Exploiting VIX spikes and crashes using Options

#Winning Trades

Disclaimer: Here, I am just sharing what I may be doing. this is not an investment or trading advice. I am not responsible for your own trades and investments decisions. 

Most of us must have heard about VIX as the "fear indicator" for the S&P500 Index. The general understanding is the higher the VIX, the higher the fear. 

According to wikipedia (https://en.wikipedia.org/wiki/VIX), VIX is a volatility index derived from S&P 500 options for the 30 days following the measurement date,[5] with the price of each option representing the market's expectation of 30-day forward-looking volatility. The resulting VIX index formulation provides a measure of expected market volatility on which expectations of further stock market volatility in the near future might be based.

So during uncertainty hot spots in the market (for example, CPI, Fed meetings, war etc), bears and bulls will want to hedge their positions. This pushes up volatilty in both put and call SPY options and that translate into the VIX index going up. But after the event has passed, certainty is established, traders get out of their positions, regardless of whether SPY rallies or crashes, VIX will come down. This is a regular pattern (in the screenshot, i have drawn the spikes and crashes in VIX) at least in recent months. See the screenshot below.    

the most recent example was the 10Apr CPI reading, VIX went up. on 11Apr PCE reading (premarket announced), VIX went up pre-market to 17.61 (+12%) but right after PCE announcement, it crashed down to 16. after market open, it went down further and closed last at 14.91. So one is looking at same day movement from 17.61 to 14.59, a drop of 17%. for comparison, SPY only moves within a 1-2% window on the same day. 

What immediately may come to your mind is how can i trade VIX then? Well, the bad news is that we cannot buy and sell VIX "shares" because there aren't. 

But the good news is that we can still exploit this somewhat predictable pattern that seemed to have a period of a week to two week through options for example $VIXW 20240424 16.0 PUT$ . 

These are some of the ways where one can consider doing:

1. During those predictable market days where there is uncertainty in the market. When the IV of the VIXW options is low enough (IV < HV) and VIX is low (around 11-12), I will consider buying a ATM VIXW call and wait for the spike up. but get ready to sell the call as after the event, likely VIX will drop. 

2. Wait for a spike up. Event unfolds. VIX will begin to fall. VIXW options IV will also fall. at high VIX, VIXW Puts will be cheap. can consider buying the ATM VIXW puts. When VIX goes down, VIXW puts goes up in price. 

3. Can consider doing put/call spreads but I find that the bid/ask price for these VIXW options tend to be quite wide due to the lack of liquidity. 

4. can consider scaling in batches as VIX goes up and down. 

All the best to us. this is just my sharing. Please share, like and comment/correct so we can all learn together. Thanks.