Part 1 of Trading Volatility'
, my Trader's Corner
article of a week ago (1/15/15), displays a graph of the tremendous growth in daily VIX options volume; 2014 saw average daily VIX options volume climb to 632,000 contracts. I also noted that VIX volume on January 15th was 734,000.
My prior Trader's Corner (Part 1) article, accessible through the above LINK, included a discussion of basic facts on the volatility indices, especially VIX, option specifications related to VIX strike prices, quotes, margins, etc. as a 'primer' on the Chicago Board Options Exchange (CBOE) VIX options.
Moreover I made the point last week and will again here that VIX trends, both on a very short-term (2-5 days) basis and on what for me tends toward an 'intermediate-term' outlook (2-3 weeks), can be assessed by the same chart and technical indicator factors as any other index or stock; e.g., chart pattern analysis, overbought/oversold considerations (especially when VIX is at overbought extremes), etc.
The growth in VIX options is due to the view that's grown by portfolio/fund managers and many individual options traders that sudden spikes in options volatility could be 'sold' or shorted by buying VIX put options or selling VIX calls. Conversely of course, if you anticipate a volatility spike, VIX calls can be bought or VIX puts sold.
It has often been easier to anticipate VIX falling back toward the 14 to 12 range from spikes into the 22 to 26 zone, by buying VIX puts than it has been to anticipate a SIZABLE upside move in VIX; although, 'oversold' RSI readings, at 40 in the period shown below (on a 13-day basis) in the Relative Strength Index (RSI) has suggested a reasonably good 'bet' on the Call side; e.g., late-August and early-December. Adding to this, the 22 to 26 zone is a fairly wide range but concomitant 13-day RSI readings in the 70 area can help to suggest WHEN to pull the VIX put trade trigger.
At the first hint of bad news, stocks have often fallen sharply and the CBOE S&P 500 Volatility Index (VIX) has shot higher such as seen above into mid-October, in early-December and again just recently. Many traders now react to the tendency of VIX to tend to revert to the 'mean' by trading VIX puts and calls. Volatility behaves like a rubber band. It stretches out during moments of stress and relaxes when panic has subsided.
I find much value in analyzing the hourly VIX chart, accompanied by use of the 21-hour Relative Strength Index (RSI). There's quite a bit of trend analysis that can be made on based on the hourly chart seen next.
Firstly, I note the periods since early-December when there were periods of bearish VIX/RSI divergences. In two instances per my chart highlights, VIX was going up but its 21-hour RSI was trending LOWER in the first example OR simply not 'confirming' VIX action into its second peak in the second example.
Also of course in the recent late-December to mid-January example VIX made a distinct double top which is a POTENT top pattern. RSI was trending lower during the period when this double top was made.
I made the point in the my week-ago Trader's Corner to look for a potential break of the up trendline intersecting just under 21, which would then suggest a move to at least 18 and possibly or probably lower; e.g., such as to support in the VIX 16 to 14 zone. I would exit VIX puts on dips to 16 or under. I'm less inclined to buy VIX calls in the 16 to 14 range (perhaps at 14) as volatility, represented by VIX can be down for weeks at a time as seen on the daily chart above. Whereas, peaks in VIX above 22, tend to be relatively short-lived.
2015 MACRO FUNDAMENTAL CONSIDERATIONS:
This year (2015), the Federal Reserve is expected to raise interest rates in the third quarter, stepping away from easy-money policies that helped revive the American economy after the Great Recession. Now, deflationary pressures have come into play in Europe.
However, U.S. economic data has had a bullish trend and suggests the U.S. is slowly recovering from the 2008 financial crisis. Decent financial data exerts a moderating to downward pull on implied volatility, accentuating the VIXâ€™s reversal to the mean tendency.
Risk in VIX trades shouldn't of course be underestimated. VIX options are priced off VIX futures, so any shift in futures prices influences options. Futures typically see quick shifts in prices, so be aware of the risk of trading volatility. It's not your Father's GE stock option.
If you have access to VIX futures prices, that's a plus. However, I trade 'technically' off the VIX chart itself (not the futures) that unfolds hourly and on a daily chart basis as I've been discussing with the VIX charts above.
GOOD TRADING SUCCESS!