Trade Alert – VIX Cake

Buying the “VIX” means that you’re buying market volatility and expecting either a pullback or more specifically that the markets are about to get edgy and make some big moves. The VIX generally trends upward when the markets trend downward and vice versa. Remember that chart I showed you last week when I bought a bunch of VIX call options, betting that the market’s volatility was indeed about to pick up? Here’s that chart.

Here’s that chart updated include the last five trading days.

That’s a 70 point decline in the Nasdaq there, which is only a couple percentage points. The markets’ recent pullback here has been stealthy rather than dramatic as stocks haven’t crashed but have certainly been trending lower. And that means that the VIX has indeed been trending higher conversely to the market’s downward trend.

Now stick with me here as we pull it all together. We’re already up huge on the VIX call options that we bought last week. But we haven’t even seen a serious panic in the markets — just this downward trend. Which means that if the next panic arrives here in the markets while they are already in a downtrend, the VIX is likely to spike higher from these already higher levels.

So, as usual, I suggest that we try to have a cake and it too. I’m putting out some offers to sell some of my VIX calls — about 1/6 of my position or so. And I’m holding onto the bulk of my VIX calls for the next several weeks as I continue to think that complacency and confidence in the markets are at rather elevated levels themselves.

Don’t forget to join us for this week’s Live Q&A Chat today at 2pm EST at http://tradingwithcody.com/chat.

Here’s some Q&A about the VIX that I answered from last week.

Q. In lieu of trading options you have recommended using common shares. There is no common VIX so what do I do?

A. Hmm, good question. You could use this VIX ETN for short-term VIX trades. Or just trim some of your longs and raise cash when you see me buy VIX. Mainly right now the VIX calls are hedges to help lock in our portfolio’s gains.

Q. Hi Cody, I know almost nothing about VIX other than I believe it to be a measure of volatility. Please provide a brief primer on the basics of VIX. What are you trading? Where is it traded and in what form? What do the amounts mean? What are you looking for as a goal for this trade both in terms of the level you expect to reach and the timing of the trade?

A. Great questions about the VIX. Let me tackle that in a complete article for tomorrow.

Thanks! works for me.

Q. My brokerage does not show any options for VIX. Should I be looking for an ETF like VIX or change Brokers?

A. Check for VXX options instead of VIX options. I wouldn’t concern myself too much with trying to emulate my VIX trades as they’re not exactly huge anyway and they’re not worth changing brokers over. In fact, hearing all this feedback from you guys, I’ll try to taylor my commentary around alternative ideas to any VIX trades I do in the future.