There’s something crazy going on in the VIX …
I’ve been watching it all week …
And I’ve even made a few plays on it too …
(My 14th win of my last 17 trades, by the way …)
You know volatility is my bread and butter … and I’ve been trading it for what feels like forever.
I mean, I was even in the room when the VIX was ‘born’!
But this week, I saw something I’ve never seen before …
Here’s what’s got me so excited this week.
All right, before we dive all the way in, let’s briefly touch on a few VIX and VIX ETP basics.
First up: the CBOE Volatility Index – the VIX itself. You might know the VIX as the market’s “fear gauge” — a higher VIX indicates higher uncertainty amongst traders.
Essentially, the VIX measures the implied volatility (IV) – or expectations of movement – being priced into S&P 500 (Ticker: SPX) options that are 30 days from expiration.
Since traders often use SPX options to hedge their portfolios, greater uncertainty about near-term volatility increases the demand for SPX options, which increases the price of SPX options, which increases the VIX.
There’s a little more to it than that, but for any vol beginners reading this, that should give you the basic idea.
The next piece of the puzzle is VIX futures. VIX futures tell us the market’s estimate of where the VIX will be on the day of expiration on a given month.
Note that VIX futures expire once per month, and VIX futures expiration is not the same as standard options expiration – rather, they expire one Wednesday per month, and they stop trading on the Tuesday before that.
As futures near expiration, they’ll draw closer to the actual cash index of the VIX – after all, they must match the underlying at the time of expiration.
Now, there’s a whole slew of VIX and VIX futures exchange traded products (ETPs), but we’re just going to focus on one today — ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).
UVXY provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index – essentially UVXY is long 1.5 times the VIX future contract 30 days from expiration.
So when VIX futures get crushed, you can expect UVXY to get even more crushed.
Still with me?
Let’s look at what happened this past week.
First, let’s take a look at the VIX futures curve.
This shows us where futures (beginning with August) are currently trading relative to VIX spot (the green line).
Remember, as these futures near their expiration, they must eventually converge with the actual VIX price.
So on Friday, August futures were trading at a 1.26 premium to VIX spot.
And these futures expire in just two trading days.
That’s a fair amount of weight to shed by Tuesday’s close!
And with futures trading abnormally high …
This presents us with some very interesting trading opportunities.
The VIX itself has been steadily dropping …
But it seems as though VIX futures – and by extension, VIX ETPs such as UVXY – are not keeping pace.
Since we’re so close to expiration, there’s also very little time premium being priced into VIX options, so they’re relatively cheap.
So VIX options are a bargain, and VIX futures are overpriced relative to the VIX, and we know they will be forced to drop to VIX spot price before expiration on Wednesday …
There’s some insane trading opportunities out there right now.
First off, take a look at this straddle on VIX August 18-strike options.
As of Friday afternoon, you could buy a VIX 18-strike straddle for $2.05 – as the VIX was trading at 15.47.
So your breakeven on this straddle is 15.95 …
So this VIX straddle is trading below parity. That should not be a thing!
And if you were watching this earlier in the week … the straddle was even cheaper!
Headed into expiration, if the VIX drops, the puts will go further into the money.
If the VIX explodes, the 18-strike calls will be in the money.
If the VIX moves up to 18, the value of the straddle should increase.
It is hard (but, full disclosure, not impossible) to lose money on a trade like this!
Or, say you like straight put buying …
Here’s a look at VIX puts that expire next Wednesday:
With the VIX closing at 15.45 on Friday, there’s multiple strikes you could buy and come out below parity.
The VIX August 18-strike currently costs $1.65 – that means breakeven is 16.35 … almost a full point higher than where the VIX closed on Friday.
Looking at VIX futures, playing UVXY right now could – and has – paid off in a big way for me over this last week.
I already mentioned my UVXY put trade in my Robinhood Trader program.
On Wednesday, we purchased the UVXY August 13 23.5-strike puts.
I closed out half of the position on Thursday, and the last half on Friday morning for a whopping 151% win.
And in my Volatility Edge program, we closed out a 61% win in less than 24 hours earlier this week.
How is this happening?
Well, remember that UVXY trades at 1.5 times the 30-day out VIX future.
That means as VIX futures drop … UVXY is going to get hammered.
I estimate UVXY will be losing about $0.35 per day … so by options expiration on the 20th, I would expect to see UVXY trading at around 21, if not lower.
On Friday, UVXY August 23-strike puts were asked at $1.11. The 22.5-strike puts were trading for $0.72 …
I’ll let you do the math on those.
Now, obviously, nothing is guaranteed …
But I know I’ll be doing some heavy trading in these in the days ahead …
Your Only Option,