Thursday, January 25, 2007

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.


Fontimama said...


Sounds good, especailly considering it is a spread that limits losses and you can always take it off whenever you want to even before losses start getting bigger. I haven't traded VIX yet, but I am looking into this and studying its behavior.

Bill Luby said...

Thanks for the comments. The persistent high IV has me struggling to come up with consistently profitable trading strategies for the VIX -- and which had me thinking in terms of a backspread to defray the cost of putting on the position while maintaining the upside potential. If I had access to better VIX historical IV data (other than looking at a one year chart) I might be able to come up with some better ideas, but the fact that the options trade on the futures prices and IV is generally so high makes some of the analysis a little problematic.

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