Option Traders,
When I ran the VXX contest several people tried to imitate my AAPL trade of buying ATM calls and selling more back month upside calls to make the position delta neutral. There is a problem with that approach. VXX IV goes up when it rallies.
When fear is at its highest is the VXX rallying or is the VXX falling? When are traders running to buy VXX? When it is on the rise. When the fear is to the upside it produces the skew below:
This skew is called a commodity skew. It is seen in products like Oil and gold. Stocks have this skew because the product is used to protect the hedger’s positions from the UPSIDE. This is the exact opposite of how a stock skew looks. This is because stock holders want protection from the downside. If a trader wanted to put on a position using multiple months, the trader would actually want to enter it the exact opposite way.
Stay tuned for later today, when we will have a guest blog post from one of my new students! Have a great rest of the trading day!
(graph from LiveVolPro)
