Have Your VIX Cake And Eat It Too

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

VIX closed at 15.01, its lowest close since the pandemic began.

This is big news, but it might only be the beginning …

Yes, we are in the midst of earnings season,  but the VIX does not seem to care. As I stated multiple times, the lack of put-buying is allowing the VIX to finally fall.

But suppose you are worried about imminent doom?

What If I told you …

You can have your cake and eat it too.

Like I said, on Thursday the VIX closed 15.01, its lowest close since February 2020.

Then, after the bell, Snap Inc (Ticker: SNAP) took a big dive, pulling some mega-caps with it.

Suppose you are looking at this market and actually worried about a sell-off.

(We are not there yet, but hey, people have differing views, I am cool with that.)

Here is the problem you face in hedging. VIX futures are still REALLY expensive:

November futures are still around 19 …

That is a massive four point premium.

So the way to hedge is not to simply just buy calls that will probably lose.

But what if you bought a strangle instead?

Take a look at November options at the close on Thursday:

The November 17-strike puts (that I told you to buy for $0.40, and then $0.55) are trading about $0.75. That means they have about $1.25 of embedded convergence decay in them.

If I buy the 19-25 call spread, I will pay about $0.80.

If I put the two together, I end up with a hedge that I am paying for if the VIX stays low.

Like this idea?

You should. It's a good one, and the type of trades we do in the Volatility Edge and the Volatility Trading Club all the time. (Call us at 889-972-3301 to find out more about that!)

You could swap the 17-strike puts out for puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) if you wanted, but the idea around this hedge is pretty solid.

Your Only Option,

Mark Sebastian

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