VIX TERM STRUCTURE TRADE: VIX FEB 15TH 16/19 SHORT CALL VERT
Updated
The two types of trades I like in VIX/VIX derivatives are (1) a "Term Structure" trade in VIX options; and (2) "Contango Drift" trades in the derivatives VXX, UVXY, and (inversely) SVXY.
A "term structure" trade capitalizes on current VIX spot price in relation to VIX futures months' prices which, the vast majority of the time, are higher than current spot price, and operates on the notion that VIX spot and the futures price will converge on one another as the futures contract approaches expiry.
A "contango drift" trade is put on in a VIX derivative on pops and capitalizes on contango which erodes these underlyings' price over time in the absence of significant and prolonged backwardation, which is rare. (With SVXY, an inverse, price in the underlying increases over time). (See VXX Post, Below, for an example of a "Contango Drift" trade).
Here, I'm using the Feb VIX futures contract price as my guideline for my short call strike. As of the writing of this, it's at 16.02. With the long call strike, I'm choosing the 19 strike to limit the buying power effect to 230/contract, although you can certain go wider, which will bring in more credit, but also increase the buying power tied up by the trade.
Here are the metrics:
Probability of Profit: 91%
Max Profit: 70/contract
Max Loss/Buying Power Effect: 230/contract
Break Even: 16.70
Notes: With these, I take a wait and see approach with profit taking. The general rule is to take profit on credit spreads at 50% max, but if we get into a prolonged volatility lull, I can see shooting for max profit, depending on where VIX spot sits in relation to the short call strike running into expiry. Should VIX be above 16 rolling into expiry, I'll simply roll the spread out to March to allow it additional time to work out.
A "term structure" trade capitalizes on current VIX spot price in relation to VIX futures months' prices which, the vast majority of the time, are higher than current spot price, and operates on the notion that VIX spot and the futures price will converge on one another as the futures contract approaches expiry.
A "contango drift" trade is put on in a VIX derivative on pops and capitalizes on contango which erodes these underlyings' price over time in the absence of significant and prolonged backwardation, which is rare. (With SVXY, an inverse, price in the underlying increases over time). (See VXX Post, Below, for an example of a "Contango Drift" trade).
Here, I'm using the Feb VIX futures contract price as my guideline for my short call strike. As of the writing of this, it's at 16.02. With the long call strike, I'm choosing the 19 strike to limit the buying power effect to 230/contract, although you can certain go wider, which will bring in more credit, but also increase the buying power tied up by the trade.
Here are the metrics:
Probability of Profit: 91%
Max Profit: 70/contract
Max Loss/Buying Power Effect: 230/contract
Break Even: 16.70
Notes: With these, I take a wait and see approach with profit taking. The general rule is to take profit on credit spreads at 50% max, but if we get into a prolonged volatility lull, I can see shooting for max profit, depending on where VIX spot sits in relation to the short call strike running into expiry. Should VIX be above 16 rolling into expiry, I'll simply roll the spread out to March to allow it additional time to work out.
Note
I'd note that these can be "pesky" for fills. This setup is bid .60/ask .80, which is quite wide. The only thing you can do is stick the setup "out there" for a mid-/above-the-mid-price fill and see what happens. Here, I'll need to VIX to come up a bit to get a .70 fill. If it fills, it fills; if it doesn't, I'll just try again another day ... .Note
Lowered the fill price to .65 and got filled for .68. Go figure.Trade closed manually
Covering here for a .38 db; $30 gross profit/contract.
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