Market Overview

An Options Strategy For The VIX

An Options Strategy For The VIX

This special presentation from Michael Bolin is from Benzinga's first-ever virtual Benzinga Options Boot Camp, which took place April 18. Click here for more coverage of this event with options trading experts giving traders of all experience levels real, dependable strategies for hitting the ground running or expanding an existing portfolio.

Michael Bolin, a trader at the Bullish Bears community for investing and trading, focused on the cash-settled Chicago Board Options Exchange Volatility Index (VIX), a popular measure of stock market volatility, in his presentation at the virtual Benzinga Options Boot Camp. 

“We had the 2008 crisis, and then we’ve got the current crisis,” he said.

“Every time we had these spikes, it was due to some kind of event that [incited] fear.”

As market participants digest information and absorb the uncertainty, the VIX reverts to its long-term mean, Bolin said. Cognizant of this nuance, he presented a trade that he said takes advantage of the volatility contraction.

“Typically we want to sell high implied volatility and buy low implied volatility,” he said.

Due to the VIX’s skew, it’s tough to put on trades that compensate traders for the amount of risk being taken on, he said. 

He suggested an unbalanced butterfly with a more favorable risk-to-reward ratio.

“Typically, if we’re going to go above price, we would buy a call butterfly. If we’re going underneath price, then we would buy a put butterfly.”

Bolin called for an unbalanced put butterfly in which traders buy 1 out-of-the-money put, sell 3 at-the-money puts, and buy an additional 2 in-the-money puts.

“The idea is that we can combine a credit spread with the butterfly, so we can take this skewed representation and build an unbalanced butterfly.”

The particular trade Bolin suggested, if constructed today, comprises 1 long 42.5 put, 3 short 45 puts, 2 long 47.5 puts for a $200 debit and 63% probability of reaching the $300 max profit target.

The passing of time is beneficial to the trade, Bolin said, adding that he’d look to close it at 50% of max profit.

Photo by Markus Spiske from Pexels.


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