Puts rack up profits in $VXX

Downside option positions have turned big gains, overnight, in the iPath S&P 500 VIX Short-Term Futures Note (VXX).

Yesterday, on Aug. 28, Our tracking system found that 22,000 Weekly $26.50 puts expiring tomorrow, 30 August, were purchased for $0.07 to $0.14 with shares at $29.67. This was clearly a new position, as open interest in the strike was only 8,855 contracts before that session began.

Those puts have traded up to $0.45 this afternoon, more than 4 times their average purchase price. The stock dropped 10.41% in the same time period, underscoring how options can far outperform moves in their underlying shares.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

VXX has fallen 4.96% to $26.63 on the session. The exchange-traded note, which reflects volatility in the S&P 500, usually trades inversely to equities.