Medium term
Trade view / 12 July 2016 at 9:24 GMT

Volatility to tick up again?

Trader /
United States
Price target:
Market price:

As a result of the most recent rally in the S&P 500, implied volatility of options on the S&P 500 as represented by the CBOE Volatility Index (VIX.I)  have tumbled below the 14 mark again. 

Historically speaking and through a multi-week/month lens, that represents a good spot to buy some Vix call options through a multi-week/month lens.

While trading the S&P 500 has arguably one of the more difficult trades over the past 18 months, buying implied volatility in oversold conditions and selling or shorting it in overbought conditions was one of the easier ones. In that vein I see a new trade setting up in the Vix options.

On the longer-term chart we see that this instrument is mean-reverting but tends to see periods of outlier spikes. I have no doubt that a next spike is not too far away, but instead of  making a bet on a big move higher, for the time being I want to just nibble on some VIX calls for a little mean-reversion trade higher.

CBOE Volatility Index

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Source: Saxo Bank

Lookinga little closer up, we see that roughly over the past 12 months whenever the VIX dipped below 14, then through a multi-week lens it was a good spot to make a near-term bullish bet for at least a moderate bounce back up to the 15-17 range.

CBOE Volatility Index
Source: eSignal

Management and risk description

The risk to this trade is simply that the VIX stays below 14 for an extended period of time, which is why my stop-loss on this trade is time-determined.


Entry: buy the October 15 strike call on the VIX for $4.70 or lower.

Stop: get out of the trade if VIX has not moved into the 15 area by mid-August.

Target: the two to five area.

— Edited by Michael McKenna

For more on contract options click here.

Non-independent investment research disclaimer applies. Read more
vsquare007 vsquare007
what is the target price again is it 20 to 25 range ?
Serge Berger Serge Berger
Hi, price target is '15 area' on the VIX.
ireland007 ireland007
Hi Serge,i like the trade but i would have thought there is more upside in the short term then 15?
Serge Berger Serge Berger
Yes absolutely could VIX rally more. But as I laid out in the analysis above, I am using 15 as a first upside price target through the lens of risk management
ireland007 ireland007


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