CBOE:VIX   Volatility S&P 500 Index
Starting in April, I started to put on long dated long-volatility plays, using dips in VIX             as my guide for VXX             setups. Now I'm looking ahead to what I should do to fade a spike. As previously noted in posts, I look to VIX             as my guide for trades in VXX             , UVXY             , and SVXY             , since these instruments suffer from contango and, because of that, it's difficult to call "levels" in those instruments.

Fading volatility 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 volatility of volatility collapses as price declines (the inverse of what happens, for example, when SPY             declines -- implied volatility increases). In scenarios where I anticipate a volatility collapse, I generally want to use a premium selling strategy to take advantage of that; the converse where I anticipate an implied volatility 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 volatility 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.
Comment: The July VIX 20 puts are currently priced at 3.40. The price on those puppies will need to come way down (i.e., we're going to need VIX to go way higher) for me to embrace a naked long put lotto trade ... .
Comment: But I can see the awful "sexiness" of this trade. Consider having put on 10 contracts of $10/contract VIX 20 puts at some point before this awful vol crush we've had (total $100 outlay plus fees and commissions). Each put is now worth $340 or $3400 for 10 contracts total or $3300 net profit ... .
Comment: ... and they were worth more with VIX at 14 before this pop ... .
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