How to go long with options when VIX is high?

[mrburnns]

Hi,

I want to go long the market but the VIX is trading at 20+ currently.

My original plan was to buy out of the money leap calls but from what ive heard, the value of the option has inflated due to the VIX spike and even if the market went up, the value of my calls would go down because the VIX would go down.

Is this correct and is there a better way? Also I'm not familiar with selling options, just buying calls and puts. Also, also, I'm assuming we test all time highs and beyond.

TIA!

 

[lindq]

Hi,

I want to go long the market but the VIX is trading at 20+ currently.

My original plan was to buy out of the money leap calls but from what ive heard, the value of the option has inflated due to the VIX spike and even if the market went up, the value of my calls would go down because the VIX would go down.

Is this correct and is there a better way? Also I'm not familiar with selling options, just buying calls and puts. Also, also, I'm assuming we test all time highs and beyond.

TIA!

Yes, you are correct to be concerned about going long calls with the VIX at such a high level.
Because if your bet on a rising market pays off, that will at the same time trash volatility.

Thus, you can win the battle but lose the war.

And if, as you say, you aren't familiar with selling options, then that is to your advantage. In this case, ignorance is bliss.

 

[mrburnns]

Ok so I can cross those otm leap options off my list. Would buying be in the money or deep in money calls solve the problem?

And thank you for the reply @lindq!

 

[2rosy]

buy a call bull spread

 

[Reformed Trader]

It's usually a good idea to avoid buying out-of-the-money options, as they are usually simultaneously overpriced and very sensitive to changes in implied volatility.

One way to take advantage of VIX at these levels is to buy an ETF and sell OTM calls against it if getting delta exposure is more important to you than actually trading the volatility of the options.

 

[srinir]

Hi,

I want to go long the market but the VIX is trading at 20+ currently.

My original plan was to buy out of the money leap calls but from what ive heard, the value of the option has inflated due to the VIX spike and even if the market went up, the value of my calls would go down because the VIX would go down.

Is this correct and is there a better way? Also I'm not familiar with selling options, just buying calls and puts. Also, also, I'm assuming we test all time highs and beyond.

TIA!

VIX represents expected volatility of SPX next 30 days. If you are looking for LEAP's which are more than a year away, then current VIX may or may not have that much influence. You have to find out, whether 1 year vol. is expensive before buying call

 

[VolSkewTrader]

You're better off selling overly expensive puts when the ViX is 20+, if you think the market is close to a bottom. OTM put premiums and their implied volatilities always trade much higher than they theoretically (based on actual realized volatility) should be priced. You'll have much higher margins/haircut when doing this strategy.

 

[sle]

VIX represents expected volatility of SPX next 30 days.

Well, actually a VIX fair strike of a variance swap which would be somewhat higher than the expected volatility due to Jensens inequality, right? Expected volatility would probably be some 100-120 bps lower.

You're better off selling overly expensive puts when the ViX is 20+, if you think the market is close to a bottom.

If you are thinking the market is close to the bottom you might as well go long via delta. Of course, caveat emptor - picking bottoms gives you smelly fingers.

 

[Kevin Schmit]

VIX... would be somewhat higher than the expected volatility due to Jensens inequality, right?

Well higher OR equal. E[f(x)] <= f(E[x]) for any concave function.
VarSwap = E(var)
VolSwap = E(sqrt(var))
VIX = sqrt(E(var))

If VIX gets high enough they'd be equal to two decimal places. Even at VIX levels reached (briefly) in the financial crisis, most of that apparent "premium" would disappear.

 

[sle]

Well higher OR equal. E[f(x)] <= f(E[x]) for any concave function.
VarSwap = E(var)
VolSwap = E(sqrt(var))
VIX = sqrt(E(var))

If VIX gets high enough they'd be equal to two decimal places. Even at VIX levels reached (briefly) in the financial crisis, most of that apparent "premium" would disappear.

I don't think that's right. Vix is a fair strike of a variance swap with some minor tweaks.

Var swaps trade at a premium to vol swaps due to the expected convexity of the PnL, not level. Simply look at the following:

VarSwapPNL = (vol^2 - strike)/(2*strike)
VolSwapPNL = (vol - strike)

So VarSwapPNL would equal VolSwapPNL only when realized volatility equals the fair strike. Thus, as long as volatility is not deterministic, you would expect to have a premium of variance swap strike (and thus VIX) over vol swap strike.