Steven Smith of TheStreet.com has a video interview up in which he asks Brian Overby for his thoughts on how to trade VIX options.
Overby, who is Director of Education at TradeKing and authors an informative options blog, Options Guy, tackles some of the idiosyncrasies of the VIX and has some excellent suggestions for those who insist on trading the volatility index. Frankly, there is close to 100% overlap between what he says and what I believe about the VIX.
I recommend clicking through to the video, but in a nutshell, Overby’s thinking boils down to the following:
- VIX options do not follow the (cash) VIX index
- To understand the price action in VIX options, look at VIX futures
- When trading VIX options, trade the front month (closest contracts to expiration)
- Trade VIX options when the VIX is at the extremes of its trading range
- Utilize a mean reversion trading strategy
- Look to sell vertical spreads (sell puts when the VIX is low; sell calls when the VIX is high)