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Volatility swaps are way too complicated for the likes of me.
There are other traders than Fiddy Cent that made big VIX trades, but usually these are multileg things like 1x2 backspreads that are hard for the financial press to grasp. A high concept idea like buying VIX calls at the 50 cent price point makes a good story.
You could say it was a kind of crude hedging strategy compared to what others do in the space, because traders usually want to find a way to finance those long VIX calls with short calls or VIX puts.
Calls like that decay fast and are very expensive over the long run.
A smarter approach is VIX call spreads 10 strikes wide, better use of capital than straight calls.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
VVIX is down to 134, so the smooth downward trend continues. Pretty soon it will be back within its normal range, between 80 and 120
Spot VIX and front month VIX futures are still at the 40 handle -- still in outer space, but down by half from what they were.
Here is one way of categorizing VIX that makes it easier to grasp:
Zone 1 -- green -- 8 to 13 complacency, mode of VIX is around 12
Zone 2 -- yellow -- 14 to 19 elevated tension, average of VIX in this zone
Zone 3 -- orange -- 19 to 22 market turmoil
Zone 4 -- red -- 23 and up, catastrophe
VIX will keep falling until it gets into the 20 handle in the next couple months.
As for the market bottom being in, I think it's more likely that the VIX top is in than the SPX bottom.
VIX could keep gradually reverting to its mean even if SPX gradually tests the bottom over the next months.
Also, take a look at that smooth trendline on VVIX, now down to 136.
Pretty soon VVIX will be back at the top of the normal range, which is the 120 handle.
Trading ideas, as long as there is so much backwardation, VXX faces a stiff headwind so it may be more efficient to sell VIX call spreads of some sort.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
On the other hand, backtests show that long VIX call spreads are the way to go for VIX upside in a choppy backwardated market like this.
6 weeks out, short strike near the money long strike 10 strikes out.
If the market keeps chopping around in a range now between 2800 and 2300, which is my assumption near term, then one can use short VIX call spreads to finance your long VIX call spreads in a pairs trade.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
One interesting side note, if you look at the VIX term structure, the bump around election time has reappeared. Before the crash, that was a serious looking goose egg. Then when the whole structure lifted up, it disappeared.
Now it's coming back. At some point it will be tradable. August?
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
