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VIX > 30 Environment


jkoptions18
Posts: 14
Topic starter
(@jkoptions18)
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Joined: 1 year ago

How is everyone feeling about VIX > 30?  For me, my options trading strategy stays the same. 

For my long positions, I don't mind the down days at all, knowing this volatility is the price to pay for reaping the long term rewards of staying in the market.

Now If VIX > 40, hmmmm I wonder if I will tweak the options trading strategy a bit.

6 Replies
earlyretirementnow.com
Posts: 273
(@earlyretirementnowcom)
Member
Joined: 6 years ago

The level of the VIX spooks me less than the change of the VIX. Looking at the put premium landscape now, I can sell puts at strike 3975 for 0.95 when the S&P is at 4525. That's for Friday->Monday. IV of that is around 70%, more than twice the VIX. Seems like an attractive landscape for our strategy. I don't think we will have a 12% drop over the rest of the Friday trading day plus Monday.

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Chris B
Posts: 9
(@chris-b)
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Joined: 8 months ago

In theory, high VIX is the ideal time to be selling options, whether cash-secured puts or covered calls, because the IV premium is higher. 

We should keep in mind what VIX actually measures, which is how far apart the prices are between strikes. During periods of volatility, the prices between two far-OTM strikes might be very close, whereas at normal or low VIX levels they are farther apart. It is as if markets are saying "Man, I don't have a clue what the asset's price will be in the future. All these strike prices are about equally likely."

This suggests high VIX environments might be a good time to trade far OTM spreads, because when VIX reverts to normal, the gap in prices between options at different strike prices will contract. Stated another way: High VIX environments mean the market is overestimating the likelihood of OTM options being ITM, especially put options due to volatility skew. Whether you're selling puts or bull spreads, you're getting extra premium. 

 

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earlyretirementnow.com
Posts: 273
(@earlyretirementnowcom)
Member
Joined: 6 years ago

Good point! Some of my worst losses happened when the initial VIX was low and then something out of left field hit the market. Once the VIX is high, I normally sell so far OTM that it's unlikely I get exercised during a 1-2 trading day window.

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earlyretirementnow.com
Posts: 273
(@earlyretirementnowcom)
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Joined: 6 years ago

All:

Just a reminder, Wednesday 12/15 is the date of the FOMC release and press conference. Expect some elevated volatility. It could all go really well and we make a lot of money. But there is a chance of a repeat of the December 2018 blowup when the market tanked after a surprisingly hawkish FOMC statement and Jerome Powell press conference. 

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2 Replies
figuy1
(@figuy1)
Joined: 12 months ago

Eminent Member
Posts: 44

@earlyretirementnowcom Thanks for the reminder. I looked up what happened in Dec '18 and it looks like the S&P 500 dropped about 3.5% if you count from that Monday morning to Wednesday close. So should history repeat itself, its best to stay away from anything closer than the ~4540 strike. We'll have to see what happens this time around!

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 273

@figuy1 Exactly! I have strikes 4475-4510. Crossing my fingers. S&P is already down to 4620 now. History repeating itself?!

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