How to Think About the Day After: Executive Summary

It looks like I am going to opt for some sleep over a long night of research, but before I head off to bed, I thought I would offer up some VIX-related bullet points for you to keep in mind as you watch trading unfold tomorrow and beyond:

• most VIX spikes last one day and start to retrace on the 2nd day


• the second most common VIX spike pattern is one of 3-5 days in duration before it starts to subside (note that the VIX had already jumped about 10% in the two days prior to today's 64% spike, which might make it even more susceptible to a retracement as early as tomorrow)


• if the VIX can carry some upward momentum past a second week, it has a fairly high chance of heralding an extended period of much higher volatility


• a very large majority of VIX moves run out of steam within 10-20 days of the original spike


• more often than not, the best way to play the VIX is to bet on it reverting to the mean (i.e., 10 and 20 day SMA) after a 3-5 day spike


• VIX options are *very* difficult to play because...
  


• their prices are a function of VIX futures prices, not the underlying VIX prices -- so often the VIX moves a substantial amount in the direction you want, but the call or put moves a lot less or in the opposite direction because the futures expectations change much more slowly than the ‘spot’ VIX price


• implied volatility in the VIX tends to be extremely high even in relatively placid markets, so swimming upstream faster than time decay can often be harder than it appears
  
  
• if you must play VIX options, consider hedging your bets with some bear call spreads instead of or in addition to buying some puts outright