Lecture on Trading Strategies for the VIX

Presented by Andrew Joov Vanazi from Option Pit

Introduction

• Andrew Joov Vanazi, 20-25 years of trading experience
• Option Pit: Provides teaching and trading services

Agenda

• Three ways to get long the VIX

Key Concepts

VIX Options and Futures

• VIX options trade off of VIX futures, not cash
• Example: August 21 VIX future prices August 21 VIX options

Skew in VIX

• VIX has an upward sloping skew
• Makes call spreads and call butterflies relatively inexpensive

VIX Zones

• VIX divided into four quartiles:
  • Zone 1: 9 to 12.99
  • Zone 2: 13 to 17.99
  • Zone 3: 18 to 23.99
  • Zone 4: 24 and above
• VIX at 12: Bottom quartile, limited downside, more upside
• VIX at 24: Top quartile, limited upside, more downside
• VIX spends 75% of time below 24

Strategies to Get Long the VIX

1. Using Futures Price

• Example: VIX at 18.62
• August 21 cycle: 18 calls at 1.68
• Futures often trade below the cash price (backwardation)
• Calls are less expensive when futures are below cash price
• Example: 17-27-37 call fly costs $1
  • If VIX stays the same, call fly could settle at 1.60, making 60 cents
• In backwardation, call flies and call spreads are inexpensive

2. Call Spreads and Call Flies

• Example: 17-25 call spread costs 1.20
• Provides positive decay profile in backwardation
• Strategy allows for hedging with puts if VIX turns around

3. Buying VIX Calls

• Preferable in Zone 1 (9-12.99)
• Buy calls 2-3 months out to reduce decay
• Hold until volatility spike
• Hedging and trading around calls are possible

Conclusion

• Strategies provide opportunities in both low and high volatility markets
• Andrew Joov Vanazi: Director of Education at Option Pit