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How to Play the VIX

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May 31, 2012 – Comments (0) | RELATED TICKERS: SPY , ^VIX

Volatility Index Credit Spread ($VIX)

TheOptionPlayer.com recommends a Volatility Index ($VIX) short-term (20-day) bullish option strategy. Investors could simultaneously:

Sell the June expiration $VIX $32.50 call for 1.35 (yesterday's closing price)

AND

Buy the June $37.50 call at .73 (yesterday's close)

The difference between funds received and paid out is a .62 credit which we keep if the VIX closes below 32.50 on June 20th, but immediately exit the position if it appears it will end up higher. See Guidelines page at www.theoptionplayer.com/ for explanation on how trade is set up.

 

Why we recommend it:

$VIX is the ticker symbol for the Chicago Board of Options Exchange Market Volatility Index, often referred to as the fear index or fear gauge. The VIX represents a measure of the markets' expectation of stock market volatility over the next 30 days and is quoted in percentages. The quoted percentage basically translates to the expected annualized 30-day price movement of the S&P 500 Index.

As confirmed in the VIX daily chart, the recent drop in stock prices has increased market volatility which is reflected in the VIX reaching its high for the year at 25.46. But keep in mind that the VIX would need to register over 30 to represent 'extreme' market pessimism and it hasn't been that high since stocks were at their low point at the end of last year. May was the first losing month for the S&P 500 Index since last September, but analysts have commented on the fact that selling has been relatively orderly. Note that as the prices for the major indexes have somewhat stabilized at support levels over the past week, the VIX has settled into a trading range. Though the VIX is at the high for the year, it actually is now more in line with historical norms. At the very least the Volatility Index has a ways to go to reach elevated levels and at the very least there is a very high probability that the price will remain below the 32.50 target for another three weeks.

52-Week High: 48.00

52-Week Low: 13.66

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