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Taking Advantage of Recent Lows in the Volatility Index


How do options traders use the VIX?

The result of this observation is the practical consideration that time spreads in the VIX must never be traded. No calendar spreads must ever be considered when trading the VIX. Failure to follow this admonition will subject your account to risk far beyond what you consider to be remotely possible. Simply put: Don't do it.

So what trades in the VIX carry reasonable and definable risk? A wide variety of trades, including those with both defined and undefined risk, is feasible. Such trades include verticals, butterflies, condors, and simple long and short options.

I strongly prefer to structure positions to include at least a component of positive theta within my trades. Positive theta simply means that the spread has a component that will benefit from the passage of time. Let us consider a modified butterfly position; this position is commonly termed a broken wing butterfly.

First, let us review the current chart pattern of the VIX:

Click to enlarge

As can clearly be seen in the chart above, the VIX is at multi-month lows, and perusal of even longer term charts confirm this value is at multi-year lows. Given this situation, the probability of a move upwards toward its recent mean is overwhelmingly high.

In order to give sufficient duration to our trade, I would like to look at a butterfly structure approximately three months into the future in order to allow for mean reversion of the VIX.

The P&L chart for our broken wing April put butterfly is displayed below:

Click to enlarge

As can be clearly seen, the trade structure has no upper bound of profitability and the risk to the lower side is the total amount paid to establish the butterfly. As such, this is a defined risk trade that will profit from a reversion of the VIX to its mean.

Editor's Note: JW Jones offers more content at

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