VIX Downside Options

[tjlocke99 18]

Kim et. all,

 

Currently VIX Aug future trades near 15.35.

 

If we look at VIX downside plays, let's say on the Aug options, they are trading near parity.

 

Thus something like a short vertical call spread, short Aug 10.5, long Aug 11.5, has a mid of $1.00 credit and trades going off at a $.98 credit.

 

Could someone help me understand this?  I know commissions on VIX are higher, but if you can get in at a .98 to .99 cent credit isn't your risk to reward very high as you can only lose .2 cents plus commissions?  I know these would be very low levels for VIX but not unheard of and you'd be trading with the idea that with commissions you risk about .05 thinking there is a greater than 5% chance that VIX will be below 11.45 in Aug.

 

Please let me know your thoughts.

 

Thanks.

Edited July 22, 2015 by tjlocke99

[Yowster 9,180]

I'm not sure of the math behind the VIX, but I think there is a floor on how low it can actually go.  Take a look at the long term chart of VRO - this is the monthly settlement price of VIX options so the price changes once per month when you look at the chart.  I quick eyeball of the history of the VRO going back to when it began in 2007 shows only one occurrence of it being less than 11.50 (11.03 last July) - and that with the VIX being quite low on average over the last 3 years.  VIX commissions are higher, basically 0.05 for opening and closing the spread, so  you'd need to factor that into you profit calculation.   I think you can open this trade for such a big credit because the VIX almost never settle below 11.50 and odds are it will be the full 1.00 at expiration.  You are right in that your downside is minimal, but based on history it will take something out of the ordinary to make money on this trade.  I also see that the VIX options volume is very low for all strikes below 12, so I'm not sure how close to midpoint pricing you would get on this trade if you tried to open it.

[Edwin 63]

Isn't short the 11.5 and long the 10.5 a 1 debit spread, not a credit spread? I am short the 16/13 put spread for a 2.07 credit. There is an FOMC meeting at the end of the month, a ton of earnings, economic data, and a jobs report the first week of August. I can't imagine all of those factors will keep the VIX this low with some uncertainty in upcoming events.

[Yowster 9,180]

Isn't short the 11.5 and long the 10.5 a 1 debit spread, not a credit spread? I am short the 16/13 put spread for a 2.07 credit. There is an FOMC meeting at the end of the month, a ton of earnings, economic data, and a jobs report the first week of August. I can't imagine all of those factors will keep the VIX this low with some uncertainty in upcoming events.

I think he just reversed his short and long in the original post - it should read short 10.5 call and long 11.5 call.  But everything else talked about getting the credit when opening the trade, so I'm sure it was just a typo error.  Your trade of shorting the 16/13 put spread is looking for a VIX spike.  His trade is looking at a low risk trade to profit it the VIX stays extremely low at August VIX expiration.

[Optrader 128]

Is there better alternative than to use VIX options like vxx, uvxy etc ? which mirrors VIX .

 

If I put a credit spread  16-13 and just in case VIX stays that low, the reward is how much ?

 

But if I can use same  put spread on say vxx or uvxy or something, then I can get much better reward to risk ratio ?

OR may be I am getting VIX wrong.

[Edwin 63]

Is there better alternative than to use VIX options like vxx, uvxy etc ? which mirrors VIX .

 

If I put a credit spread  16-13 and just in case VIX stays that low, the reward is how much ?

 

But if I can use same  put spread on say vxx or uvxy or something, then I can get much better reward to risk ratio ?

OR may be I am getting VIX wrong.

You don't want to use VXX or UVXY, they have significant contango drag with the VIX futures, unless the you think the VIX term structure will go from contango towards backwardation in a short time period.  It basically means that when the front month VIX futures are less than the 2nd month VIX futures, they are in a contango state, and VXX and UVXY is constantly selling front month VIX futures to buy next month VIX futures (which is going to be more expensive) on a daily basis.  So when VIX futures are in contango, VXX and UVXY will constantly go down.  That's why it has to periodically reverse split, because they constantly go towards 0, unless there is backwardation in the VIX futures term structure, where VXX and UVXY will pop and go up 10-30% in a short time period.    There's more info about this on the following sites:

http://vixcontango.com/Site/Introduction#InsideVolatilityETFs 

http://sixfigureinvesting.com/2013/04/how-does-vxx-work/ 

http://seekingalpha.com/article/3012686-how-does-uvxy-work

http://seekingalpha.com/article/3327635-caution-needed-in-the-current-volatility-market 

http://vixcentral.com/ 

 

The risk reward on the 16/13 August put spread is a max profit of 210, and max loss of 90 per spread.  The breakeven is VIX at 13.90 at August expiration.  I'm expecting that VIX won't stay at 12 between now and then, just based on the fact that there's a fed meeting at the end of the month, non-farm jobs report the first week of August, there's additional economic data coming out, a ton of earnings reports, etc.  I'd still make something off the spread if there's just a small temporary pop in the VIX.  In addition to that SPY & SPX IV Rank is at 0%, and VRatio (VXV/VIX) is above 1.2.  That doesn't mean that it's definitely going to be a winning trade, but I like the odds that VIX won't stay at 12 and under for the next month.

[Yowster 9,180]

Is there better alternative than to use VIX options like vxx, uvxy etc ? which mirrors VIX .

 

If I put a credit spread  16-13 and just in case VIX stays that low, the reward is how much ?

 

But if I can use same  put spread on say vxx or uvxy or something, then I can get much better reward to risk ratio ?

OR may be I am getting VIX wrong.

You may have things backwards here - when you sell a VIX put credit spread you want the VIX to spike up.  This trade will lose if VIX stays low.  So your reward comes if the VIX rises and not when it stays low.

 

I agree with ebdoc in that you don't want to use VXX to play for a spike up in the VIX - because the selling of front month to buy the next month is typically at a higher price which drives the price of the VXX down (so that will be working against a VXX trade playing for a rise in the VIX). That being said, I love using VXX trades to play for the VIX to go down after its been up for a bunch of days because then this behavior can work in your favor.

[Optrader 128]

How do you use VXX for trades for VIX going down ?

and  is there a reverse of VXReverse which does the opposite of VXX ? meaning who are buying next month and selling current month ?

OR can I just short or buy put spread on VXX if it is going to keep on going down in long run ? 

[Yowster 9,180]

How do you use VXX for trades for VIX going down ?

and  is there a reverse of VXReverse which does the opposite of VXX ? meaning who are buying next month and selling current month ?

OR can I just short or buy put spread on VXX if it is going to keep on going down in long run ? 

Looking at a long term chart of VXX, buying puts or put spreads certainly works out well historically as that current month to next month futures swap works in your favor most of the time.  I was thinking of placing a longer term trade using VXX options 6 months out and buying ITM puts or a OTM put spread.  I'm also expecting VXX to do a reverse split in the near future as its price is getting too low.

 

Regarding shorter term trades for the VIX to drop after it rises for a few days in a row.  I love VXX diagonals for this where I'll short a slightly OTM put expiring in 5-10 days and buy a slightly ITM put the next option series out.  You can use farther dated options if you like, but since the VIX dropping back down usually happens fairly quickly I like the shorted dated ones.   If the VXX works against me and continues to go up, I'll turn the trade into a calendar.  If the VXX drops as expected, I'll close the trade near the short leg expiration.

[Optrader 128]

Nice strategy. But why you need to a diagonal. Positive theta ? We can just do a plain buy put spread on way down on VXX with shorts sitting ATM . I think both works, just the risk reward ratio .

 

Nice that VXX has weeklies  and its very high IV.

[Yowster 9,180]

Nice strategy. But why you need to a diagonal. Positive theta ? We can just do a plain buy put spread on way down on VXX with shorts sitting ATM . I think both works, just the risk reward ratio .

 

Nice that VXX has weeklies  and its very high IV.

I like diagonals because they can still make some profit if the VXX stays the same (because of the positive theta) and because they can be easily adjusted into calendars.  But you are right in that they both will work if the VXX goes down.

[SeanM 29]

is there a reverse of VXReverse which does the opposite of VXX ?

 

Yes, XIV.  It's pretty much the greatest long term investment of all time.  

 

Also, there is some really good info in this post from a few years back.  Volatility Products Strategies & Trades 

The VXV/VIX ratio strategy mentioned in the post is especially solid.  See the following white paper for some great reading.  Easy Volatility Investing

[Edwin 63]

Yes, XIV.  It's pretty much the greatest long term investment of all time.  

 

Also, there is some really good info in this post from a few years back.  Volatility Products Strategies & Trades 

The VXV/VIX ratio strategy mentioned in the post is especially solid.  See the following white paper for some great reading.  Easy Volatility Investing

You can also trade SVXY, which has options available to trade with it.

[Optrader 128]

Thanks . I will review the links and research . The  options should be liquid to trade. A lot of ETF's have options ,but not all are liquid.

penny increment is great like FB.  Less slippage. 

[Yowster 9,180]

Based on the stats for the last few years, it seems buying puts on VXX performed far better then buying calls in inverse VIX ETF's like XIV or SVXY.  Since the beginning of 2013...

• XIV went from 17 to 50
• SVXY went from 35 to 95
• VXX dropped from 115 to 16

I'd take any of these gains, but to get the best gain% to play for the VIX staying low to moderate I think you are far better off playing for VXX to drop compared to playing XIV/SVXY to rise.

[Edwin 63]

UVXY (Ultra VIX short term Futures) has gone from a high of 281.4 on 10/16 to a low of 26.28 yesterday.

[tjlocke99 18]

Based on the stats for the last few years, it seems buying puts on VXX performed far better then buying calls in inverse VIX ETF's like XIV or SVXY.  Since the beginning of 2013...

• XIV went from 17 to 50
• SVXY went from 35 to 95
• VXX dropped from 115 to 16

I'd take any of these gains, but to get the best gain% to play for the VIX staying low to moderate I think you are far better off playing for VXX to drop compared to playing XIV/SVXY to rise.

 

The statements about VXX have been true however if you buy VXX puts you do pay a huge premium in time value, so in many cases you do need a large drop in VXX just to break even.  Yes that has GENERALLY happened in the past, but it is something to note.  Even buying DITM puts 6 months to a year out will have pretty high time value unless you go DEEP in the money.

[Yowster 9,180]

UVXY (Ultra VIX short term Futures) has gone from a high of 281.4 on 10/16 to a low of 26.28 yesterday.

Yeah, forgot about that one.   A little less volume/liquidity than VXX but certainly another choice to play with puts for the VIX staying on the lower side - but note that IV of the UVXY option is extremely high so you'll have to account for that premium in trading strategies.   The UVXY performance is another example of better options gain% playing for VIX instruments to go down as opposed to playing for inverse VIX instruments to go up when making trades for the VIX staying relatively low.

[tjlocke99 18]

Isn't short the 11.5 and long the 10.5 a 1 debit spread, not a credit spread? I am short the 16/13 put spread for a 2.07 credit. There is an FOMC meeting at the end of the month, a ton of earnings, economic data, and a jobs report the first week of August. I can't imagine all of those factors will keep the VIX this low with some uncertainty in upcoming events.

 

All of those factors could lead to a lower VIX as well.  The Fed not raising rates, really good earnings leading to the S&P rising and VIX falling, . . .  This is certainly not the most likely situation for VIX to fall, however given these rates with commissions you'd have to be right about 1 out of every 12 times to break even.

[Yowster 9,180]

The statements about VXX have been true however if you buy VXX puts you do pay a huge premium in time value, so in many cases you do need a large drop in VXX just to break even.  Yes that has GENERALLY happened in the past, but it is something to note.  Even buying DITM puts 6 months to a year out will have pretty high time value unless you go DEEP in the money.

Agree 100% with this statement...  That is why I love diagonals for this type of VXX trade where I'm selling shorter dated OTM puts against longer dated ITM puts - if the VXX drop is gradual I can show profit on both legs, if the VXX drop is quicker I cap my gains but its still a very nice gain, if VXX starts to rise I can roll the short legs.

[Edwin 63]

Yowster, what do you use as your entry point for your diagonal in VXX? Are you basing entry on VIX?

What ever happened to the VXX broken wing fly that the forum was looking at before?

[Yowster 9,180]

Yowster, what do you use as your entry point for your diagonal in VXX? Are you basing entry on VIX?

What ever happened to the VXX broken wing fly that the forum was looking at before?

Broken Wing Fly - turned out to be problematic if the VXX dropped too fast and you could lose if VXX overshot on the downside.  Wanted a trade structure that would still win even on the downside overshoot and could be adjusted if the VXX moved against me and went up, hence the diagonal.

 

Entry point for diagonal - Up until now I've only been using this trade after the VIX/VXX has been up for a few days in a row (liking my chances at fall back down after some up days).  However, given the longer term downtrend in the VXX based on the rolling futures behavior, I'm also looking into some longer term trades to play for the longer term dropping.  I'm thinking of going out 3-6 months and selling upside OTM call spreads and using the credit to buy downside OTM put spreads, but haven't opened the trade yet.

[tjlocke99 18]

Agree 100% with this statement...  That is why I love diagonals for this type of VXX trade where I'm selling shorter dated OTM puts against longer dated ITM puts - if the VXX drop is gradual I can show profit on both legs, if the VXX drop is quicker I cap my gains but its still a very nice gain, if VXX starts to rise I can roll the short legs.

 

Yowster, since VXX is cash settled, a diagonal or any time spread using has unlimited liability correct?  Again it is unlikely to go too far, but there is unlimited liability because the short front month can end up more expensive then the back month.  Is this correct?

[tjlocke99 18]

Broken Wing Fly - turned out to be problematic if the VXX dropped too fast and you could lose if VXX overshot on the downside.  Wanted a trade structure that would still win even on the downside overshoot and could be adjusted if the VXX moved against me and went up, hence the diagonal.

 

Entry point for diagonal - Up until now I've only been using this trade after the VIX/VXX has been up for a few days in a row (liking my chances at fall back down after some up days).  However, given the longer term downtrend in the VXX based on the rolling futures behavior, I'm also looking into some longer term trades to play for the longer term dropping.  I'm thinking of going out 3-6 months and selling upside OTM call spreads and using the credit to buy downside OTM put spreads, but haven't opened the trade yet.

 

Yowster, what do these trades buy you using the credit from the call spread?  You still have the margin requirement, so whether the cash in your account has to be held for margin purposes or is used to directly buy the put spread, isn't the return on investment the same (in other words the return on a debit outlay of 2 bear put spreads will be the same as the return on margin using bear calls)?

[Edwin 63]

I believe that VXX is American style stock settlement, not cash settled. http://sixfigureinvesting.com/tag/vxx-options/

[Edwin 63]

Yowster, so if you were to put a trade on today, you would look at something like the Long Aug1 17 put and sell the Jul4 16 put? There is no downside risk. Do you close it for a loss if you get a huge pop in the VIX and VXX, or just let it ride until your short leg expires knowing that VXX will eventually come back down due to contango drag in the VIX term structure?

Edited July 22, 2015 by edboc

[Yowster 9,180]

Yowster, what do these trades buy you using the credit from the call spread?  You still have the margin requirement, so whether the cash in your account has to be held for margin purposes or is used to directly buy the put spread, isn't the return on investment the same (in other words the return on a debit outlay of 2 bear put spreads will be the same as the return on margin using bear calls)?

You are right about the margin requirement being the same for the 2 different types of trades and the return being the same if the VXX moves below your put strikes... but if the VXX winds up near expiration not moving that much and is above my put strikes and below my call strikes then the call credit spread and put debit spread combo will be break-even, but if you just use the put debit spread then the trade would be a loser.

[Yowster 9,180]

Yowster, since VXX is cash settled, a diagonal or any time spread using has unlimited liability correct?  Again it is unlikely to go too far, but there is unlimited liability because the short front month can end up more expensive then the back month.  Is this correct?

VXX is an ETN that you can own shares in (unlike VIX) so I'm fairly sure that the options are not cash-settled, as ebdoc said in his post.  Also, I do not believe it is possible for the front month strikes to be more expensive than the back month strikes.

Edited July 22, 2015 by Yowster

[Yowster 9,180]

Yowster, so if you were to put a trade on today, you would look at something like the Long Aug1 17 put and sell the Jul4 16 put? There is no downside risk. Do you close it for a loss if you get a huge pop in the VIX and VXX, or just let it ride until your short leg expires knowing that VXX will eventually come back down due to contango drag in the VIX term structure?

This is the type of short-term trade structure I put on after a VIX pop, if the VIX rises gradually I'll move up my short strike to turn it into a calendar.  If the VIX makes a huge pop (which is the worst case for this trade) then I'd close the short leg and let the long leg ride for a bit know that history is on my side (for the last 3 years or so) for a drop.   That being said, I do not have one of these trades on currently - with the VIX at a fairly extreme low I'm a little uncomfortable with a 2-week trade looking for VIX to remain the same or dropping further.  However, if you are looking at a longer trend trade with your long leg expiration being farther out then selling a short-term ATM put would make sense.

[Edwin 63]

All of those factors could lead to a lower VIX as well.  The Fed not raising rates, really good earnings leading to the S&P rising and VIX falling, . . .  This is certainly not the most likely situation for VIX to fall, however given these rates with commissions you'd have to be right about 1 out of every 12 times to break even.

What I mean is that there is uncertainty leading up to the FOMC announcement and right after the announcement the VIX and IV collapses in SPY and TLT.

Take a look at the VIX chart on each day of the FOMC announcement, the VIX pops leading up to the meeting announcement.

http://mam.econoday.com/byshoweventfull.asp?fid=466474&cust=mam&year=2015&lid=0&prev=/byweek.asp#top

http://mam.econoday.com/byshoweventfull.asp?fid=455475&cust=mam

[tjlocke99 18]

I believe that VXX is American style stock settlement, not cash settled. http://sixfigureinvesting.com/tag/vxx-options/

The prospectus talks about VXX itself.  Where does it say if the options are American or European style?  I'm not sure what it is but if its European and can go into backwardation then i'm concerned these trades are ticking time bombs.  Certainly the VIX calendars could have unlimited liability.

[tjlocke99 18]

You are right about the margin requirement being the same for the 2 different types of trades and the return being the same if the VXX moves below your put strikes... but if the VXX winds up near expiration not moving that much and is above my put strikes and below my call strikes then the call credit spread and put debit spread combo will be break-even, but if you just use the put debit spread then the trade would be a loser.

yes but but given the volatility skew on the puts this would not work as a normal inversed risk reversal.  if you went let's say 5% OTM both ways your put spread will cost you MUCH more then you can sell a 5% OTM call spread.  You also open yourself up to much more losses if VXX goes up.  if you just bought fewer call spreads you would have the same risk at settlement if VXX went up vs if it stayed flat.

[tjlocke99 18]

What I mean is that there is uncertainty leading up to the FOMC announcement and right after the announcement the VIX and IV collapses in SPY and TLT.

Take a look at the VIX chart on each day of the FOMC announcement, the VIX pops leading up to the meeting announcement.

http://mam.econoday.com/byshoweventfull.asp?fid=466474&cust=mam&year=2015&lid=0&prev=/byweek.asp#top

http://mam.econoday.com/byshoweventfull.asp?fid=455475&cust=mam

Fair enough.  I was thinking, oh then why don't people buy VIX options and hold leading up to the FOMC announcement.  However I think the answer is that VIX options themselves have a "vol of vol" component.  That VIX "vol of vol" will pop as well right?

[Edwin 63]

VVIX is the vol of vol. It doesn't look like it trades or has options.

[Yowster 9,180]

yes but but given the volatility skew on the puts this would not work as a normal inversed risk reversal.  if you went let's say 5% OTM both ways your put spread will cost you MUCH more then you can sell a 5% OTM call spread.  You also open yourself up to much more losses if VXX goes up.  if you just bought fewer call spreads you would have the same risk at settlement if VXX went up vs if it stayed flat.

Richard - Yes, I see the skew is quite large and I guess not surprising given that the VXX goes down the vast majority of the time.  So any type of inverse risk-reversal strategy would have to take that into account (like by going wider or closer to ATM on the call credit spread).   I haven't opened this longer term VXX down trade yet (I'd like to wait for some level of pop up first), but I definitely want to pick a trade structure that will not lose too much if the VXX does not drop below my put spread strikes (while of course not spiking up longer term which I know would be a losing scenario).  I'll have to look at some different trade structures to see what I would be most comfortable with here.

[Edwin 63]

I got out of the put spread today at 1.89, which I had sold at 2.07.  It looks like the calendar did a better, but I'm happy with some profit on it.

[tjlocke99 18]

Richard - Yes, I see the skew is quite large and I guess not surprising given that the VXX goes down the vast majority of the time.  So any type of inverse risk-reversal strategy would have to take that into account (like by going wider or closer to ATM on the call credit spread).   I haven't opened this longer term VXX down trade yet (I'd like to wait for some level of pop up first), but I definitely want to pick a trade structure that will not lose too much if the VXX does not drop below my put spread strikes (while of course not spiking up longer term which I know would be a losing scenario).  I'll have to look at some different trade structures to see what I would be most comfortable with here.

Depending on your portfolio size, a very DITM put may be the best, however the extrinsic value is high even on pretty DITM puts.

[Yowster 9,180]

Depending on your portfolio size, a very DITM put may be the best, however the extrinsic value is high even on pretty DITM puts.

Yeah, that option is definitely one to consider too.  If I go that route, I'd likely sell shorter-date OTM puts against it on an ongoing basis.