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If you think the market will experience more than usual volatility over say 6 months, would buying VIX options be the play if you were a bit of a gambler?

Thanks
Rich

I’ve been waiting for a VIX of at least 20 for seemingly forever…one day it will happen, but when???

If you think the market will experience more than usual volatility over say 6 months, would buying VIX options be the play if you were a bit of a gambler?

In a word, no.

The main reason is because VIX futures and options are not like stock index futures and futures options.

For a stock index, arbitrage can keep the futures value and by extension the FOPs values close to the current index level because stocks can be bought and sold. Further, since nobody has any better information, the most likely level of the index a few months out is the same as today's level, so that's where the future trade. This all means that trading the futures today is almost exactly like trading the future value of the index.

But VIX is an imputed thing, which can not be traded directly, so arbitrage isn't really possible. This has several effects, one of which is volatility. (we're speaking of volatility of VIX index itself: implied volatility going up and down quickly). Since the futures expire at some specific future date (and the options are just derivatives of the futures), the current value of the VIX does not track the current value of VIX: the market assumes some mean reversion is more likely than the current value, and there are no arbitrageurs to drive the two into parity. When the VIX spikes, the futures don't.

All this is just a long winded way of saying that a spike in VIX will not do you much good, since the futures and options won't move NEARLY as much as the current VIX print, unless you happen to be lucky enough to see the spike a day before the current expiry date.

In my book, a perhaps more sensible/profitable way to play volatility is to have a stance on the more appropriate or more desirable price of something you know about. If you think the frog is going to jump some time soon, put your hands where you think he'll land. Maybe put in stinker bids on BRK or your favourite other stock. Or, if you expect maybe a wee panic melt-down, buy some out of the money put options against something that seems to have a whole lot of air between the current price and value. They probably aren't too hard to find.

If there is a stock market panic, what 10 stocks are most likely to have big drops? A while back I suggested a slate of the wannabe second- and third-string EV companies. Perhaps too late for that now, several have already gone bust. Including Fisker, again, even though they aren't fools or charlatans like some of the others. Maybe it wouldn't be too hard to think up some third- and fourth-tier "AI" firms that are way ahead of their skis.

Jim

the current value of the VIX does not track the current value of VIX
Were you perhaps thinking of the VIX futures fund VXX not tracking the current value of VIX?
Anyway, I agree with Jim, stay away from VIX futures and funds, including VXX.

the current value of the VIX does not track the current value of VIX
Were you perhaps thinking of the VIX futures fund VXX not tracking the current value of VIX?

Yup, typo, I left out a word. What I meant to say was:
the current value of the VIX futures does not track the current value of VIX

(instead what it tracks is the market's best guess of what it will be on the expiry date of the futures contract, which generally embodies the assumption of quite a bit of mean reversion)
A long time ago I spent some time coming up with a system for trading VIX, and it was insanely profitable in backtest. Until I realized you can't trade the VIX as such.

In an unrelated comment, I find the one year equivalent of the VIX to be more interesting sometimes. The VIX is based on the prices of options one month ahead, which means it's a very short term outlook, but there is a different index (sometimes ticker ^VIX1Y) that looks at the price of options expiring a year out. This captures a very different kind of jitters versus complacency. For example, I'm pretty sanguine about the next month but have serious doubts about the floor over the next year.

Right now the one year volatility index is around 18.5, not far above its all time lows around 16. It has fallen gradually over the last two years from around 31-32. One possible translation: "the market" thinks the next year will be very calm. Another possible translation: if you want to take the other side of that bet, the options to do so are currently very reasonably priced compared to history.

Jim

A long time ago I spent some time coming up with a system for trading VIX, and it was insanely profitable in backtest. Until I realized you can't trade the VIX as such.

You could make this a mechanical investing-type screen where you buy/sell a basket of ATM options on various stocks. Options are a tough trade, but if you created an automated trading system, you could put in orders splitting the bid/ask on twice as many stocks as you need then cancel the remaining when a sufficient number of trades have been filled. As correlated as the market has become, your basket of a dozen or so stocks may be plenty. Not something you want to trade in/out of very often due to slippage, and plenty of issues with the trading/selection/etc. But, if it's "insanely profitable" which I believe, it may well end up as merely "very profitable."

If you think the market will experience more than usual volatility over say 6 months, would buying VIX options be the play if you were a bit of a gambler?

Yes, but they would have to be VIX call options, because VIX rises as volatility rises. Or perhaps you could sell VIX put options if you think VIX won't be going down anytime soon due to increased volatility.

I don't recommend it because VIX has consistently surprised most people.

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