Jared Woodard's Option Strategy For CBOE VIX

BGC Partners' Senior Equity Derivative Strategist, Jared Woodard, was on Bloomberg TV Wednesday to share his option play on CBOE VIX -VOLATILITY S&P 500 VIX. Here is the trade he revealed.

The Reasoning

"So, the trade I am talking about...it's something that we have been doing with clients for a little while," Woodard said. "It's called the VIX call ratio. The basic trade structure is to buy one at the money VIX call, sell two or three upside calls to monetize that expensive skew, that expensive premium on the upside. That gives you protection against any kind of churn in the market, if the S&P just goes sideways. If the S&P rallies, you keep the credit that you receive."

He continued, "If the market sells off and even if it's a fairly moderate selloff over the course of several weeks, you actually would make several multiples of your initial outlay. The real risk in the position is in a very dramatic kind, very big tail-risk kind of an event. So, you are kind of selling some of those tales to fund moderately bearish hedge and or neutral exposure."

The Trade

So, the trade for today is looking at the September expiration, buying the 16 strike calls one time, selling the 20 strike calls 3 times. And when we price this up yesterday at close and this morning, it was about a $0.75 credit. So, that's the credit you would receive if the market just stays sideways or goes higher from higher. If the market sells off moderately up to that 20 strike in VIX September future, you could make 3 or 4 times that amount,"