This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Taking Advantage of a 'Low' VIX

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

WEBINAR: Volatility World Tour 01/10 at 6pm ET CLICK HERE FOR INVITE AND TO REGISTER

The relationship between realized volatility and implied volatility is always unique in that it never fully makes sense. Generally speaking we think of implied volatility as the dog and the tail as historical volatility. But, at times, the tail does wag the dog. I can think of numerous instances where implied volatility only moved after a stock or index started moving, like last week. What does the CBOE Volatility Index (VIX) point toward?

Clearly, a week ago Friday, the VIX was pointing toward a major move as it was breaking 22%. Thus, the forward-looking index correctly predicted that we would have a move that would produce back to back 2+ percent moves. Only a week after the VIX hit a 52-week high, the index is sitting at 52-week lows. When we come in today, the VIX will be trading right around 14%.

Yet the before and after can give us a very clear idea. If options traders were properly predicting a move of about 5% out of the cliff, and option traders were predicting the VIX to go back to 14% by Friday, what kind of realized volatility should we see over the 18 days that follow our cliff move? The answer is somewhere right around 12%...if the VIX is perfectly priced. If we accept that the VIX is almost always overpriced, especially when it is low, where does that put realized volatility for the next 16 days or so? Probably closer to 10%

This would still point toward an uptick from what we saw on Thursday and Friday where the market moved at less than 8% annualized volatility. Basically, the VIX may look like a buy at a 52-week low, but it's probably not (if you could buy it), the VX Jan future and certainly the iPath S&P 500 VIX ST Futures ETN (VXX) (which should almost never be purchased) look like terrible trades.

So how should traders take advantage of this "low VIX?" I would point toward a combination of buying and selling. I am willing to venture that there are some opportunities in March options that might be favorable to purchase right now. The March quarterly straddle in the SPX is probably a value at an IV of 13.8%. Even if we do not move that much, I think the decay will be slower than the model predicts as volatile creeps higher. That may be a nice trade.

I would also be looking for opportunities to sell volatility against that SPX straddle. Yen vol has ticked up considerably, maybe it is a sale. Maybe there are stocks out there when the premium is overpriced. Another trade might be to short VXX or VIX options against our SPX trade.

Looking at the Vol ETNs and VIX options themselves...I would not be looking to get long, and in the case of VXX, with the now STEEP contango and spread between Jan VX_F and cash, I think the VXX could have a quick trip back below $25, possibly as early as the end of next week. Certainly by Jan expiration. The safest place to play though might be in February.

In VIX, I am waiting for an expiration play, however, I would point out that there is a huge spread between cash and future, and the 15s are certainly in play. They are ITM in the cash and currently OTM in the future. This should present a great trading opportunity.

Have a great week.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Mark can be followed on Twitter at twitter.com/OptionPit

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.


Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Partners Compare Online Brokers

Top Rated Stocks Top Rated Funds Top Rated ETFs