The CBOE market volatility Index, also known as the VIX, can be a very rewarding trading vehicle.
You can use option trades on the VIX to take advantage of the different moves and volatility in the broader markets. The VIX can mirror the same volatility of the S&P 500. Playing this index long or short can take advantage of these moves without as much risk as in the outright buying or selling of the VIX futures.
One of my favorite strategies in the VIX, is the Ratio Butterfly.
Ratio Butterfly Example
This trade is entered when I feel the VIX is much more likely to move higher than lower. An example of the structure of this Butterfly can be as follows:
- With the VIX trading around the 15 level, you sell 4 VIX 15 Puts, buy 1 VIX 16 Put and buy 4 VIX 11 puts.
- Place all of these orders in the same expiration, which is approximately 20 to 40 days from expiration.
I have had consistent profits with this strategy whenever the VIX begins to trade around 15 or even lower. In the 12 to 14 area, you could also sell your Butterfly around the 14 strike.
This trade is put on as a net credit and can be relatively inexpensive to adjust, based on the size of your risk tolerance. You could place the trade small and then risk 50% to 100% of the cost of the trade.
I often have this trade on near the options expiration. This trade is positive theta and the closer to expiration, the more time premium profit I will accumulate.
The trader can also speculate on the VIX, by simply buying long Calls or long Puts. They are often not very expensive. You could also buy long Call Verticals and long Put Verticals to decrease your capital outlay and your amount of risk.
I have not utilized Time Spread strategies on the VIX and am not aware the risk or rewards of that type of set up.
Upside of the VIX
One other thing I would caution against, is being short on the upside of the VIX. VIX upward moves are often quicker and much more dramatic than VIX moves, where volatility is lowering.
If you decide to do this, be sure to have longs backing up any shorts and do not enter naked short Calls. Be sure you understand VIX futures and VIX options well before you place any live trades.
-Mark Fenton, Senior Options Mentor