Fading products can be tricky for a couple of reasons, not the least of which is the fact that "the ceiling" is no where near as clean as the floor and the fact that the implied of collapses as price declines (the inverse of what happens, for example, when SPY declines -- implied increases). In scenarios where I anticipate a collapse, I generally want to use a premium selling strategy to take advantage of that; the converse where I anticipate an implied expansion. So, how and where should I do that in VIX/VXX derivatives?
As a rather crude guideline, I'm looking to fade either VIX or VIX derivatives at VIX between 20 and 30 (naturally higher is better) with a particular focus on something above 25 (that late August 53.29 spike looks "anomalous" from where we're sitting now, but you never know). That's the "where."
Because this is a contraction situation, I'm looking at premium selling setups to fade, whether they be in the form of a simple short call credit spread (in VIX , VXX , or UVXY ) or something like a diagonal, where the back month expiry is later than the front month, so that I can roll out the short call to collect additional credit if the setup needs additional time to revert to its mean. (Keep in mind that SVXY is an inverse, so you would either go short put credit spread or put diagonal). And that's the "how".
In all likelihood, I'll look to VXX , UVXY , or SVXY for this particular setup, since I'll get the added advantage of contango working for me to the short side on the fade -- something I won't get if I go with VIX options ... .
A Sidenote: I know that some people want to short VIX/VIX derivatives with longs puts. I could contemplate doing that if we get a spike to VIX 30 and if, for example, VIX 20 puts become incredibly cheap (<.10 contract) and you can get them in an expiry that allows for plenty of time for a reversion to sub-20 levels ... . Naturally, you just have to look at options pricing if a spike like that occurs to see if a "lotto" trade with a reasonable chance of success surfaces.