How to play volatility

S

stockoptionstrader

Hi all,

I'm preparing myself how to trade when volatility in the VIX spikes up.

I've read a lot of articles about it. And I think the most safe way is to play VXX or UVXY when volatility starts declining.
you can buy put options on VXX or UVXY or go long XIV after a sharp drop.

Anyone has some advice or thoughts if played with options what's best to take for expiry, I'm planning on buying strip straddles, so if my timing is not 100 % I can still get out with profit.

I think trading volatility can be very profitable, there are not much times you can play this, but If volatility spikes, you can make a lot and your year can be good.

I want to make this a good discussion thread so all thoughts and insights are welcome!
 
I just made a post about this in another thread:

https://www.elitetrader.com/et/threads/how-would-you-hedge-the-us-financials.305712/#post-4386626

I've been long XIV before, entering during or right after a volatility spike. That works, but I'd never buy VXX or UVXY even if I was confident of high volatility coming. It just decays way too fast. Your idea of buying VXX puts when volatility starts declining might work, but the premium on VXX puts will be very high due to it's leveraged nature and I'd prefer to have more control over duration...check on this, but I think I recall VXX trades only the closest expiring contracts at close to ATM strikes. I agree with you that I'm expecting VIX spikes over the next few months and VIX is historically very low right now so great time to get long. I think best and most simple way to play volatility is with long VIX calls or short VIX puts. That gives you more control over duration and strike selection so your trade has enough time to play out.
 
Last edited:
ET180 said:
I just made a post about this in another thread:

https://www.elitetrader.com/et/threads/how-would-you-hedge-the-us-financials.305712/#post-4386626

I've been long XIV before, entering during or right after a volatility spike. That works, but I'd never buy VXX or UVXY even if I was confident of high volatility coming. It just decays way too fast. Your idea of buying VXX puts when volatility starts declining might work, but the premium on VXX puts will be very high due to it's leveraged nature. I agree with you that I'm expecting VIX spikes over the next few months and VIX is historically very low right now so great time to get long. I think best and most simple way to play volatility is with long VIX calls or short VIX puts. That gives you more control over duration so your trade has enough time to play out.
More...

I agree with you on the fact that VXX or UVXY decays too fast to buy them. With going long VIX calls or short VIX puts do you mean going short (by buying puts) or do you mean short puts (selling an option)? Can you explain why it has more time to play out (do you mean vs buying VXX or UVXY and the decay)?
 
stockoptionstrader said:
I agree with you on the fact that VXX or UVXY decays too fast to buy them. With going long VIX calls or short VIX puts do you mean going short (by buying puts) or do you mean short puts (selling an option)? Can you explain why it has more time to play out (do you mean vs buying VXX or UVXY and the decay)?
More...

I consider long VIX to be long VIX calls or short VIX puts (so that the trader makes money if VIX goes higher). I consider short VIX or short volatility to be the inverse, long VIX puts and short VIX calls (so that the trader makes money if volatility goes lower). Notice that long volatility is a defined-risk trade no matter how you play it. Short volatility via short VIX calls is undefined risk (unless one shorts a call spread of course).

I edited my previous post while you were posting, but I added a few points to clarify why I prefer to trade VIX options over VXX and UVXY. From the VXX product summary:

"The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index."
More...

http://www.ipathetn.com/US/16/en/details.app?instrumentId=259118

So VXX only trades the two front month CBOE VIX contracts. That's great if you expect a volatility spike in a few hours or tomorrow. But if you're like me and don't know exactly when volatility will arrive, but only have strong confidence that it will be higher sometime over the next few months, then you can create a better trade for that scenario by simply trading the CBOE VIX options directly. I also don't know what strikes the VXX or UVXY is buying, but trading VIX directly instead will give more flexibility for your trade strategy.
 
There are exchange traded products for Vix contracts a few months from expiring: VXZ (positive volatility) and ZIV (inverse volatility).

If you're using Interactive Brokers, beware that their VIX contract margin requirements are insanely high right now, at least insane if you're going long: ~$11k initial, dropping to ~$9k maintenance, at a time when the front month contract is at ~$13k.

Another way to go long volatility might be to short SVXY or buy puts on it. SVXY is short volatilty, so it has "volatility drag" bringing it down (because it is an inverse ETF, not because its underlying is related to volatility) partly offsetting its gains from shorting volatility.
 
toonerdy said:
There are exchange traded products for Vix contracts a few months from expiring: VXZ (positive volatility) and ZIV (inverse volatility).

If you're using Interactive Brokers, beware that their VIX contract margin requirements are insanely high right now, at least insane if you're going long: ~$11k initial, dropping to ~$9k maintenance, at a time when the front month contract is at ~$13k.

Another way to go long volatility might be to short SVXY or buy puts on it. SVXY is short volatilty, so it has "volatility drag" bringing it down (because it is an inverse ETF, not because its underlying is related to volatility) partly offsetting its gains from shorting volatility.
More...

You are correct about the margin requirements for VIX using IB. Regarding SVXY, I think I recall some additional tax paperwork being required for trading that product which was not required for XIV. I like the SVXY idea, but if volatility does stay low for a while longer...even if it does not go lower, SVXY will keep marching higher so I wouldn't directly short it, but one could buy puts on it...unfortunately, those puts won't be cheap. Leveraged ETFs are really hard to play. I think they are only meant for hedging so they are relevant to this topic. I just don't like to trade them.
 
I trade a lot of volatility products such as VXX, UVXY, VXZ. Just look at a historical graph of any of these and you can figure out what to do.

The contango in the front futures destroys VXX and uvxy over time. It's important to know the range of the 1st and 2nd month future to understand if you are in a low VIX future environment. My advice would be as the front futures become elevated, buy put options, sell call options spreads, buy put options spreads...they all work. It's more important to understand the structure of these products and to know for example currently what % of the front month future is in the price of VXX and uvxy.
 
When volatility rises you can do 4 things:
Buy spys
Sell spx puts
Buy puts on vix
Do nothing

Kind of like Obama in regards to Osama bin laden when our intelligence found him in Pakistan:
Bomb the building
Send troops to kill him
Do nothing

Then claim major personal accomplishment and act like its an achievment.


Both examples are very easy trades.
 
Last edited:
TheDowJones said:
I trade a lot of volatility products such as VXX, UVXY, VXZ. Just look at a historical graph of any of these and you can figure out what to do.

The contango in the front futures destroys VXX and uvxy over time. It's important to know the range of the 1st and 2nd month future to understand if you are in a low VIX future environment. My advice would be as the front futures become elevated, buy put options, sell call options spreads, buy put options spreads...they all work. It's more important to understand the structure of these products and to know for example currently what % of the front month future is in the price of VXX and uvxy.
More...

But if you have to go through all that work, why not just trade VIX directly and trade whatever strikes and months best suit your strategy? What advantage do those ultra-leveraged ETFs buy you over trading VIX directly?
 
Its just a completely different product (VXX versus VIX options). VXX isn't leveraged. I have no idea on what the VIX futures will do, but I can tell you what VXX is going to do. VXX and UVXY (2X leverage) are going to zero forever. Just go to yahoo finance and click on the max chart for VXX. VXX lost ~70% UVXY lost ~94% of its value in 2016 in part due to contango losses. They will just keep reverse splitting the product when it gets down to under $5 or so, take it back to $40ish and let it go back down to $5 again.If you short the VXX and give yourself time you will ALWAYS be right.

When you trade the VIX options you are investing in a particular months future. I guess you can make money either way if you guess correctly on the direction with VIX options. I just know that VXX, UVXY, VXZ due to the structure of how the product is created is broken and whenever volatility settles will lose money even if the volatility does NOT increase due to being in contango 80% of the time. So for example, right now current contango losses in the front to second month is ~14%, so even if the first and second month futures stay at this exact spot until they roll VXX would lose around 14% and UVXY would lose 28%.


UVXY reverse split announcement
http://www.proshares.com/news/2016-12-22.html

https://cfe.cboe.com
 
You must log in or register to reply here.
Back
Top