader subscribers with fantastic risk reward dynamics.

An agreement being reached in the fiscal cliff negotiations calmed the fears of investors a few days later. The result of this was that equities recovered; the S&P rallied more than $60, easily regaining the ground lost in week before.

Fears dissipating in the markets caused volatility to fall, and the result was a 24.01% profit for SK OptionTrader subscribers. This return was 5 times as much as holding the S&P over the same time period.

February, and the coming spring, holds many more opportunities that take advantage of specialised trades similar to this. If you want to be in on trades like these and have access to our current portfolio, you can do so right now. All you have to do is sign up via either of the buttons below and you will become one of the privileged SK OptionTrader premium subscribers.

 

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