Realized Volatility is high, but not equally high

Where is Realized Volatility?

The realized volatility in this market is very high.  So high in fact that all the blinky lights on my TradeHawk realized volatility page are turning red, red, red.   What also is pervasive is the stubborn backwardation in the $VIX complex.  My last blog was about buying gamma and selling vega, which is a long realized volatility trade.  The best thing about option is that one can trade the near exact risk one wants to take.  It is just a matter of price.

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Trading the $VIX Curve

A lot of trading VIX has to do with the shape of the $VIX curve.  When there is a very backward $VIX curve, we have larger realized volatility in the $ SPX.  What we have right now is a flat $VIX curve, backward to cash.  To me that is a different read on what is going on.  A flat $VIX cash curve means the market thinks $SPX can go anywhere but $VIX will drop by the spot future expiration date.  If $VIX Nov was a lot higher, we would expect more realized vol and larger relative move in $VIX cash.  What we have is an “orbiting” signal, up and down but in a large range for at least the VIX Nov cycle.  That conveniently holds the Mid-Term elections.

VIX charts by VIX Central

The Orbiting VIX Signal

$VIX cash at a 22.63 is high but seems a little underpriced given we were down almost 10% from the all-time highs just a month ago.  That is because the orbiting movement damps the $VIX cash somewhat.  $VIX cannot keep the move over 24.  24 $VIX is my Zone 4 number, and most volatile area.  That leaves us with some trade ideas.

The Trade

$SPX is orbiting but $QQQ is not.  An idea  I like is  long  $VIX strangles  and long $QQQ call spreads or flies.  You can price it such that $VIX holding this pattern close to the election will pay for both trades.  To learn how to do it, take a look at our $VIX courses.

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Disclosure: $QQQ, $VIX, $SPY positions

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