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New Trade in the VIX

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This is an advanced play so if you haven't traded VIX futures you might want to consider papertrading this one.

First, the VIX:

The VIX on its own has shown tremendous volatility as of late. The large spike up to 31 and the breakdown below 22 before shows that trader expectations of future volatility are very mixed, and players are not agreeing on price. This trade is based on this assumption:

Over the next 7 trading days, VIX traders will be in much more agreement about volatility than what they have been for the past 3 weeks

The trade we are doing is essentially an options expiration play. We will make money if the VIX stays within a particular range.

Let's also take a look at the SPX:

With the current momentum, it seems that we are a short move away from retesting the October highs. By selling premium on the front month VIX, we will essentially be long volatility. So another assumption we are making is:

With the recent volatility at the end of October, the VIX will not retest the lows it made during the Oct peak on the SPX

Currently this thesis makes sense. The first time the SPX hit our current levels (1096), the VIX was at 21.80. That shows that investors are still wary of any potential volatility coming in.

When it comes down to it, this is just a play that volatility at its current levels is near the right amount, and that the VIX will continue to be stuck in a range.

So here's the trade:

Sell -3 VIX Nov 22.5 Puts for .70

Sell -3 VIX Nov 26 Calls for .35

Total Credit 105 * 3 = 315

So our breakevens are at 21.45 and 27.06.

This trade is also based on the mean reversion tendency of equities as well as underlying volatility-- given the strong momentum over the past few days and the lack of volume, this trade will in effect be short the overall market.

If the VIX continues to break down, we can add hedges by going long December contracts-- these are based upon a completely different asset (Dec VIX futures) but the exposure should help.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/