Published On: Fri, Mar 17th, 2017

Strategic Trade: One way to trade VIX — #SaxoStrats


By Georgio Stoev


The CBOE Volatility Index (VIX) appears to be hibernating now for four months straight locked in a range of $ 10.50 by $ 14. We have had these prolonged periods of historic low volatility in past, as well. Back in 2015, between March and August we chopped between $ 12 and $ 15.30 for a good four months before the fear index produced a growl up to $ 20. So, it’s not if but when exactly this spike and short-term market correction would occur. We don’t have the crystal ball but we have tools, in the options den.

Source: Saxo Bank

Without succumbing to emotion and speculation, let’s assume that there are could be a few bumps in the market place caused by Trump’s tweets, the upcoming French elections or Q2 earnings, or anything else that could wake up the beast and break down the nervous system.

How would we trade this?

In last week’s OptionsLab webinar, we had the privilege to listen to another insightful presentation from the director of the CBOE Institute, Dr VIX himself, Russell Rhoads.

VIX, VIX Futures and ETPs all give traders exposure to volatility, albeit in different way. 

For our volatility position we will use VIX options. VIX options are cash-settled, priced off VIX Futures and usually expire on Wednesdays. As in other options, VIX options will have a time decay and their value will erode with time. We will therefore look at a vertical spread to offset some of that time decay. Here’s how we could structure a bullish view on VIX:

Management and risk description

The long call spread has a risk of $ 0.30 per contract

Underlying Price: $ 11.22 

Status: opening trade

Trade: buy + 2 Vertical VIX  19 APR 17 14/16 CALL at $ 0.30

Maximum gain: $ 1.70 (at expiration)

Maximum loss: $ 0.30 (at expiration)

Breakeven: $ 14.30 (at expiration)

Today as a vertical spread

VIX to trade above $ 16
Time horizon:
30 days

— Edited by Jack Davies

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