Today, I bought 3 VXX Sept 20th $20 call contracts a short time ago. By all appearances, though not yet confirmed, the iPath VXX ETN appears to be at a double bottom. The current price is in the high $16’s, so I would need to see about a 25% spike in the VXX to get this one in the money. Historically, VXX has rallied as much as 100% in some significant corrections….and even on a relatively minor correction, it has shown the ability to rally about 25%, at the least.
Take a look at the VXX daily chart (shown at the bottom of this blog post)….it appears to be at a double bottom today…but of course, the double bottom is not YET confirmed. If the price breaks much below the horizontal blue-dashed line at about $16.76, then the double bottom would be a false conclusion….especially if it closes below that line.
Also, I looked at the SCTR score on VXX…it is at the absolutely lowest level on that measure at 0.1….it can’t get any worse than that! (The Stock Charts website owns the formula and patent for the SCTR measures at http://www.stockcharts.com .) So, on a relative basis to other stocks, the VXX is a screaming bargain, it seems…
Now granted, the VXX and its cousins such as UVXY and TVIX (I know there are others, I just can’t think of them right now)…are ETFs that de-grade over time, especially in a flat or rising stock market. So, in some ways, the lower SCTR score would be the norm any way….
But a SCTR at 0.1 is suggesting that at some time in the future, it’s got to get a lot better than this? At least for a spell…
By extending out to mid-September on the purchase of my call contracts, I can let these pups sit in my portfolio for many months, assuming they don’t degrade too quickly in price, which could only happen if the market keeps rising and investors get too complacent. These VXX calls can act as an anchor against some of my long trades….and, at least compared to recent history, the price on these calls are very cheap right now….and that’s when you want to own them, imho…when they are cheap!
So, they can act as cheap portfolio insurance — of course, going out to September is also taking advantage of annual cyclical moves, as the stock market often swoons in late summer and into September, which is historically the worse month for the stock market…
I may pick up a couple more of these VXX calls, should the double bottom not hold…and if it does hold, at least I have a good foothold with 3 contracts today. If somehow, the price jumps 40% from here to late August, I would stand to make about a $180 profit per contract, or close to a $550 gain on these 3 contracts. I don’t have too many long positions right now (I am actually short some specific stock names like SHLD and VRX currently), but someone with a larger long positon might consider more contracts than this.
So, what could cause a stock market correction? Seemingly any number of things! We have the FED meeting coming up in the next two days, and how will they word future interest rate increases? And the debt ceiling debate is starting to come into focus, and the Republican Party seems to be quite fractious when it comes to this subject, so don’t expect an easy push to raise the limit, in my opinion. Then there is the high valuation of the current stock market, and perhaps too much optimism by investors as to how quickly Trump can get things moving?
Also, there is much divisiveness in the communities of our country– it seems about as divided as it was in the pre-Civil War days, but only the haves versus the have-nots (rather than the North vs. the South). But even if one believes the market can look past all of these threats, then one should still respect that our current market valuations seem to be pricing in perfection. Just one big “slip up” is all it takes to send stocks tumbling, in my humble opinion.
I am not a registered financial advisor, and so these are only one person’s opinions. You should always consult a licensed RIA or licensed stock broker before investing or acting on any trades.
VXX daily chart