Earn premium each week, or make capital gains, or both
Covered call writing is no secret. Nor is selling calls on the VXX. But timing is always everything. People could have earned plenty of premium selling calls on VXX as it declined from the fall of 2011 through the spring of 2012 to bottom out around the high $15 range, down from the $30 range. But while premiums on most shares with options have gradually declined in recent time (maybe because of a crowd of eager call writers), the VXX still offers about the highest premium you can get. Think Apple (AAPL) or double-silver AGQ are high premium options? They are. But the VXX offers you more. You can sell them weekly, and you can make about a percent or more selling calls just 5 days out a whole dollar higher for at least $0.19 each usually.
What are we talking about? Today, May 31, 2012 at about 12:31 market time, if you pay $2,090 for 100 shares of NYSE:VXX, which is at about $20.82 per share right now, you can immediately get $10 back ($14 minus $3.10 commission on eoption brokerage) for selling a call option expiring tomorrow June 1 with strike price of $22.00 per share ($118.00 one-day gain if I am called away). Probably we will not get called away, but who knows, VXX was up near $21.70 earlier just this morning. That's the kind of volatility people are paying you for. Supposing though that you are not called away, you pocket the $10 after commission, and that represents almost half a percent profit (0.47%) in a bit over a day, and you can repeat the process starting Monday, selling the June 8 expiring call.
Or, if the market keeps tanking and VXX finishes tomorrow June 1 over $22 then your 100 VXX shares get called away by the buyer of the option you sold. That represents a 1.5 day profit of 6.12% ($118 + $10 = $128, and $128 / $2090 = 6.12%).
Worst case scenario? You only get to do this a few times and get caught when they announce QE3 - 5, China forbids interest rates, or the European Union issues bonds issued by all Eurozone countries but paid only by Germany. This is why you need to own a few nice dividend paying stocks outright too, so part of your portfolio can enjoy that mania. Meanwhile maybe you can keep selling further out of the money calls, for less, on the VXX you still hold at a loss.
All that aside, when Monday comes, your VXX are either gone and you have $2210 in the account, or you have your VXX unencumbered plus $10 and are ready to sell the June 8 call (or another one if you want). You can probably sell another call with a strike price at least $100 above your basis on 100 VXX shares, or even a few hundred higher (like the $24 for June 8) for $30.00 ($0.30 each). Assuming that expires worthless too, and you keep your VXX, that $30 represents a one week profit of 1.4%. This is the kind of return people used to earn from covered call strategies on regular stocks in the early 2000's, we hear. You really can't now. But on VXX you can, and in the environment we've been in since April this year, 2012, buying VXX and selling calls on it has been a nice source of income. Also successful in many of the times we have gone through very similar to this in the past two and a half years, since about the beginning of 2010. But of course this same time has been punctuated by multi-month rallies where your VXX bought too high can burn a hole in your books. Don't be blind, don't get too greedy, and keep some balance so if and when they do announce a quadrillion dollar stimulus check to every household you don't keep buying VXX.
And don't forget to buy gold!