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How A VIX Spread Gained 70% in 3 Weeks:
VIX is the average implied volatility (IV) of options which are traded on the S&P 500 tracking stock (SPY). It is called the “fear index” because when market fears arise because of some future uncertain event, option prices move higher and push VIX up. Most of the time, VIX fluctuates between 12 and 14, but every once in a while, it spikes much higher.
Just before the election that took place on November 8, VIX soared to 22. I recommended to my paying subscribers to place a bet that VIX would fall back below 15 when the option series that expired on November 23 came around. Here are the exact words I wrote in my November 5 Saturday Report:
“When VIX soared to above 22 this week, we sent out a special note describing a bearish vertical call credit spread which would make very large gains if VIX retreated toward its recent average of hanging out in the 12-14 range. As you surely know, you can’t actually buy (or sell short) VIX, as it is the average implied volatility (IV) of SPY options (excluding the weeklies). However, you can buy and sell puts and calls on VIX, and execute spreads just as long as both long and short sides of the spread are in the same expiration series.
You are not allowed to buy calendar or diagonal spreads with VIX options since each expiration series is a distinct series not connected to other series. If you could buy calendars, the prices would look exceptional. There are times when you could actually buy a calendar spread at a credit, but unfortunately, they don’t allow such trades.
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Vertical spreads are fair game, however, and make interesting plays if you have a feel for which way you think volatility is headed. Right now, we have a time when VIX is higher than it has been for some time, pushed up by election uncertainties, the Fed’s next interest rate increase, and the recent 9-day consecutive drop in market prices. This week, when VIX was over 22, we sent out a special trade idea based on the likelihood that once the election is over, VIX might retreat to the lower 12-14 range where it has hung out most of the time recently. This is the trade we suggested:
BTO 1 VIX 23Nov16 21 call (VIX161123C21)
STO 1 VIX 23Nov16 15 call (VIX161123C15) for a credit of $2.60 (selling a vertical)”
This spread caused a maintenance requirement of $600 against which we received $260 for selling the spread. That made our net investment $340 (and maximum loss if VIX ended up above 17.60 on November 23rd.
It worked out exactly as we expected. VIX fell to below 13 and both puts expired worthless on Wednesday. We pocketed the full $260 per contract (less $2.50 commission) for the 3 weeks. How sweet it is. We also placed the identical spread at this $2.60 price for the series that closes on December 28 (after the Fed interest rate decision has been made public). With VIX so much lower, we could close out the spread right now for $75, netting us a 51% profit. Many subscribers have reported to us that they have done just that.
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P.S. If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595. Or make this investment in yourself at the Black Friday/Cyber Monday sale price – the first time this has been offered in our 15 years of publication – only $69.95 for our entire package. Get it here using Special Code BFCM16 (or BFCM16P for Premium Service - $199.95). Do it today, before you forget and lose out. This offer expires at midnight Monday November 28th, 2016
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts. seth@terrystips.com
You can see every trade made in the actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
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