Trader VIX

by CC October 11, 2016 1:12 pm • Trade Ideas

Back on September 8th we detailed a long vol trade in VIX options. This is a strategy we like and it’s probably the best pure vol play in the VIX as it doesn’t suffer from all the issues that long vol ETFs like VIXY and VXX contain. I could go on and on about VIX ETFs, we’ve written about them a lot, (for more, here and here) but to summarize, buyer beware. And that’s an understatement.

So to our trade idea from September 8th:

*VIX ($12.25) Sell the Nov 15 put to buy the Nov 20/29 call spread (call spread risk reversal) for even money
  • Sell 1 Nov 15 put at 1.00
  • Buy 1 Nov 20 call for 1.70
  • Sell 1 Nov 29 call at .70

Since that day, we’ve seen a couple mild spikes in the spot VIX with one immediately following the original post to as high as 19. What we haven’t seen is any sustained sell-off in the market. So although vol has picked up, the market is essentially in the same place. But that’s fine! This trade cost nothing to put on and as long as the VIX expires above 15 it’s a free look. With the VIX at 15.55 today, this trade is essentially unchanged.

From Bloomberg
From Bloomberg

As far as management, the spot VIX is just above our short strike. But remember, the more important instrument to keep an eye on is the VIX future expiring in November. That future is currently 16.75. So there’s some room to be patient and any spikes between now and then in the VIX are more significant with greater profit potential for the trade, especially if that spike is over 20.

Of course, 20 is farther away from that future than 15 is. And below 15 is the actual risk on the trade. So for those looking to roll out this trade to December with the same strikes, that would only cost about 10c at the moment.

We’re going to be a little more patient with the trade as a follow through on today’s selling would be an even better opportunity to roll or adjust. And in the meantime we’ll be keeping a stop on the trade if that Nov future approaches 15.