2 Trades To Play The Backward VIX Curve

The Option Pit VIX Traffic Light is Yellow: Volatility Will Move Wildly.

Hey Trader,

The VIX futures curve is now partially backward, with cash trading higher than near-term futures.

But the futures are not starting to enter full backwardation quite yet …

So what’s a trader to do?

Should we go long iPath Series B S&P 500 VIX Short-Term Futures (Ticker: VXX) or ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY)?


Backed By Movement 

With the VIX at 24, the S&P 500 (Ticker: SPX) is going to have to move about 1.5% every day to justify the price …

On Monday, so far, it is moving that much …

The Nasdaq 100 (Ticker: NDX) is actually down 2.43%. that would be a CBOE Nasdaq Volatility Index (Ticker: VXN) of about 34. Currently, VXN is 28.70. The Nasdaq 100 Volatility Index (Ticker: VOLQ), which measures at-the-money implied volatility (ATM IV) rather than looking at the whole options chain like VXN, is at 25.50.

The point is that IV is still expensive, but the actual movement the last few days is making it much less expensive than it was …

So …

What do traders do that want to play potential upside?

With the VIX futures curve like this:

There is actually upward drive in October futures …

That will benefit VXX and UVXY if the curve sits … which is something it has failed to do.

Thus I think we are still in a spot where using VIX options to hedge is a better idea than using the ETP’s like VXX and UVXY.

In my Volatility Edge program, we bought the VIX 25-35-45 call fly this morning.

The potential payout on that 10-point fly is GREAT, as the spread is under 1.00.

Another pretty cheap alternative would be to buy the VIX 28-37.5 call spread for about $0.90.

The payout is about nine to one, and I do not see VIX getting to 37.

Your Only Option,

Mark Sebastian

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