Buying SVXY Calls when the VIX Spikes

Based upon some of the emails I have received this week, it appears that a number of readers have been focused on buying some of the inverse VIX ETPs, notably XIV and SVXY, when they saw the VIX spike. Some have preferred shorting VXX, TVIX and UVXY, based partly on availability, while others have preferred to trade VXX options, generally by buying puts or limiting risk with the likes of a bear call spread.

I had thought that my recent Options on UVXY and SVXY Open Up New VIX ETP Trading Approaches might nudge some traders into considering strategies involving the +2x leveraged long VIX short-term futures ETF (UVXY) and perhaps utilize the -1x short VIX short-term futures ETF (SVXY) as well, but based on the volumes, these issues are still in the process of gaining a broader audience. In fact, UVXY did see record call volume of 7300 contracts on Tuesday, but SVXY has been the laggard so far, as the graphic below illustrates.

So here is a thought: the next time the VIX has a significant spike, one of the first trades you should investigate is fading that spike by buying SVXY out-of-the-money calls. This is a simple trade and has the potential to be quite profitable. The SVXY April 90 calls, for instance, have jumped 40% from Tuesday’s close.

The exciting news about options on SVXY and UVXY is that traders can now easily structure a broad variety of trades that involve defined risk and substantial upside. While VXX (and VIX) options are still the gold standard in terms of liquidity, SVXY and UVXY options also deserve some love – even if the spreads are still wider than those of VXX.

Related posts:

• Options on UVXY and SVXY Open Up New VIX ETP Trading Approaches
• Four Key Drivers of the Price of TVIX
• Will TVIX Go to Zero?
• All About UVXY
• VXX Options Calm After Second Highest Volume Day Ever
• The VIX-VXX Minotaur Trade
• Managing Risk with a Short VXX Position
• VIX ETP Returns for Q1 2012
• VIX Exchange-Traded Products: The Year in Review, 2011
• Performance of VIX ETP Hedges in Current Selloff

[source(s): LivevolPro.com]

Disclosure(s): long XIV and SVXY, short VXX, TVIX and UVXY at time of writing; Livevol is an advertiser on VIX and More