Discretionary Trade Idea: Sell VIX

Consider below. 

First is 1 year Daily chart of VIX. 
Question is: "Will it stay this high 1 or 2 months from now?"
First impression:  "It looks unlikely to stay this high isn't it?"

 

Second is 20 Year Monthly chart. 

Question is: "Is it certain to fall 1 or 2 months from now?"

First impression:  "Maybe, maybe not?".  Nothing is certain in trading.

 

Possible VIX Trading Ideas:

1. Sell VXX ETF if you are not Options enabled. 

• Looks to me, current price of $20.65 is not a bad price to start selling.
• Challenge is loss is not defined - setting a cut loss point will most likely turn out to be unnecessary.   However, if the current meltdown turns out to be something worse, your loss can become very large, and your broker may force liquidate your position at the worst possible time.
• Key Success Factor:  Small position sizing.

2. If you are Options enabled, consider either buying VIX Puts, or sell VIX Call Spreads.

Consider the Options Table with 29 DTE (Days to Expiry) below:

1. Buying Puts

My hesitation is that the Options Market Makers prices VIX to perfection.  

a. NTM Strike ($29).
- Extrinsic (Time) Value is very high at $9.5, i.e. it requires VIX to fall to $29 - $9.5 = $19.5, before the trader breaks even.  
- Still looks better than 50/50 odds, but odds are the returns are unlikely to be specatuclar.

b. OTM Strike (e.g. $25).
- Outlay smaller ($7.2), but break-even point is lower, at $25 - $7.2 = $17.8 at expiry, before the trader breaks even.
- Still looks better than 50/50 odds, but not much higher.

c. ITM Strike (e.g. $35).
- Higher outlay ($16 approx.), but break-even point = $28.03 - $9 = $19.03 which doesn't appear optimal compared to 1.a. above.   Most likely temporary mispricing.

In short, if you want to own Puts for predefined risk, the odds of winning appears better than 50/50, but is not a certainty as VIX must fall back down by nearly a third, before the trader breaks even.   Otherwise, he runs the real risk of losing money, even if VIX falls back down say 25% at expiry.

2. Selling Bear Call Spreads

This is a low return, but extremely high probability trade, with predefined risk, and is my favourite method.

Yesterday, at close, I sold a small amount using 2% capital as Margin the $26/$28 Bear Call Spread.  The Premium is approximately $0.30 ($0.35 not executed).   This is approximately 15% maximum returns in 24 days, if VIX falls below $26 by expiry date.

Here is a good example where the Option Chain and me have 2 very different views on the probability of winning this trade by expiry.   Options market thinks there is only 53% probability of winning.  Whereas I think it is closer to 90%-95% probability of winning.   Since we both have different views, I decide to trade 2% of my capital against the market by selling the Bear Call Spread.

Note expectancy = 90% win rate x 15% return - 10% win  rate x 100% loss = 0.35R, which looks reasonable to me.   If your win rate is higher like 95%, then, the trade expectancy is even higher than 0.35R. 

3. Alternatives

Look for "bottom" in S&P500 instruments.  The main risk is "catching a falling knife".  What looks cheap can become cheaper.  However, if you have a longer term strategy to capitalize on this with predefined risk, it can be a positive trade expectancy.

At this juncture, I think selling VIX Bear Call spreads is a higher probability of winning trade, until we see clear reversals in the S&P500.  It means safer to wait for higher prices in general.   A small speculative capital (risking no more than half of what you normally risk) can be utilized to try to catch the S&P500 bottom (such as naked Calls or Debit spreads) - the #1 key success factor here is that if S&P500 crashes, your loss is predefined and limited.

Conclusion

There are no certainties in trading.  
Consider this as just an idea.