Setting Up For A Vol Spike In The Next Six Months
We Expand On A Recent Option Insider Network Question
Yesterday (12/7) I was on The Option Insider’s Network’s Pro Q&A program which is one of my favorite formats. Basically, I just field questions from members of the network around any market related topics people have in mind. One question, which is the subject of this article, asked how I would position myself if I expected one more, quick move higher in VIX sometime in the next six months. I liked that question so much, I decided to offer up a more specific example of how I would set up a trade based on those parameters in this space.
For long VIX positions I like to use VIX options as opposed to the long VIX related ETPs. If the question was, “I think we are going to have a volatility spike tomorrow”, my response would be by the front month VIX future or buy UVIX (2x long VIX futures ETF). However, for a trade that is all about when the spike is coming, not if, I have a different solution.
The front month VIX futures and, by association, front month VIX options tend to track spot VIX more closely than farther dated VIX futures and options. Based on VIX closing today at 22.29 and the December future at 22.45 I decided on the following trade. Sell VIX Dec 21 Put for 0.75, buy VIX Dec 18 Put for 0.10, and buy VIX Dec 27 Call for 0.58 resulting in a net credit of 0.07. I would keep this position on through Friday December 16, unless the anticipated VIX spike shows up. That Friday is the week before VIX expiration and if the December spread is still open, I would close it and roll to a similar trade using January options. The payoff diagram below shows the potential payout for a couple of days before and then including Friday December 16, the date I would roll this to January contracts.
Note, even though the long call is at the 27 strike, if a move to the mid-20’s materializes in the next few days this trade will have a partial profit in the 0.50 to 1.00 range, depending on the time left to expiration. A true spike would take VIX to at least 30, where depending on the time to expiration this trade would have an unrealized gain of 3.00 points. There is downside for this trade, if VIX returns to the teens the short put will work against the trade, but this loss is limited to 3.00.
So now we have some low cost long VIX exposure that could be monetized with a spike in VIX. If VIX moves to 30, we will price this trade out and report back. Otherwise, we will talk about rolling to January VIX options next Friday in this space.
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