Why This VIX Belongs To The Faders

The Option Pit VIX Traffic Light is Yellow: Volatility Is Going To Move.

Hey Traders,

Over the last week,  the S&P 500 (Ticker: SPX) has seen its share of volatility.

It’s down about 150 points since the 28th …

Must be great to be long volatility … right?


Well …

In the last five days, the S&P 500 is down about 150 points.

But here is something you might not be noticing …

VIX is down since its initial pop on the 28th.

iPath Series B S&P 500 VIX Short-Term Futures (Ticker: VXX), which should be killing it when the VIX is partially backward …

Is up about 0.20.

In fact, volatility hedging has not really worked at all.

It has been tradeable, but not useful as a hedging tool even in short-duration strategies.

In essence, unless you anticipated this second sell off on the 28th literally the day before it happened, you did not make much money in this mess.

Even most professionally-managed hedging strategies do not jump on the first day of a spike.

They missed out too.

What has been happening?

Volatility is going up at-the-money …

But rising vol is actually not moving out-of-the-money options. In fact, those might even be going down.

So the VIX rising is based solely on the index itself moving strikes …

So VIX kind of meanders …

It also means that hedging using the equity index is going to work better than in VIX itself, (although my butterfly trade is good too).

It also means that unless VIX breaks out, the money is going to be made by faders, not long vol traders and hedgers.

I’d be long VIX puts, and long index put spreads.

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.