Hi all, Any suggestions for buying puts after a spike in the VIX/VXX? What do you think is the best way to trade spikes. I'm wondering if it's best to buy ATM or OTM and how many days/weeks/months out without risking much if volatility stays elevated for a certain period. TIA
I generally buy next month and a strike OTM. For example I bought the SEP 12 VXX put for .68 Friday. It's priced about .90 right now. I'll close it in no more than about 5 days. Not saying I know more than anybody else about this, or that my method is the best. It's just what I've been doing. IV was running 80% so you need a large move (~8%, or more, if IV drops) in 5 or so days just to get a 50% profit. Of course VXX is based on the futures and doesn't track them well. Still, I usually make a profit on these. Just don't bet the farm. Good trading to all.
Probably better off selling calls imho...btw i actually caught that vixx spike very well ...bought august 16th calls at 0.55, sold em at 2.45.
Why options rather than shorting VXX directly? If the answer is to limit risk, why not do a protective call, and then hold the call after you cover VXX. You'd get about half of the down move (same as a put), and leave open the potential to catch a rebound or to short it again.
I'm not familiar with shorting and I don't want to lose more than I have paid for the premium, that's why I prefer simple buying puts instead of selling calls. With buying puts how can I calculate my risk in premium over time? I would think that buying them more months further out is less risky? I just don't know what's the ideal time till expiration date. Now I'm thinking something like 3 months or so.
It all depends on the time frame of your trading system. Try out this (free) grapher: http://www.hoadley.net/options/strategymodel.htm Develop a trading strategy, pick an option to trade and get the quote. Look at IV and how it changes and how theta works at different exp dates. Look at how price changes in the underlying affect option prices. Keep at it and you'll figure it out. Well...at least good enough to make money - maybe!
Protective calls are fine for limiting risk if you are not concerned about margin during extreme moves, but I don't know of any brokerage anymore that offers sensible margining in United States ordinary (regulation T) accounts for protective calls on volatility exchange traded equity products. I have only checked around a little bit, but, so far, Interactive Brokers is the only brokerage that I have seen explicitly recognizing protective calls in their margin offers for US equities, and, unfortunately, it appears that their new VIX=18 stress test does not take such margining into account, at least as of last Friday, when I tried converting protective calls to puts of similar strike and same expiration. One speculative ray of hope for bigger investors might be that it is possible, perhaps even probable, that other brokerages' portfolio margin stress tests may implicitly take protective calls into account, just by including at least the intrinsic value of the calls when simulating an increase in the price of the underlying. However, for Portfolio Margin, I believe you need to have $125k in the account (or $100k if your brokerage does real time margin enforcement, as is the case for IB), and I thought I read a message somewhere a couple of years ago implying that PM accounts had to have a United States owner (individual, maybe entity).
I tried to check it out, but for me it's very complex to work with it. Is there an easier way to calculate these things?
This one from the CBOE looks pretty easy to use: http://www.cboe.com/trading-tools/strategy-planning-tools/tradebuilder-with-trade-analyzer Also these two books helped me when I first started about 20 years ago: Options As A Strategic Investment - McMillan Option Volatility and Pricing - Natenberg