The Vix Index or the “Fear” Index dropped over 10% today. Of course, this is not surprising given that the much-watched Greek elections over the weekend were what the markets wanted. The markets did indeed dodge a bullet ! However, all is not well with Spain’s 10-year bonds spiking to over 7.1% today, and that has the European and U.S. markets worried. We are entering a low-VIX environment and this can produce a few great strategies over the next 6 to 12 weeks. In this video, we discuss some of these Options strategies.
A low-VIX environment is a great time to be a buyer of Options and to have an Option buyer’s profile. Due to lingering uncertainties in Europe, a low-VIX environment cannot be sustained for long, and this can produce nice profits when the volatility starts to go up again. Since you’re an Option buyer, you have to watch for two things – Time decay or a decrease in Volatility. By timing your entry in a low-VIX environment, you’re almost removing one of those risks entirely, although its possible that Volatility may go down some more this week, especially if the FOMC meeting produces any announcements that the markets can cheer on. We’ll be watching to see if a VIX level of 15 is hit this week. If it hits 15, it will be a great time to buy some Options positions that can produce dramatic returns when Volatility goes up again.
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It’s a good post.
A couple of caveats are in order, though…First, “time to buy” should be interpreted as going long equities, not the VIX derivatives. Second, one needs to distinguish between relative values of the VIX (relative to a SMA or EMA, for instance) versus absolute values (i.e., “go long the markets when the VIX is over 40 and go short when the VIX is under 15” or something like that.) I think the relative high/low VIX play is a much better stgaetry than the absolute high/low play.Third, much of the rationale for the saying you quote and VIX-related strategies in general depends upon the tendency of the VIX to revert to its mean. Check out all the posts with a to learn more.Finally, if you are interested in seeing some publicly disclosed strategies for trading the VIX itself, check out the third paragraph in my on this blog.Cheers,-Bill
Vovor,I absolutely like the long stdldrae play here. Laurent,I am a big fan of CPCE (less so of CPC) and follow these fairly closely. For the most part these are positively correlated with the VIX, but there are divergences. The work I’ve done with the VIX:CPCE ratio definitely shows it has some value as a market timing tool, but I can’t say that I trade off of this ratio.Your theory about ITM options is an interesting one.I’ll have to put this subject back into my R&D queue and see what I can come up with. (Maybe it’s time I hired an intern so I could trade, write a book and publish a newsletter — yet still have some time for some more new research…)Thanks for posting your thinking here.Cheers,-Bill
Markets don’t seem to be worried. The VIX has been below 20 for months now.
vix is no longer a reliable indicator of risk.