VolatilityAnalytics.com

With the market finally showing some weakness after an unrelenting move higher over the last six weeks, the VIX has come off the 13 handle to almost 18. None of this is out of the ordinary, although the financial media acts like the world is falling every time the market takes any kind of a break. There always must be an explanation for a down day, and if they didn’t have Crimea or China to fall back on, they would find some rumor or bring out the bearish punditry to babble about fiat currencies or 1929 chart similarities. There is more BS and misinformation on CNBC than anywhere else unless you watch Fox News.

These pullbacks are opportunities to sell some vol, and there are plenty of ways to do that. First, the VIX curve provided buy vixcentral.com:

You can see the backwardation in the front of the curve and how the entire curve shifted higher over the past week. The VIX March future expires next week, so it will be in lockstep with the VIX at this point. The implied vol on the VIX options expiring Tuesday is through the roof:

If you think things will not escalate in the next two days, or that there was a risk premium in the Crimean vote, then you can sell VIX call spreads that expire Tuesday and settle Wednesday morning. 19-21 would net around .25, and 18-20 would net around .50.

Another way to sell vol without having to look at you computer every 5 seconds, would be to sell VXX spreads out to March 28th or later. It is holding virtually all April futures right now, and that will be the front month come Wednesday morning. Here is the chain for March 28th, which is a bit off due to the weekend quoting being less than accurate:

The 48-49 spread can be sold for about .30, and you have two weeks for things to calm down only slightly. If the market sells off to 1800 or below, than you can expect the VIX to approach 20 and the VXX can certainly rise 10-15%, sending the VXX to the 52 area. But even that will not last for very long as the faster the market falls, the faster it gets to real support. (Permabears can ignore that sentence, since we all know you think the SPX is going to 1000.) The key will be to roll this spread out before it’s too late and it widens. But if the VXX were to head to 52, I would be selling April 4 or 11 spreads over 55.

Other options of selling vol include selling put spreads on the ETF’s with elevated vol like IWM, FAS and TNA. You can get almost .50 for an 86/84 Mar 28th FAS put spread. You can also sell SPY put diagonals, taking advantage of heightened vol in the nearer options.

On April 10th, the VXST, or short-term 9-day rolling VIX based on SPX option volatility will give vol traders the ability to trade short term vol in an more efficient way than trading the monthly VIX options. I will discuss that more as we get closer to that date.