Enough is enough here, we are very close to last years highs and in my opinion the market is all too complacent.
I just bought a Call Fly in the VIX that I alluded to early last week….I think we are due for a vol spike and wanted to look for a cheap way to play, with defined risk.
TRADE: VIX 17.90 Bought March 21st 25/30/35 Call Fly for .27
-Bought 1 March 25 Call for 1.36
-Sold 2 March 30 calls at 1.46 (.78 each)
-Bought 1 March 35 call for .47
Break-Even on March 21st Expiration:
Profits Btwn 25.27and 30.00 make up to 4.73, max gain at 30 make full 4.73 and pay off trails off btwn 30 and 34.73
Losses of up to .27 btwn 25.00 and 25.27 and 34.73 and 35.00, with max lose of .27 below 25 and above 35.00
TRADE RATIONALE: VIX calls have steep skew and they are expensive, VXX us a ridiculous product due to the contango that exists. So the point is to buy a vol spike is expensive and usually costly. IN this scenario I ma looking out of the money and looking to spend as little as possible while isolating a level where I think the VIX could could go if we got a move down about 5% in the next 4-6 weeks.
This is obviously not a high probability trade but one I don’t mind committing some premium to when I consider the potential payout and what I feel is a strong possibility for a spike in vol over the next month or so.
This doesn’t mean a whole heck of a lot, but the chart below obviously shows how the index trades in a very technical fashion. If the index gets above 20 and stays that we it will most likely establish a new range btwn 20 and 25 and then 30 on any real sell off would not be that out of the question……25 and 30 will serve as significant resistance levels and will take a real sell off in equities to break both of these levels. But if we do get up there (the 200 day moving average is 25.93) than this Butterfly will be very much in play and the .29 in premium that may seem expensive given how far out of the money the spread is, will then seem very cheap.
[caption id="attachment_8621" align="aligncenter" width="300" caption="1 Yr VIX chart from Bloomberg LP"]
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IF THIS SORT OF TRADE INTERESTS YOU REMEMBER TO USE LIMITS……WHEN I LOOKED AT THIS INTIALLY WITH THE VIX AT 17.90, THE BID ASK WAS .15 AT .40, I PUT IN A .30 BID AND GOT FILLED AT .29!! I BOUGHT ANOTHER HALF POSITION AT .25….SO MY AVERAGE IS .27