Two Ways to Play the Sub-10 VIX

No one has complained (yet), but I think it's time for some more brevity in my posts.

Here is what I am thinking: I suspect that one of those 20+% VIX moves may be right around the corner, but I wouldn't be surprised if we are entering a longer volatility lull than we have in the recent past, such as was suggested by the Faux-VIX.

This means that one way to play VIX 9.89 is to buy the calls outright; my preference is to put on a call backspread, which I can do for a credit. I'm looking at selling 1 of the Feb 9 calls (2.25-2.45) for every two of the Feb 11 calls (0.85-0.90) I buy. Another possibility is to do the trade with calls that are entirely out of the money: sell 1 Feb 10 (1.40-1.45) for every 2 Feb 12.5s I buy (0.45-0.55).

Since I already own some of the Feb 11s outright, I can leg into the Feb 9/11 position, then watch to see if either of these two setups can be established for a larger credit during the day today. At current market prices, a new position would be profitable below 9.45 and above 12.55, with a maximum loss at 11.00. Of course, profitability above 12.55 is theoretically unlimited. I will watch to see if these numbers get better during the course of the day.

Just prior to opening, the SPX futures are down a little, while EBAY and QCOM have the Nasdaq poised to open higher.

A Challenge to Two Things You Think You Know About the VIX

From Jason Goepfert via the virtual pen of Steve Sjuggerud and archives of Investment U and comes several VIX-related ideas that are worth mulling over 1 ½ years after they were published.

Goepfert, who heads up Sundial Capital Research and sentimenTrader.com, attempted to reconstruct what historical VIX data might have looked like if it were possible to simulate VIX readings all the way back to 1900. In this manner he developed what he calls a Faux-VIX that looks back over a century. As described by Sjuggerud, Goepfert determined that while current VIX readings look quite low by the historical standards that cover two decades of official CBOE VIX/VXO data, looking back to 1900 with the Faux-VIX, it appears that volatility readings below the current 11 level happen approximately one third of the time.

Further, and consistent with the initial post in this blog, Goepfert concluded that sustained periods of high volatility tend to alternate with lengthy periods of low volatility in cycles which average approximately five years. Much to my surprise, Goepfert then concludes that “buying the first large spike in volatility has paid off time and time again.” This contrasts sharply with my current thinking, which favors capitalizing on the mean-reverting tendencies of the VIX by fading large volatility spikes.

In future commentary, I will examine the degree and duration of various types of volatility spikes and return to Goepfert and the fade-or-buy-the-spike debate.

Note: For those who may be interested, Goepfert is a frequent contributor to Minyanville.com and archives of his articles on that site can be found here.