Cboe Market Volatility Index (VIX), Trending Stock Report

Every once in while we like to buy cheap volatility insurance using options on the Cboe Market Volatility Index (VIX). If you’ve been with us for a while you already know this. The last time we did this we bought a VIX call debit spread back on May 29^th of this year for the September 18^th expiration. You may still be holding the options, or you may have exited with a nice profit when we talked about exiting the VIX debit spread in the ODDS Online Coaching session on August 6^th after the VIX spiked well above the strike price that we sold.

If you’re still holding the spread that expires in September, you may want to hold on. September volatility has a seasonal tendency to increase, and that trade is still in profitable territory up 36% as of yesterday’s close. If you already closed your VIX trade during the August spike, you may be looking to buy another volatility insurance policy. Yesterday VIX increased nearly 5 points. The 2-month implied volatility on VIX options is rising. With VIX moving higher so quickly yesterday, the cost of our volatility insurance is increasing. The good news is that we can use a debit spread just like we did last time to reduce our costs.

This Volatility Term Structure chart for VIX is showing that shorter terms are relatively more expensive than longer terms. VIX options expire on Wednesdays, and Monthly expirations are much more liquid than weekly options. By going out to October’s monthly expiration, we can get a good price while getting coverage during the seasonally high volatility pattern, and we have sufficient liquidity to give us a good chance of getting filled at the price that we want.

This Volatility Skew chart for VIX is showing that lower strikes for the October 16^th expiration are cheaper than higher strikes. With this skew, we can select a strategy that purchases lower strikes and sells higher strikes to reduce our costs. The trade-off is that we limit our profit potential. That’s okay if we can get the price we want with enough profit potential to cover any potential losses we may incur from increased market volatility.

VIX started increasing yesterday. If you don’t already have volatility insurance during this seasonal period that tends to have increasing volatility, you may want to buy some now before it’s too late.

To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.