Short term
/
Buy
Trade view / 17 March 2017 at 15:03 GMT

Strategic Trade: One way to trade VIX — #SaxoStrats

Product Manager, Options Trader, Educator
Denmark
Instrument: VXJ7
Price target: 16
Market price: 11.23
saxo strats

 
Background

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.

VIX Daily
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:

VIX















Management and risk description

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

Parameters
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

Stop:

Target: VIX to trade above $16

Time horizon: 30 days


— Edited by Jack Davies

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here

2y
ChristianK ChristianK
Hi Georgio. Good trade idea - thanks. Why are costs so high relative to the premium on these types of trade? Also, why not use the May expiry. The premium will be a bit higher but you also have the second round of french elections covered - ?
2y
Georgio Stoev Georgio Stoev
Hi Christian - our account appears to be on a "regular" commission schedule of $3 per contract. Haven't looked that far, need to see how these are priced and if too rich approach it with different strategy... Will keep an eye of course as we come closer.
2y
ChristianK ChristianK
Thanks. Keep me posted please. I will also speak to my account manager.

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