A Simple VIX Trading Trick

Man time has flown by and we are heading into the final couple of days of the VIX August expiration cycle. That good ‘ol day where wall street frantically awaits whether their option expired in-the-money or out-of-the-money.

Leading into expirations, I am always looking for plays in VIX.  

This is because the last couple of days of the life of a VIX option can produce the best convergence plays.

A convergence play is a trade that attempts to play the value of the future of VIX vs the value of the cash that the future must settle into.

Until I saw oil earlier this year, I would have said that the VIX is by far the biggest wild card on its expiration.

I am not sure that there is a product that has settled plus or minus 10% of the previous day’s close more often than the VIX future.

Because of this wild card, the VIX future tends not to trade at the price of the ‘cash VIX’ index until the moment of settlement.

Take the current VIX for example:

The cash settled on Monday at 21.56.

The August future settled at 22 for the day.

This means that all other things being equal, the future has about $.50 to drop between now and tomorrow night. That is NOT chump change when you think about it.

But, the options will not price that way, until the movement actually happens.

Thus, the 22 and 21 puts are both technically, OUT OF THE MONEY.

With the 22 put trading about $.75, and the 21 put trading about $.25,  

Do you think there might be a trade I could build there? Reply back and tell me what you think I should do. 

I know what I think….

The VIX Light is Red – which means it should continue to go down.

Your Only Option,

Mark Sebastian

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