I want to know how I can use options to trade volatility. I can obviously just trade VIX futures directly. But is there a way for me to isolate volatility when trading options. Please explain or post a link - thanks.
What exactly would you like to isolate? Vegas? Gammas? What is your expected scenario? One way to isolate volatility is with calendar spreads. For example, you can buy the back and sell the front at a ratio that leaves you theta neutral and approximately gamma neutral, but long vegas.
I'd like to add volatility trading as a strategy of mine because its the only market that I'm aware of that is truly mean reverting. I usually only trend trade stocks because - because trading mean reversion in stocks is half as profitable and twice as hard as trend trading. I was originally thinking of just trading VIX futures but its a pretty big contract so I was wondering if there was a way to trade volatility using options where there is less money at risk until I get more comfortable with the strategy. I took a look at VIX futures for the first time today and I noticed that the volume for theses contracts is very low - so I assuming that most funds that are trading volatility are doing so thru options. Why is there no volume on VIX futures (symbol VX) or is there another VIX futures contract that I'm not aware of?
Most of the vbi volume is institutional order flow. If the 1000 multiplier is too big for you why are you concerned with the low volume? If your edge lies in trading index vol mean reversion then sell bound premium in the vix ops using the vix futures as spot.
Very good observation (about the mean-reverting nature of volatility). Another problem with the VIX futures is that there's nothing that ties them to the VIX index except at expiration - absolutely nothing. So you'll find that when the VIX goes to extremes and you want to fade it, the futures lag far behind, so it's not as good a trade as it should be. The VIX options suffer from the same weakness, as their underlying (for all practical purposes) is the futures, not the actual index.
I think if we could trade a product that almost exactly tracked the VIX - that would be awesome. What I don't like about VIX futures is (1) there is almost zero interest in the product if you look at volume (2) expires every single month which makes it harder to build a longer term position and (3) does a poor job at tracking the actual VIX index. Isolating volatility thru calendar spreads is too complex for an options newbie like me. So hopefully someone will come up with a better VIX derivative trading product like a VIX ETN - that would be great.
trading volatility is NOT for option newbies. It might take you a long time to know what you should be doing and you better start to read a lot and know about as much about options as any market maker does. Read Natenberg and Baird, you might want to read Taleb too.
The mean reverting part can be very misleading, it might take forever to mean reverse and in the long run we are all dead as you know.