TRADE IDEA: VIX SEPT 19TH 11/13/13/14 SYNTHETIC BIG LIZARD
People frequently ask under what circumstances I would long a volatility product and, if so, what product I would use.
I generally shy away from long setups in instruments that experience either beta slippage or contango erosion such as VXX or UVXY since the vast majority of the time you're rowing against the contango tide -- a pop in volatility is required before contango eats away at the position and as we all know, volatility can remain lower for longer than we'd like.
Consequently, my usual go-to for long volatility setups is in the VIX itself and not one of its derivatives and only then under a particular set of circumstances: (a) VIX spot is objectively low; and (b) VVIX (the index which describes the implied volatility of the VIX) or VIX implied volatility is also low.
Currently, spot is at 12.86 and VIX implied is 92%. The 30-day low was at 11.44, the 2018 low was sub-10, and although that 92% would be considered high for other underlyings, it's in the 30th percentile of where it's been over the past 52 weeks for VIX, so it's pretty low here. I might wait for a little lower before pulling the trigger on this particular setup (making any strike adjustments necessary giving movement of the underlying), but this setup is representative of what I would use to play -- a synthetic big lizard with risk one to make one metrics.
The standard big lizard is generally made up of an at-the-money short straddle, along with a long call where the credit received for the entire setup exceeds the width between the short straddle and the long call, resulting in no upside risk for the setup. Here, I've thrown on a cheap long put to bring in buying effect substantially over just having the short put hang naked out out there, resulting in the following metrics:
Max Profit: 1.05/contract
Max Loss: .95/contract
Break Even: 11.95 (no upside risk)
Theta: .06
Delta: 9.91
Since pops can be awfully fleeting, I would look to take this off at 50% max for just the short straddle and long call aspects (the long put frequently goes to worthless quickly, and its going no bid can put the kaibosh on getting filled at 50% max for all four legs of the setup). I'll naturally post a live trade should circumstances develop where I think it might be worthwhile to pull the trigger (low VIX + low VIX rank/implied).
I generally shy away from long setups in instruments that experience either beta slippage or contango erosion such as VXX or UVXY since the vast majority of the time you're rowing against the contango tide -- a pop in volatility is required before contango eats away at the position and as we all know, volatility can remain lower for longer than we'd like.
Consequently, my usual go-to for long volatility setups is in the VIX itself and not one of its derivatives and only then under a particular set of circumstances: (a) VIX spot is objectively low; and (b) VVIX (the index which describes the implied volatility of the VIX) or VIX implied volatility is also low.
Currently, spot is at 12.86 and VIX implied is 92%. The 30-day low was at 11.44, the 2018 low was sub-10, and although that 92% would be considered high for other underlyings, it's in the 30th percentile of where it's been over the past 52 weeks for VIX, so it's pretty low here. I might wait for a little lower before pulling the trigger on this particular setup (making any strike adjustments necessary giving movement of the underlying), but this setup is representative of what I would use to play -- a synthetic big lizard with risk one to make one metrics.
The standard big lizard is generally made up of an at-the-money short straddle, along with a long call where the credit received for the entire setup exceeds the width between the short straddle and the long call, resulting in no upside risk for the setup. Here, I've thrown on a cheap long put to bring in buying effect substantially over just having the short put hang naked out out there, resulting in the following metrics:
Max Profit: 1.05/contract
Max Loss: .95/contract
Break Even: 11.95 (no upside risk)
Theta: .06
Delta: 9.91
Since pops can be awfully fleeting, I would look to take this off at 50% max for just the short straddle and long call aspects (the long put frequently goes to worthless quickly, and its going no bid can put the kaibosh on getting filled at 50% max for all four legs of the setup). I'll naturally post a live trade should circumstances develop where I think it might be worthwhile to pull the trigger (low VIX + low VIX rank/implied).
