The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Remain Stable or Fall.
Hey Traders,
On Thursday, the market fell apart at the end of the day.
But that is not what I was paying attention to.
What I was watching was 1x Short VIX Futures ETF Fund (Ticker: SVIX) and 2x Long VIX Futures ETF Fund (Ticker: UVIX).
Why?
Because they listed options on Thursday.
UVIX traded 1512 options, SVIX only 67.
While that might not sound like a lot, let me assure you that in the case of UVIX … that is a lot.
Remember, these ETFs listed on Wednesday.
The stock volume for UVIX was almost 300,000 shares, and the same holds true for SVIX.
I am telling you this: UVIX is going to be a hit. SVIX probably as well.
The stocks are trading, which means the options will follow suit.
In the case of UVIX, more than 1500 contracts on the first day of trading is HUGE.
I do find it interesting that most of the volume was calls:
Remember, UVIX is 2x leveraged exposure to the movement of the index iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) is based on.
Traders right now are looking for a move higher.
So how do you trade it?
When options first list, the implied volatility (IV) of the options is usually way too high.
UVIX vol closed at 167.68, while ProShares VIX Short-Term Futures ETF (Ticker: VIXY) (a VXX clone that doesn’t have the same issuance problems) vol was 89.16.
So believe it or not, UVIX is already pretty fairly priced.
So how do you trade it?
For starters when vol gets high – I mean really high – SVIX is an interesting way to get short vol.
And when vol looks like it’s going to pop, UVIX is now better than UVXY to take advantage of that … using calls.
I expect markets to get really tight, and when vol normalizes, to make a lot of money owning puts in UVIX.
For now, I would still trade UVXY in a fast market, but as markets tighten, I would shift to UVIX.
If you think we are heading back down though, the 17-25 call spread in UVIX for April only costs about $1.70 … that could pay.
Your Only Option,
Mark Sebastian