The CBOE Volatility Index (VIX) appears to be hibernating now for four months straight, locked in a range of $10.50 to $14. We have seen prolonged periods of historic low volatility also in the past. Back in 2015, between March and August, the VIX 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 a crystal ball, but we have tools, in the options den.
Source: Saxo Bank
Without succumbing to emotion and speculation, let's assume that there could be bumps in the marketplace caused by US president Donald Trump's tweets, the upcoming French elections or second-quarter 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 ways.
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. So we will 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)
Entry: Today as a vertical spread
Target: VIX to trade above $16
Time horizon: 30 days
— Edited by Jack Davies
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