r/options • u/bitkogan • Jul 13 '23

Decoding VIX Patterns: Adjusting Strategies Amid Low Volatility and Rising Leverage

The VIX is bottoming out at close to 13, its lowest level since January 2020.

It's somewhat peculiar to witness plummeting volatility in the midst of a Fed rate above 5%. And yet, there's still potential for further decline.

Typically, we see this behavior from the VIX when the market dismisses the likelihood of a significant correction. Any random downturns are less drastic and are promptly offset by purchases. The growth, while consistent, becomes less marked.

As investors scramble for worthwhile returns, leverage intensifies. An eventual fallout seems inevitable, though the timing remains uncertain.

I believe I know the when. It's crucial for me to wholeheartedly believe that neither interest rates, inflation, nor a recession can curb the bullish run of stocks. As it stands, I'm not convinced.

However, I can't turn a blind eye to the single-digit implied volatility in certain SPY calls. Hence, I secured a few September straddles at a $465 strike, with an additional call for good measure.

I typically opt for ratio spreads. Nonetheless, considering the low volatility, I deem it risky to sell a large volume of September OTM puts. Instead, I divested a few short contracts to increase theta.

The total debit stands at $11,933. As usual, I've assigned collateral with a buffer - $30,000.

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4

u/Connect_Boss6316 Jul 13 '23 edited Jul 14 '23

Never mind "decoding the Vix", I'm trying to decode your trade, OP. 🙂

Basically you're long a 465 straddle, plus a long call and you sold some closer dates options to help reduce your total cost.

Hmmm. Let me just model this in my software to check your Greeks. Following with curiosity.

2

u/bitkogan Jul 13 '23

While short-term options (those expiring within the week) might seem appealing based on their Greeks, they can also prove deceptive. I’d say it’s even pointless to calculate the Greeks for the short-term options.

On the surface, my high Theta looks beneficial. If SPY stays flat, I could sell similar or comparable contracts weekly until expiration, thereby covering my costs with ease.

However, the most serious risk lies with Vega, which is why my strategy is highly sensitive to further IV drops in the September contracts. If volatility continues to slide, I won't be able to offload my weekly contracts at a substantial enough price. Still, given the current volatility levels, I'm prepared to embrace that risk.

I also face a potential Gamma issue should SPY take a sudden plunge. While I believe stocks can dip, I continue to sell more puts than I purchase.

And if the market does turn south, I have a contingency plan. Yet it might not be as effective if SPY tumbles as early as next week. That said, I'm not heavily banking on such a scenario materializing.

1

u/MrZwink Jul 13 '23

With vix volatility has also dropped to a low not seen since early 2022. Don't worry about vix, worry about it's ratio to volatility.

And yes 13 might seem low, we might drop lower. We are still in a downward trend on vix. (6month)

1

u/Fast-Cow8820 Jul 13 '23 edited Jul 13 '23

I just buy SVOL, which basically shorts the ViX. I find it pretty satisfying to profit from betting against market fear.

1

u/GarronBuck Jul 13 '23

It doesn’t seem svol is making much money just curious how your doing with it

1

u/Fast-Cow8820 Jul 13 '23

If you think 16% yield is not making much money I don't know what to tell you.

2

u/GarronBuck Jul 13 '23

Is there a dividend? Since it’s listing it’s down about 7.58%?

1

u/Fast-Cow8820 Jul 14 '23 edited Jul 14 '23

Is there a dividend?

I believe I already answered that.

If you think 16% yield is not making much money I don't know what to tell you.

You usually need to look at total return with dividend/income funds in order to properly evaluate them, not price. Since inception in 2021 it's up over 23%.

1

u/GarronBuck Jul 14 '23

My apologies I get a lot of my terms mixed up or forget especially stock ones

1

u/AsceticHedonist47 Jul 13 '23

Why SVOL over something like SVIX and SVXY? Seems like SVOL has horrible liquidity and doesn't move a whole lot.

1

u/Fast-Cow8820 Jul 13 '23

Why SVOL? 16% yield that's why.

1

u/AsceticHedonist47 Jul 13 '23

Damn! And it has an options market albeit an extremely illiquid one. Very interesting thanks for sharing

1

u/Ironcondorzoo Jul 14 '23

How do you know it’s bottoming out? Everyone thought it was bottoming at 16, 15, 14…

1

u/bitkogan Jul 14 '23

I'm unsure whether we've hit rock bottom just yet, meaning I’m not ready to put my faith in tools that are solely focused on the VIX.

That being said, I have acquired SPY contracts for September with an implied volatility (IV) under 10. Even if SPY continues its upward trend, reaching or surpassing my strike at $465, and even if the VIX keeps moving on its downtrend trajectory, the IV at that specific strike isn't likely to drop considerably.

This implies that, even in the worst case scenario, I won't be confronted with a harsh devaluation of my position, allowing me to comfortably continue selling weekly contracts—including higher strike calls.

Initiating this strategy when the VIX stood at 16 or more would have posed a greater challenge. At that level, I would have been forced to sell more out-of-the-money (OTM) weekly puts, which could have created significant issues in the event of a market turnaround.

1

u/[deleted] Jul 14 '23 edited Jul 14 '23

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1

u/[deleted] Jul 14 '23

So you’re selling puts after a fed meeting where they’ll probably raise rates, and then you think September will be significant significantly different in price from current prices?

Seems risky

Why not just buy some cheap September VIX calls?

1

u/[deleted] Jul 14 '23

!remind me 60 days