I am not a big proponent of VIX options under normal circumstances. I think the VXX is a far easier option to trade, as the underlying is easy to get a quote on. That said, there are some things about the VIX that is favorable, for instance, in the final week it does start to act like the cash VIX. One things traders need to understand, is that the VIX options are based on the FUTURES not the cash. With that said, I am going to try to find some value in examining VIX option implied volatility.
Here is a question though, does VIX volatility tell us anything? The short answer, probably not a ton, but I think there are a few things. First let’s take a look at the state of VIX options:
VIX vol is still elevated, yet at 24 is certainly at the low end over the last year. Yet implied volatility is not at the very low end of the spectrum. I would call vol basically in the middle. To make things even more interesting, I think VIX skew (which is a commodity skew) is somewhat high.
What is this telling me, a few things?
1. Fear of a VIX pop persists
2. The market expects continued swings in implied volatility
3. Traders don't trust the current level
This probably explains why SPX skew has remained elevated. It also can explain why income trading has been near impossible for the "trade the same trade every month" crowd. At any given time there are trades out there, but trading the buffet of trades is going to kill any return.
Right now, trades that might make sense are butterflies, and certain double diagonals. I think stock picking vs. trading just indexes makes sense. Stock vol, in the right stocks isn’t crazy, on the indexes, unless the trader is picking the right trade, it is a losing proposition.
Finally, this explains why understanding weighted vega, skew, relative volatility.....basically, volatility is so important.
VXX Trades:
Our VXX trades are both still underperforming, but they both still have a shot. Here is a quick look:
Our second trade is the first leg of a butterfly:
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