VIX Made Easy

Easily the most confusing product in the option world is the VIX.  I know because Option Pit spends a fair amount of time teaching people about it and the oddness of the VIX products creates a lot of opportunity.  I will address a simple VIX anomaly today hope that clears up a thing or two.

VIX cash itself has a high volatility.  The chart is showing 20 day realized for VIX but note how low the 30 day implied volatility, a basic VVIX proxy, is.  Why the heck is the VIX IV so low when VIX is really moving around a lot?  The reason is 30 day IV comes from the Aug options right now and those price off of the VIX Aug22 future.  The reality is that the VIX Aug22 future moves at a roughly 50 delta to the VIX cash.  There is a lot of slippage in VIX futures as they really were designed to price the “rightness” of the current VIX cash.

The current $2 in VIX Aug22 contango, value above spot VIX, is the market pricing time and uncertainty.  The juice is in the VIX future and the higher IV, the lower the gamma of an option in general.  The juicy VIX future moves in a dead fashion until VIX cash really starts to move.  Buying Aug22 VIX is buying a $14 ATM VIX.  Remember that next time you load up on upside.  The reason VVIX can stay high is the OTM calls in VIX get crazy expensive so a VIX Aug22 15/25 call spread trades under $1.  That is a much easier nut to pay for.

You can take our VIX Made Easy Series here. To learn to finance VIX call spreads.   Scroll to the bottom of the Store page.

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