VIX trade ideas
CPI news wakes up the volatility genie, markets drop $vixSPX reacted negatively to higher than expected CPI data. month over month was more than expected. year over year CPI , the headline most of us like to chat about is at 8.3%. SPX VIX DXY
VIX is in consolidation mode, stillI really like this chart, its getting close to a resolution to the big upside move imo
First main test will be at 31.30
VIX - UPDATE So far VIX moved according to our plans.
Where we are:
- touch of triangles bottom
Where we are headed:
- If we break that trendline - we will move towards the bottom curve
- If we bounce from here - the top curve shouldn't be a resistance anymore - and from there a brutal drop in stocks and crypto
Crutial beginning of week and upcoming CPI results. Monitor those 2 areas to eventually breakout.
The Market Storm May Not Be Far AwayIn the past few weeks the VIX seems to have been tamed despite all the uncertainties in the market. We are currently approaching the trendline support spanning from Jan 2018 and we should hopefully see some reaction in this symbol. If the market responds at the trendline support like that of Jan 2020, a break of the triangle (indicated by the green arrow) should see some heavy selling in the overall market.
Note: This is not a financial advise. This is my way of sharing my trade ideas with the community. Any decisions you make from this is entirely yours and has nothing to do with me.
Options Trading / Gaining the Edge & VIX Curve Implications
Options Leverage has become increasingly popular over the past decade. In the past 30 months,
their popularity has risen significantly relative to the Underlying Instrument.
Increasingly so, Options tend to move Prices through the effects of Leverage.
This is why we see Stocks Split, it vastly reduces the Price of Entry and increases the Potential
for increased participation.
As in all Markets, Liquidity plays the most important Function.
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The Traders Edge is best capitalized through an understanding of the Derivatives/Options Greeks as
well as VIX timing (previously discussed and linked below).
I will thoroughly explain the relationships and provide direct correlations using Price in each example.
Simplicity will become self-evident after All the Variables are explained.
Directional Risk Management is the Traders Edge. It provides the Risk/Reward parameters in Options
Trading will make you a far better Options Trader.
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Options are a 1st Tier Derivative, ie. - their value is "derived" from an underlying asset. How this value
is derived depends upon a number of factors:
1. The 5 Greeks and their functions - Delta, Gamma, Theta, Vega & Rho.
With any Derivative - Dependent and Independent Variables define the Function.
Greek Dependent Variable Independent Variable
Delta Option price Value of Underlying Asset
Gamma Delta Value of Underlying Asset
Vega Option Price Volatility
Theta Option Price Time to Maturity
Rho Option Price Sensitivity to Risk-Free Rates
Let's put this into context with simple and concise examples of each.
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Delta - How much the Options Price will increase or decrease with a
$1 move in the Price of the underlying Instrument.
By Example:
Underlying Price of Instrument = $100
Options Premium = $2
Delta = $0.60
For instance - were the Price to move from $100 to $101 the Price of the
Option would increase by 60 Cents to $2.60.
Were the Price to decline from $100 to $99 in the underlying instrument,
the Price of the Option would decline to $1.40 ($2.00 - $0.60).
It is extremely important to understand Implied Delta is to occur at
any point in time prior to or upon Expiration.
Think of Delta as the Probability of your Options Potential, as well,
it is actually the Number of Shares relative to the Options 100 Share
implied leverage.
An out-of-the-money Call Option with a 0.25 Delta has an estimated 25%
probability of being in the money at expiration.
A deep-in-the-money call option with a 0.90 Delta has an estimated 90%
probability of being in the money at expiration.
A Delta of 1 cannot occur as it implies Par with the underlying instrument
and provides Zero incentive/profit Potential. This is important as we can
observe it would be far more intelligent to purchase the underlying outright.
For example, with a Delta of 1, for every $ move higher in the underlying,
the option price would rise by $100. As you can see there is no incentive to
simply not purchase the underlying instrument, it becomes a zero-sum
game.
Think of Delta in its simplest form with respect to Leverage.
Delta in my example above is $0.60 - you are leveraging 60 Shares as
opposed to 100 @ a theoretical Delta of 1.
Delta's implied theoretical ranges:
Calls - 0 to 1
Puts - 0 to (-1)
Actual Range @ the Money
0.50 Delta - therefore a Trader is leveraging 50 shares.
Why?
Because a Trader does not technically own the shares.
Consider it the Options Writers Profit Margin or Vig.
The further in the Money on an options chain, the higher the
Probability your Option will have less Risk. Of course, there is
a premium to Risk/Reward as we move lower and away from the
underlying Instrument or Share Price.
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Gamma - How much Delta change with a $1 move in the underlying
Price.
Delta and Gamma are both affected by Price movements up or down
by $1 increments.
Continuing our Example above:
Underlying Price of Instrument = $100
Options Premium = $2
Delta = $0.60
Gamma = 0.012
For instance - were the Price to move from $100 to $101 the Price of the
Option would increase by 60 Cents to $2.60.
The Delta will change as it will include Gamma after the $1 Price increase:
Delta 0.60 + 0.012 or - 0.612, the New Delta or $2.612.
As the Option price moves towards In the Money, once again - Gamma will
increase.
It is important to lock down the context, these are Price relationships - Delta
and Gamma.
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Theta - Options Prices decrease as Time passes moving to the Expiration Date
aka "Time Decay"
There are 2 distinct variables to decay.
1. Intrinsic Value: Simply put a Call option will have Intrinsic Value when the
underlying Asset is above the Strike price of the Option.
By Example:
Underlying Price of Instrument = $100
Option Strike Price = $90
Intrinsic Value of Call Option = $10 ($100 - $90)
Intrinsic Values can only range from Zero to a Positive number.
For Put Options, the Value is the opposite, or when the
underlying Aesst is below the Strike Price of the Option.
Underlying Price of Instrument = $100
Option Strike Price = $110
Intrinsic Value of Call Option = $10 ($110 - $100)
Intrinsic Value is Directly related to Price and only changes when
the underlying Price changes.
Time has no impact on an Options Intrinsic Value given there is
no change in the price of the Underlying Asset.
2. Extrinsic Value: aka "Time Value" or Options with more time
until expiration will have more Extrinsic Value than Options with
less time until Expiration for the same underlying Asset for the same
Expiration Cycle. ie. OPEX Date.
Why?
Over time Price ranges have the potential to expand and contract.
Expansion leads to Contraction and vice versa.
LEAP Options - 365 or more Days to Expiration have immense
Extrinsic Value due to the component of time.
It is important to note Theta begins its larger declines within 30 to 45
Days of Expiration. Theta goes steeply negative within this timeframe
with a very High Probability.
"Time" truly is Money - Extrinsically.
Less Time, less Extrinsic Value, less Money.
Options lose Time Value (Extrinsic) - Theta is expressed as a Negative
Number.
By Example:
Underlying Price of Instrument = $100
Theta = $0.50
Time to Expiration = 10 Days
Option Strike Price = $90 ($10 Intrinsic Value)
Theta (decay) $0.50 X Time (duration) 10 Days = $5.00 of Extrinsic loss
over Time to Expiration (Theta).
Projected Theta Burn (decay) implies the Price of the Option will be $95.
* This assumes there is No Change in Implied Volatility (More on this later).
It is important to note when your Portfolio may show a steady change in
Portfolio Theta, this is should not be assumed to be a linear function as
Delta or Change is the only Constant. Markets move Higher and Lower
with increasing Volatility.
Changes can and are significant.
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Vega - Changes in an Options Value with respect to a 1% Change in
Volatility or the Implied Volatility (aka the Widow Maker).
Why the Widow Maker?
If (IV) Implied Volatility drops significantly while the Underlying Asset's
Price remains constant. This is an extreme example, but one that has
become increasingly more common since September of 2021.
Implied Volatility is the expected change to Price in the Underlying Asset's
can change over time. Consider it the Price Range.
It is important to remember an Options Price must change for Implied
Volatility to change.
Simply Put - a change in demand for an Option over time will determine
its Implied Volatility.
Supply becomes a Factor as Risk (implied volatility changes) - you would
not want to assume the Risk of selling Naked Puts in a downtrend. Supply
would decrease and Premiums would rise. The overall level of confidence
and Fear would dictate demands while Supply would Price Risk.
Conversely - and this is the Key, any option with a Higher Extrinsic Value
will have higher Implied Volatility.
By Example:
Underlying Asset 1
Price = $110
Call = $100
IV = .69
Underlying Asset 2
Price = $105
Call = $100
IV = .47
A favorite time for the IV Crush is into Earnings of the Underlying as
Volatility drops significantly aka - Buy the Rumor, Sell the News.
As well, the timing of VIX Roll to Settle play a very large Role in
Vega, as does the term Structure of the VIX Curve.
Timing and Positioning in Time are the leys to the proverbial Kingdom
in Options Trading.
An Options Price changes by its Vega with a corresponding move in the
Underlying Price of the Assets, Implied Volatility will rise by 1%
By Example:
Underlying Price of Instrument = $100
Option Strike Price = $90
Intrinsic Value = $10
Vega = 0.25
Implied Volatility = 60%
Option Price $10 + Vega $0.25 = $10.25
Implied Volatily = 60% + 1% = 61%
What has the highest exposure to Vega?
Options At the Money and those with High Extrinsic Values.
Remember, Volatility scales with Time, contraction to expansion.
By Example:
Implied Volatility is expressed on a 365 Day Basis.
$100 Underlying Price
Implied Volatility = .25
We can simply calculate the Range for the Underlying Price
for the next 30 days:
1 Month Range = $100 x 0.25 x Square Root (30/365)
Or $3.45 either side of $100
Or $103.45 to $96.65
or a $6.90 range.
Finally - and of extreme importance: The shorter the Duration the more Extremes in Volatility
affect Price.
A large Decrease or Increase in an Underlying Assets price will have a far more pronounced
effect on Options of shorter Duration.
Melt ups and Melt Downs can be anticipated for Large moves in Leverage and isn't this what
today's Options Trader is seeking.. the answer is yes, absolutely.
The Setups require patience and an Edge over the Greeks.
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Rho - Measures the sensitivity of the option price relative to interest rates.
A benchmark Interest Rate increases by 1% - Option Prices will change
by Rho's Value as a percentage.
Rho is presently within an arrangement unseen in prior Cycles, be it Business
or Credit.
The Treasury Curve, as well as the Effective Funds Rate, have direct Impacts
upon Rho.
Underlying's Alpha (Which has lower Volatility and higher Pricing Power) has less
sensitivity to Rho - to a point, a point where Rates become too burdensome
on the Economy.
Underlying Beta (Which has Higher Volatility and Lower Pricing Power) has more
sensitivity to Rho as forward Earnings are more steeply discounted to Low Beta or
low to high Alpha.
Given the tumultuous environment currently, Rho is being turned on its head as this
Cycle is quite frankly unlike any in history. it Rhymes, yes, its repeat will be similar
to Long Cycle Durations.
This primarily due to the expansion of Credit and Default/Liquidity Risks present
which are unseen in Human History.
In prior expansions, rising yields had a profound effect on Bank's Balance Sheets.
That was then, Rho would provide a lift to Delta increasing the Value of an option.
The exact opposite is beginning to occur now and will likely stay in trend for some
time.
The math is exactly the same as above, this is where you, dear trader get to exercise
your skills in what you have learned.
Reminder:
Delta and Gamma are Price Calculated in $1 Increments.
Theta, Vega, and Rho are Percentage Calculated in 1% Increments.
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This week will be particularly challenging given the sheer size of this Expiration @
Quad Witching in Septenber 16th.
With CPI due Wednesday and the FOMC the following week.
It's going to be Volatile in the extreme.
I hope this helped you in gaining an Edge with respect to trading Options.
Trade Safely, with the Edge, and Good Luck this Week.
- HK
Please remember the VIX roll to Settle Strategies I discussed here -
So Long and Thanks for all the FishI wasn’t able to do much charting and analysis this week.
I'm taking a step back from charting the next few weeks as I finish a project.
I wanted to get this last chart out that I have been working on for historical look at the vix.
Why is the VIX so important?
I would argue that the VIX is the most important indicator in a speculators arsenal.
The vix is important because after a volatility event the vix will do what it does.
Revert to Mean.
To see this phenomenon in action all you have to do is a regression trend of VIX from ~2003 to pre-march 2020 to find the mean for VIX is 15.39
Next add another regression trend line sine the Covid 19 Spike and you will see that it took Oct 25 for the VIX event mean return to historical mean.
So a speculator like me can conclude that the Crash of 2020 has completed its mean reversion.
What was the cost you ask?
To determine that, just extend the regression trend to now to find the current mean and WHAT THE HELL!
A trend line formed from the completion of the mean reversion for covid to today and we see that the VIX Mean overall has now risin to 19.70.
This is huge as a speculator because it gives us a variable to use in our analysis and some assumptions we can make to predicting a trend after an event.
1. When a crisis occurs, the government will step in to correct it with QE in some form.
2. After a large volatility event or even a bear market selloff, we can estimate an amount and time to reversion.
Everyone has questioned why the Fed kept the peddle to the QE meddle.
Well now you know why, to give the markets time to revert to mean.
The bigger the spike, the more QE and/or time it will take to revert to mean.
OK Then. Can the VIX predict a crash?
I think it can and already is pointing to a near term event.
If you compare the 08 GFC you will see 1 important trend of VIX since Jan 07 is a steady increase in volatility until the market eventually crashed.
Unlike the March 2020 event which was spontaneous pop in VIX.
Now you see, since mean reversion completed in Oct 25th, a steady increase in overall market volatility has taken hold.
While the market still mean reverts after a bear leg selloff, that overall mean continues to rise.
So How long before it pops?
While 07-08 rise in volatility prior to its crash gives us some indication an event is imminent, it won’t be the same.
I suspect it will be sooner and larger than anyone expects.
If you look at 07-08s incline, It indicates we are knocking at the doorstep.
It’s why I think VXX stopped issuing in March.
It’s why we get such crazy market rallies in the middle of a “recession” and inverted yields.
Everyone knows there is something wrong, the FED is waving their arms in the air like they just don't care.
OK smart ass, then why won’t the markets crash.
It’s because capital markets of today are much more reflexive than they were in the past.
Since 2018, options began increasing in volume and popularity.
Now, the dealers that sell those options, aka house the risk (or lack of risk) need to dynamically hedge their delta.
When 1 dealer is offside from dealer 2, you can expect they will continuously hedge back and forth until….
They reach mean.
This isn’t an overnight process and takes about 21 days in my estimation and is the VANNA and CHARM effects so prevalent in the markets over the past 2 years.
It’s why there were such predicable dips every 19th during 2021.
It’s why we got a huge bear rally this summer. (Volatility Compression).
It’s why every golden cross has a death cross.
It’s why moving averages provide hints to direction.
OK, OK. This makes sense.
But Why?
Massive amounts of Delta hedging.
I broke down one of the largest hedges wrapped around todays market equities and mapped out the strategies Delta graph.
Delta is simple to understand and once you can visualize negative and positive delta you can extrapolate the zones of volatility.
Once you map those zones to changes in volatility you have a good base to start marking assumptions.
VIX Log Returns moving average.
In the bottom panel I created a log return moving average that can give you a magnitude of movements.
Ranked from 0-10 in increased volatility you can see that covid 19 moved the volatility scale the most in history with a 9.0 in the VIXTER SCALE.
This scale can also move negative to -5
For each spike high there is always an equal push negative to bring volatility back to mean.
With all this knowledge we can form a picture in our mind of a trampoline.
The tension (or reflexivity) in the trampoline are the dealers pulling liquidity to their side. This includes all the hedge funds, market makers, bulls, bears, prop traders, theta gang, tsla gang, retail, institutions, etc are all pulling the trampoline tighter to their side.
Each economical decision or crisis is going to launch VIX that much higher.
That is until the trampoline breaks under the pressure.
The FED saved banks and corporations after Covid with Stimulus, not the checks you got in the mail (those take time to trickle down to corporations), but the debt they were buying and adding to their balance sheet.
That is a massive 9 Trillion dollars.
That gave our trampoline the added support it needed to recover.
What happens now when the FED puts that 9 Trillion in assets back into the market.
The tension grows until the next crisis or event launches it to 10.
Then it's...
So long and thanks for all the Fish.
VIX in a Detailed SnapshotLabeled every info that I am aware of at this moment. Time interval seems correct, similar retracement levels, etc... Looking to have some HUGE jump on VIX. Track the economic calendar and there would be some quite significant events happening soon.
How I plan to trade VIX Leaving this here for my own benefit so I can come back and press play and watch how it either went to plan or went to sh*t lol
Not financial advice
VIX Weekly CoilingTo get a big move down in stocks the weekly MACD needs to be above the zero line. It looks to be coiling for a break higher. Have to see if it is confirmed.
VIX Weekly CoilingTo get a big move down in stocks the weekly MACD needs to be above the zero line. It looks to be coiling for a break higher. Have to see if it is confirmed.
VIX 2008 vs 2022 sentimentHistory doesn't repeat, but does indeed rhyme - and same happens with human sentiment. Because VIX is a representation of it - we can see something similar happened along the lines of 2008. We all know a a drop is coming - we don't expect a bounce before though - and it is that bounce which I'm predicting to happen soon - and will turn bearish when it happens.
VIX Triple Top RetestVIX has reached the broke wedge targets and since then couldn't go above it - It formed a clear triple top that broke to the downside aggressively, and now it is retesting that range area - Strong signs it could lose this battle and move down for new local lows as a retest. More info about the situation on other charts ideas of mine.
VIX remaining bullishVIX is one of the indicators I watch and it doesnt look promising for the bulls.
So far its a 3 wave move, but its in its new bull trend channel.
Next week or two will not be easy for the markets, volatility is going up, things might start to get crazy any time after Sep 13th!
P.S. Dont forget to like my posts, so it gets pushed up on TV for others to see as well.
Thanks in advance!
Critical support zone at 18.58-20.48.
The attached chart reveals the major support zone where major pullbacks seem to find support since Jan 2022. The recent retreat has tested the same spot and has risen to around 26.62, a crucial point in next week's session to the upside. 31.52 and 34.66 are potential targets if the price holds above 26.62; if it fails, it will likely come down to retest 20.48 and 18.58 support zone.
Volatility MonitorThis is a volatility monitor I use to tell when volatility is peaking in vol compression.
To give yourself alerts from trading view.
Right click on the vol compression horizontal line and select Add Alert on Horizontal Line.
Select preferences and now you will get an alert when vol compression is at its highest compression point and you can maximize your returns on your hedges.
