Most traders get really confused by the CBOE Volatility Index ( VIX) options, but it is not always their fault. Virtually every piece of trading software sets VIX options implied volatility to the cash VIX and its actually based on the futures. This is why most traders don't understand how to set up bullish plays on the index.

With the VIX breaking 16, I think we may be at some sort of temporary bottom. In the long run, however, I think the VIX will not be staying over 19 for very long. Yet, if not set up properly, a bullish VIX options play could still lose. We are going to set up a trade that is bullish and bearish at the same time in order to create a winning bull-call time spread in the VIX.

I think in the short term we could see the VIX pop back up to 18-20 over the next 30 days. It is the middle of earnings season and there is still a load of macro economic uncertainty in Europe and in the United States. Right now the VIX February future is trading about 18 (a $2.00 premium to the cash). If we want the right sensitivity to the VIX, then buying either the 17s 18s or 19s makes the most sense.

Without getting into contango, the VIX March future is trading more than $2.00 higher than the February future. This actually creates a situation where the February contract is more sensitive to changes in the underlying than March, to an even greater degree than most calendar spreads. It also allows us to set up a trade where we buy the front month lower, sell the back month at a higher strike, collect a nice credit on the trade and allow that contango in VIX futures to work in our favor. I could see a situation where February futures trade right to 19 or 20 and the March at-the-money calls either do not move or barely budge.

I am going to set up a bull time spread that collects a credit, is flat delta, long gamma and makes money on the contango squeeze.

Trade: Buy to open VIX February 18 calls for $1.55 and sell to open VIX March 22.5 calls for $1.70.

The net buy is a VIX February/March bull-call time spread for a credit of $0.15.

At the time of publication, Mark Sebastian was long VIX calls.

Mark Sebastian is COO and Director of Education for Option Pit Option Mentoring. Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the Director of Risk for a private hedge fund. He started the popular blog Option911, which is now the Option Pit blog. Sebastian has been published nationally on Yahoo! Finance, is a featured contributor for TheStreet's OptionsProfits, SFO, OptionsZone and is the managing editor for Expiring Monthly: The Option Traders Journal. Mark has a Bachelor's in Science from Villanova University.

On January 19, TheStreet's OptionsProfits is hosting a webinar featuring John Carter of Trade the Markets. Concepts, citing specific trade examples, will include: market sentiment, technical indicators and trading psychology. We will also discuss how to use options and other asset classes to position and manage your portfolio through 2011.

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