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