The reason I didn't show that is it's just not efficient since the open interest was only at 6 that day, and also the cost of the contract could be prohibitive as well. The 75 put when the VIX was 75 would have been about 43.00$. And same thing, it hit a few peaks of profit along the way, but also had strong negative periods where it would have been down huge. If a person waited until that perfect day they could have made money, but I doubt in real time anybody would have waited until a few days before expiry.
I may, but there isn't too much to say. Credit Suisse for some reason is exiting their ETNs. I don't think it has anything to do with volatility ETPs specifically, it's just their ETN business in general. So if you are holding TVIX, I'd look for an exit as soon as you can. Nobody should ever be trying to trade products when they are being delisted. There's plenty of other vol ETPs to trade. VXX, UVXY, SVXY...
VTS - Brent Osachoff Thanks Brent for the prompt response, I was thinking holding TVIX till the delisting date (12th) in hope to recuperate some of my losses (got in at around $220 for couple hundred shares), really appreciate your help Brent.
VTS - Brent Osachoff I have done research but couldn’t find the answer, when I decide to sell my tvix shares, do I sell it to the issuer or other investors? The reason I am asking this is that if I decide to exit on the 12th, would I be able to sell my shares right before the delisting? Thanks Brent!
There's something important you didn't mention: options on the VIX aren't on the spot VIX - they're on the relative future. So when you buy a put expiring in 3 months you're actually buying a put on the 3 month VIX future - which never even came close to $85.
Thanks! Yes this type of analysis surprises people because people are led to believe that Options trading is about price. If VIX is 75 and you buy a put and it goes to 30, they think it should make money. But Options trading is just as much about the Vega, Theta, and Gamma than it is Delta. Price is only 1 factor of many
Nice video. Correct me if I'm wrong, but based on your comments about the effects of vega outweighing delta, it seems to me that a more efficient way of taking advantage of VIX spikes would be to sell both calls and puts. If you are aggressive, then selling naked straddles; if you are conservative, then selling hedged iron butterflies. Of the two, I would probably prefer the iron butterflies, because a straddle could hurt pretty bad if you don't catch the exact top. Is that right? I would love to see you run the same simulation but with selling options instead.
Yes selling straddles works well, I do them often on VIX Options, but you have to keep in mind that while it hasn't happened since the Oct 1987 crash, the VIX technically can go much higher than 82. In Oct 1987 the old VXO would have gone over 170 and closed over 150. So if you're opening naked positions like straddles, you do have to make sure you hedge them and understand the risks. I agree Butterflies are the safer choice, and those are also a common trade for me. Good risk reward
Really great comment, this is what I wanted to find seems to be so misunderstood. Thinking of playing more aggressive VIX option strategies in the future.
I've sold a lot of options, but I can't bring myself to buy options as the premium is so high, and a lot of things have to go right to be ITM worth anything. This math you use here applies not just to the VIX, but many quickly moving tickers.
Premium being high or low is a relative term, and long vs short premium is basically a wash so all that matters when trading options is to sell when it's expensive and buy when it's cheap. Again though, on a relative basis. Just because the nominal levels seem high, doesn't mean it's high relative to where we've been or where we are going. That's the trick in options, it's never about absolute values, only relative to the market you see playing out going forward.
Some ETFs are being delisted. What does it mean for TVIX, VIX traders? Can I still trade them after they are delisted? What are tha advantages or disadvantages? Thanks
I may make a video about something, but honestly there isn't a whole lot to say. They are being delisted, so while I can't tell anyone what to do, I would say it would be best to close out any positions if you have any, and just don't touch TVIX anymore. There's plenty of other ETPs to trade :)
Hey it is a really GREAT video and u explained so we'll . Can u do MORE of this kind of videos for other stocks ? While others are talking about the general market for what the index would behave during the recession . Or after interest rate hike .I think it would be a great idea to compare both before and during the recession of the popular stocks. Cuz no one just buy index these days and even the index are up . Don't mean all the stocks are up too. That way people would really see if certain sectors really Performs during or before the recession. Cuz when the recession occured the stock had already gone down there is no point in knowing that when it is already down
A lot of what I do is on indexes, as individual stocks are not predictable with any reliability anymore. In the past when the financial markets were less engineered that was possible, but these days there's no real consistency on pricing of individual stocks. It's mostly just momentum and influence, which is hard to develop systems around. So I do tend to stick to index trading whenever possible.
This shows the power of theta as well. Selling calls would have been better. But the cap req on naked calls would have skyrocketed as the underlying price went to 80.
Yes in this case it would have been better to sell the calls, but you have to remember, hindsight is 20/20. We are looking at it now and we know it didn't go higher than 82. But the VIX can go much higher. Using the old VXO it would have gone over 170 in Oct 1987 and closed around 150. It's impossible to pick the tops and bottoms, so if a trader sold calls when the VIX crossed 50, thinking it only happens a few times per decade, they would have been in a world of hurt while the VIX is heading up over 80.
Calls it's less of a Vega issue because presumably you'd be buying the calls when Volatility is low, so you wouldn't be overpaying in the same way. Buying Puts when VIX is super high is a massive Vega headwind. The issue with call buying is just getting the timing right. Volatility doesn't spike often, so you're usually left with a decaying position that eventually expires worthless. Basically, it's a tough trade on both sides :)
wish you covered more spreads--seems selling a call spread or buying OTM put spreads could be better (as the short put should offset some of the volatility cost)? good video, though. edit: should have watched to the end, i see you mentioned put verticals, lol.
I assume you mean on the VIX? Most of the time that strategy will work pretty well since volatility is elevated and the VIX is medium term mean reverting so it will likely go down again before too long. The problem is, there's no ceiling to the VIX and it could just keep going. If you sell calls when you think the VIX is high, how do you define "high?" What if you sell your calls when the VIX is at 40 which historically speaking is extremely high, but it's on its way to 100? So the key would be to structure a trade that has a higher probability of success, while still being protected against worst case scenarios. At some point in your trading, you're going to be VERY wrong on direction. The key is to have those times not cost you too much, and typically selling naked calls will violate that rule. I'd personally recommend people stick to defined risk trades and avoid naked options.
So in other words, just use spreads instead, just make sure you're vega/theta neutral. So it really is that easy? So use bear put spread when it has spiked?
Well it's never easy because we don't know how long the volatility will stay elevated. But as far as choosing the structure of the trade, yes I think sticking with spreads on the VIX is a good practise. Paying up for those high Vega positions nearly always fails to pay off, so spreads are the way to go. As far as timing the entry, that's up to you :)
Thanks for the interest. The free trial comes with all subscription levels, you don't get charged until you've already see a couple weeks of the service so you can just cancel it if you don't like what you see. If you happen to forget and you do get charged, just email me, I always give refunds no questions asked. :)
I like that as well and do them often. I call it my "Wheel of Fun" strategy but it's essentially what you're saying, just cash secured puts when something is beaten down in price and volatility is high. Works well, but it should always be done cash secured of course. There's too many people who do those trades on leverage, and they end up in a position that if it continues to move against them, they don't have the capital in their account to take assignment of the shares, so they are forced to just lock in massive losses. It should ALWAYS be done fully cash secured :)
VTS - Brent Osachoff awesome and I really appreciate your response and your content btw! Seems like some very underrated/under utilized strategies for interesting investment strategies. I’ve gone down quite the rabbit hole of education thanks to your videos including your website and you probably have the most unique edge of any of the experts I follow online, keep up the great work!
VTS - Brent Osachoff one more question too if you have time, I noticed (thanks to you) that the VIX term structure is currently in a very unique state with the M1 being in the 99th percentile lower than the M2 Does this mean that the vxx and UVXY will for sure rise to the value of the M2 between now and expiration of the m1? And if so, wouldn’t that mean it should be perfectly safe to sell some deep ITM covered weekly puts over the next few weeks? I noticed there are some contracts with 5 figure premiums that, if I’m not mistaken, should decrease dramatically as we move toward the current m2 transitioning to the M1, meaning that could be a pretty large amount of weekly premium to collect in this unique timeframe... Am I missing something?
Very good video. Exactly the answer I was looking for online. Question, would the inverse trade be profitable? Writing the put option instead of buying to open?
Selling the puts would likely be better, but the issue there is how far OTM and at what low level of premium would you accept? If the VIX is over 50 a lot of people think that selling a 30 or something would safe, but then there are times when it can go well below that. So then if you accept a much lower premium it hardly makes the risk worth it. I typically find the best entries come after waiting a while for it to settle back down, and then getting into new trades. Trying to trade the long or short side when it's very elevated is tricky. For those I much prefer just defined risk trades like verticals, butterflies, even calendars. But straight buying or selling puts, not great when the VIX is near it's highs.
The problem there is that the VIX futures are in serious backwardation, so there's a massive headwind. Now obviously hindsight is 20/20 and this time around it would have been successful, but in the moment it would not be wise at all to short volatility ETPs when the VIX futures are in the lowest percentile of backwardation.
Correctly timing calls is much more profitable, but it's not very likely which is why the payoff is better. Correctly timing volatility spikes is nearly impossible, mostly just luck when it happens. I think it's best to look for higher probability trades.
Yes, anything to do with spreads that hold both long and short legs are going to be more successful because the volatility aspect of the trade is reduced. As long as the strike gap between them is small, then the issue of high volatility is less of a problem and you can have success fading very high volatility levels. All the same rules apply though, don't over-allocate just because you think it's a good set up :)
Brent: another great video. I wished you made this video years ago. You could of saved me some money :-). How about instead of buy a put option when vix spikes, we do a straight short of VXX when it is 75. By the time it gets down to 20, it would be a 350% gain.
The problem is the VIX futures at that point are in massive backwardation, so even if volatility does settle back down the VXX can continue to stay flat, or even still go up more. The only reason it looks like a good trade now is because hindsight is 20/20, and we saw one of the fastest recoveries in S&P 500 history. We can see that the trade "would have" worked this time around. But in general, it's a really bad idea to be shorting the VXX when VIX futures are in massive backwardation. The last few years have been a "buy the dip" environment, but trust me, that's not always the case and we could easily see the volatility ETPs go up and stay up for much much longer than people thought possible...
@@VolatilityTradingStrategies VXX lags the VIX and has decaying factor due to rolling forward and contango, isn't buying VXX LEAPS PuTS 9 month - 12month a good bet if VIX rises and especially after fear capitulation and money flowing back in? Personally had a 6 month VXX Put that went ITM to 800% after entering on the day VIX was the highest. I did take profits before then
@@sedul2006 I don't know what you mean by VXX lags the VIX. The VXX tracks VIX futures, the VIX tracks S&P 500 options, they aren't the same underlying. As to the LEAPS, you're still paying the huge up front Vega and the duration doesn't save you from that. When the VIX settles back down in the future, the contracts that you paid a lot for will be priced a lot lower. Also we can just use the ThinkBack for VXX LEAPS purchased on March 16th, and those contracts still didn't do very well, even bought at the absolute peak. They were losing trades up to the 30 strike, and then ok profit up to the 50 strikes, and only the in the money trades did well, but even then they maxed out at about a 60% profit. And that's bought at the absolute top and waiting 5-6 months for profit. The markets had the most V shaped recovery ever, and those leaps still didn't do what people would think they would. That's what happens when you pay too much for an option. Even when the result goes perfectly afterwards, they still don't make that much. Options trading isn't about direction or price as much as it is about volatility and fair value.
@@VolatilityTradingStrategies Thanks Brent. I meant VXX pricing wise seems to lag the VIX in terms of change in price. But because they track different underlying/ structured differently, this is probably a non-relevant observation. I see - so for LEAPS VXX Put when the VIX Futures in backwardation, will likely have very high Volatility due to market crash (2009, 2018, 2020), and since they are LEAP options, the sensitivity to Volatility change will be very high. And if they are too expensive, the delta change may not outweigh the cost of Volatility dropping and you have Theta Decay against you (especially short term contracts). Reading your other comment replies, may be better buying VXX Puts when Volatility calms down. If I understand you correctly, this higher vol price premium paid for LEAPs apply to other underlying's, simply, high vol LEAP is not great because the option trading as you said it's not just about Delta, it's about the Volatility which could drive up the price. What about OTM delta 4 delta and LEAP to JUN 2021, JAN 2022 at that time if it was available? And waited for 6-10 months? Curious, then at MAR 2020 peak VIX, and really high backwardation of VIX futures, are we saying there is no good way to profit from shorting the VIX using VXX LEAP Put Options? How about selling call credit spreads on VXX in addition to buying the LEAP Put, to simulate shorting the VXX (without actually shorting the VXX?) (Risk reversal) to pay for some of the premiums. Additionally, you mentioned that Bear Put Debit Spreads are safer since you're selling a bit of high volatility. Otherwise, what other options are there - don't play it entirely in such a fashion when the market is at really high VIX, wait for it to settle down then enter on the spikes that come after (i.e. JUNE 2020) And not to mention, conversely, if the market were to crash and VX Futures trade up really high, the VXX Leap Puts may lose value really fast right?
@@sedul2006 There's definitely plenty of ways to profit from the eventual crush in volatility, I'm just saying that a bad way to do it is highly vega sensitive trades like Long Puts. I've made other videos talking about better ways to do it, and that usually involves spreads that have both a long and short vega component to them like verticals, butterflies, iron condors, even calendars. If there's long and short vega then the volatility component is less of a concern and then you can absolutely profit when volatility goes back down, or the VXX starts to decay again.
So they're not great for shorting, but this does make me think that they're actually great for hedging. It seems like the IV increases as the option ages making them a little tricky to use. I would think, if you could handle a little mismatched volatility upfront, that theses would be good hedge for VXX options. Like you could start out with a long call, lower priced, lower IV VIX option, and a short VXX option, make some initial profit, but in the end wind up completely hedged.
Yes, that's true of all trading. The trader themselves can set their strikes anywhere they like. But the mathematics of the Options market makes them identical trades. Of course if a person wanted, they could do an OTM, ATM, or ITM Vertical put spread or call spread, or any variation they want. But they are the same thing :)
It's a different risk reward profile, since holding the shares doesn't lose money if the stock stays flat. The call option will lose its premium if that happens, so on the flip side there is an additional potential gain to compensate. So they are directionally the same, but risk reward is a little different. It's not about which is better than the other, it's always situational and based on your trading hypothesis and how it fits in to the rest of your portfolio. Personally, I don't like long calls AT ALL, but I also don't buy and hold. I'm always looking for defined risk option spreads instead of shares or calls.
I would say no, that's not the lesson to take away. If I wanted the video to be 2 hours long I could have shown all the strikes and the result is about the same. Buying into a massively high Vega headwind is a losing strategy, period. Of course I have to make choices though to make sure the videos aren't way too long. Bottom line, don't buy into massive Vega, make sure you structure trades with higher probability like verticals, butterflies, condors etc.
@@VolatilityTradingStrategies I understand. Would buying puts on VXX instead be profitable during the downturn in March 2020? I saw your videos on this explanation.
I think your title should read "Here's why buying VIX Put Options don't work". Adding in "Buying". I just stick to selling calls & puts, and pocket the premium. I had always thought to simply sell calls after the peak, but it seems selling puts would be nearly as successful too based on these numbers, even though conceptually it doesn't make sense!
The problem with selling premium is that you never know how far something will run so just be aware of that. It's definitely the higher probability trade and you'd do much better long term to be selling the puts. But they aren't without risk so just make sure you allocate conservatively and understand your pain points :)
Yes, verticals would work far better than straight puts, that's what I tried to say in the video. Verticals use both long and short strikes so there is no vega headwind. It's a much more efficient trade.
Do you mean short the VXX when the VIX is 50-75 and just wait? You could, but there's a few issues. First, the VIX doesn't get to 50-75 more than once per decade or so, so it wouldn't be something you do often. Secondly, and more importantly, what's to say that when the VIX gets to 50-75 the next time, that it doesn't just keep going to 100 or 150? Remember the old VXO calculation using S&P 100, which tracks very very closely to the current VIX went to 172 intraday on Black Monday 1987. People often think the VIX has.a ceiling, but it actually doesn't. Volatility can just keep going higher for a longer period of time. So it would still be very risky to try to pick the top and short something like VXX which is a very risky trade. You'd want to make sure your allocation size is small, and you have hedges and a risk management plan, and by then it may not even be worth it. Might just be better focusing on making your short vol profits during better more stable times, and being more trend following. Contrarian trades trying to time reversals is a very hard to trade to make money with long term. I personally much prefer trend following...
@@VolatilityTradingStrategies I really appreciate your reply, and I do agree completely with it. It appears that one would be better off by just shorting the position instead of buying the put, as the short position cannot be affected by time decay and volatility premium. Is this assumption right? Thank you so much for all your help.
But what happens when it goes way WAY above 40? Like on Oct 19th, 1987 when it would have hit 172 intraday? That short call will have huge convexity and would almost certainly margin call the entire account. Now it won't happen often, but remember, you only have to blow up your trading account once to blow it up. One single day mistake, at any time in the next 10-20 years will be enough to ruin everything that was gained before that. That's the reality people don't ever calculate. Sure setting at 40 will work well "most" of the time, but it only has to massively fail ONCE :)
@@VolatilityTradingStrategies Thanks Bro. I immediately felt uncomfortable... even as I was typing it out.. Ended up closing the short call the next day! :P
It's my understanding VIX options lack put-call parity since the underlying cannot be directly traded so there is no arbitrage opportunity. Could this also make the puts too rich in premium for a profitable long?
In general, there is no arbitrage for any options. Back in the 90's and early 00's even, when the markets weren't as sophisticated there were far more opportunities for systematic harvesting of premium. These days they are far more efficient, and that applies to VIX, volatility ETPs, and ETF and equity options. It requires far more of an edge than simply knowing that VIX mean/mode reverts, or that volatility ETPs decay, or that equity options have skew.
It's not really a good hedge because there's no convexity to selling options. The reason hedges are used is because a small allocation can provide protection against a relatively larger portfolio, because long volatility (long vega) has convexity and can go up very quickly in a crisis. But short volatility can only make the premium collected, so it doesn't provide any protection. Short volatility is generally used as a stand alone profit generating strategy, where as hedging should be long volatility.
What about if you bought the long put option before the VIX spike? I'm guessing it would have been super profitable if you bought ATM put options lets say... a week before the VIX spiked??
@@VolatilityTradingStrategies What do you think about buying VXX shares then? I mean we know it's going to go up in price at some point right? What are your thoughts on selling calls for VXX/VIX?
@@keoniborge2498 The big problem with the shares is they are based on a methodology of rolling VIX futures contracts. Roughly 85% of the time there is positive roll yield in the futures, so the VXX tends to decay most of the time. If you hold it long term the odds are high that you'll just be holding a decaying product, and when it finally does pop (which of course it will at some point) by then you'll have bleed down so much that it may not even pop back up to the break even price let alone an actual profit. Insurance always costs money, there is no way to game the system. That's why so many traders focus on being on the short side of the trade. Obviously that comes with massive risk that needs to be reduced somehow, but that's the reason why.
Individual call and put buying isn't something I do often. It's just not a very efficient trade and really just comes down to speculation. I'd still recommend people try to structure their options in the form of spreads to try to reduce the amount of speculation and make it more structured risk reward.
Yes and you can't actually own the VIX or take assignment, it's cash settled. But I'm curious, what does that have to do with the video? Did I miss explaining something?
This question has nothing to do with volatility. What about short selling meme stocks right before their earning reports are released? Would it be hard to borrow the shares since everybody would be trying to do that?
Could be hard to borrow yes, but even doing it with options I would say is risky. Do you have any extended data that shows they tend to go down after earnings or is it just something you've observed? Sometimes our cognitive biases get in the way, so I'd first want you to actually test the data.
In general yes, but options trading specifically is about buying underpriced options and selling overpriced options. The reason the VIX is even more specific to the problem, is because of the mean reverting nature and the fact that when it's very high, literally everyone knows it will go down. They don't know the time frame specifically, but everyone knows the future direction, so the problem of buying high priced IV is even worse in the VIX than other assets.
In general, yes. But I've not found timing VIX spikes to be a very high probability trade so I don't really both with those either unless it's for hedging purposes.
@@theguvnr3364 Unfortunately the myth surrounding "50 cent" on those VIX calls has been greatly exaggerated :) In actual fact it's almost certainly just hedges against a broad long portfolio. Very likely those profits on the calls were all offset and more from the losses on the portfolio when stocks go down. It's a fun story, but it's not reality :)
@@VolatilityTradingStrategies 50c plays are certainly hedges against a broad long portfolio. I actually think they're quite effective and could even be EV+. I however don't like them because of low win rate - win rate matters psychologically, as low win rate strategies are very difficult to stick with long-term.
When doing it from an elevated level, no that's not true. In order for the contract to make money, the move down has to be an outlier, by very mathematical definition. So it's not most of the time, it's rarely. That's the point of the video. It's not opinion, it's a fact based on the way contracts are priced in high volatility. It is by very mathematical definition a low probability trade. The trader would be well advised to choose a better structure that doesn't have the large Vega headwind, or better yet, has the Vega advantage. Then they really can have their VIX trades work most of the time.
@@VolatilityTradingStrategies I meant more of what you're saying. It's possible, you just need to have an edge to win, unlike covid crash where you could nail the trade and still lose money
If buying put options don't work, then selling puts should work, which works for me. I trade the VXX using the power of time decay, it proven profitable to me.
I would be careful on that logic, because when the VIX is that elevated, neither buying puts nor selling calls works. Buying puts doesn't work because you're paying too much Vega and it's hard to overcome it. Selling calls doesn't work either because eventually the VIX will spike even higher and wipe those out too. Now obviously selling calls has a much higher probably of success and most of the time the VIX will quickly fade and those positions will be profitable. But one day the VIX will go high, and keep going, and keep going. Remember in Oct 1987 it went to 172. Careful picking up pennies in front of the steam roller :) Defined risk spreads are always best.
@@VolatilityTradingStrategies Thanks for the input. I trade the VXX and you are correct and not to trade it when elevated. I sell calls they are covered, I can't trade naked in a IRA account so my gains would be limited. Yes you correct as selling naked calls (which I don't do) can be risky. I use selling weekly options on VXX to either profit from calls or puts expiring worthless. As a starting point I use Delta of.30 to sell calls and --.30 to sell puts. Also looking at weekly support and resistance levels adjusting accordingly. Current looking to sell the covered calls at 29 for 1.15, will adjust according as the week progresses. .
@@VolatilityTradingStrategies Although the short call on the vix may have been blown out at the peak of 2020, but couldn't you have rolled it out in time several months with an eventual profitable trade?
@@kamran6336 The problem is, there is no cap ceiling on the VIX. Using the old VXO calculation the VIX went as high as 172 on October 19th, 1987. So the issue with those types of undefined risk trades is that you'd have to put such a TINY percentage of your capital in it that it wouldn't even be worth it. Please remember, shorting volatility isn't about what simply works and makes a profit. There's dozens of strategies that if done right can make a profit. The only thing that matters is what is the MOST efficient and MOST profitable long term. Selling undefined risk options and then "rolling them out" if you get in trouble might work if you use a small enough amount of capital and you are extremely patient in how long you have to wait for it to get back to break even. Sure, that "might" work. But it's definitely not the best way to short volatility, so why bother? Defined risk options that protect capital FIRST and chase profit second are always going to be more efficient and profitable long term. Focus on the best methods, and ignore the rest. Undefined short vol trades aren't worth it.
@@VolatilityTradingStrategies Let's say, hypothetically, if I were to sell an otm call credit spread which was tested, how would I be able to get a scratch and turn it into profit? Just wait for volitility to collapse? Credit spreads are much more difficult to roll out in time.
Not sure about this. March 18 had a low of 1.25 yesterday. High 2.20 today. Can’t go too far on expiration date as futures roll monthly. I’m in the trade now, expecting close to $3, avg $1.93 with 18 contracts. Intrinsic should beat all the greeks when VIX (VRO) settles under 20.
It's best to view all options as net zero, and the only way a trade makes money is if your thesis plays out faster or larger magnitude than what's already priced in. So in the case of trying to fade VIX spikes, a long put option is the net zero edge trade, and the only way it makes money is if the speed and direction outpaces the already very high Vega that's priced into the contract. As the example shows, that time it did not, and the long puts would not have made money even though the VIX dropped to the 20's quite quickly. It didn't drop fast enough, and the high Vega won. That's not always the case. There are times when it does in fact drop so fast that it can outpace the Vega. The point of the video is, be very careful buying into high Vega trades. It's far better to just eliminate that variable by simply using spreads that have both long and short vega legs in them. That way it is more of a directional trade, and you can make way more money way easier. Single leg long Vega trades are very hard to make money consistently on. Low Vega spreads are better long-term.
Please show us what would have happened if you sold a call rather than buying a put in the same scenario. My guess is the outcome would be very different. Also, you are comparing an options contract with a far out expiration (months) to a contract with 1 week or less..
Selling naked calls and buying long puts aren't the same risk reward profile, so it's not an either or type of comparison. Clearly if you sold a call and timed it well, it collects the premium and you make money. If you sell the call too early, you can get smashed if the underlying keeps going up. In the case of the VIX, the vast majority of people who sell naked calls start doing it around VIX 30 or 40, so obviously if it goes over 80 you're going to get destroyed. I don't consider it even remotely realistic to wait for the VIX to hit 80 and then sell a call. Obviously that kind of market timing isn't even worth running backtests on. And don't forget, even if you did have the unbelievable patience to wait a decade and sold a call at the exact high of the last 10 years, the VIX can still go higher. In October 1987 the old VRO would have gone over 150. So how fun would that be? VIX goes to 80, you sell a call and think you're genius, only to see it go to 150 and you still lose your account. Just, don't :) Selling naked calls on volatility instruments of any kind, whether it's VIX, or VXX / UVXY, it's a terrible idea. You may get a lot of easy wins in a row and think it's easy money. But eventually, the market will do something crazy. Eventually, there will be a flash crash of some kind. Eventually, the naked call sellers will have to pay back all those easy wins, WITH INTEREST :)
Great video Brent, but let's reverse the roles here. If buying VIX puts during heightened volatility doesn't work, why not sell VIX puts? After all, we trade in a - two-sided - market. Assuming the spread and liquidity are appropriate, we can take the opposite side of the trade if we believe one side of the position is unfair.
Yes, better use of the Greeks to your advantage, but be VERY careful and make sure you're hedged, because there's nothing saying the VIX couldn't go significantly over 100. Keep it small, keep it hedged, and then yes strategic shorting on the short vega side would work out better.
I'm confused 😂. I bought puts on vxx today, 240+ contracts 4 separate strikes and 2 different expiration dates. I was up on every single one of them. I also know someone who made a 2000% return doing the same exact thing, so how is Video even right?
Are you trying to suggest that one trade during one market environment disproves the concept of Vega headwind? I'm confused how you could think such a small sample size is relevant.
The 170 vix print in 1987 lasted just three weeks. If you were to buy ATM puts every ten points from 30 till 170, in which it surged in just one week, your average basis would be 100 points. You would've made profit if you held it for two more weeks. Assuming you bought contracts several months out.
@@kamran6336 That's not how options trading works, unless you're talking about a tiny account or something. Anybody with any reasonable level of capital doesn't risk 100% loss on lotto ticket trades. Now of course feel free to do so, but no that's not a viable way to manage a portfolio. When people have something significant to lose, that's when they need to have intelligent strategies that focus on risk management. You can't compare a YOLO 5k account with what someone does with their net worth.
+NnotOF remember he took an extreme case where the covid crash happened, which increased the volatility a lot, and once it started dropping Vega decreased in this case theta+ gamma outperformed Delta which the contracts will definitely lose their value, however, if you buy those contracts during more stable times( like the whole period after the crash till 2022) you can definitely make that %, however, the probability to make money will be much lower since you're buying OTM options.
@@seropelmayan3032 The same concept applies in all of options trading, it's not just Covid. If you buy into massive Vega headwinds, it's a very inefficient trade. To be successful long term trading options, you have to use the Greeks to your advantage. When Vega is high, you sell vol, you don't buy it. When vol is low, you buy vol, you don't sell it. What that original poster was doing was taking an outlier example and trying to extrapolate to everything, which is obviously false. Buying high vega on the long side is just asking for trouble.
That's the point of the video, to illustrate the massive cost of Vega when the VIX is high. When the VIX was at 75, the 60 put was still a premium around 32$. You're paying a fortune for those contracts.
Hey Brent, since VIX options DON'T realistically work, so why are you still recommending VXX puts? It doesn't really work either (due to very HIGH premiums incurred).
VXX and VIX are entirely different. VXX is not a mean reverting index, it's based entirely on a freely traded VIX futures market so the options in VXX is a fair and balanced market on both the call and put side. VXX options are just about balancing the vega/theta and directional risk. Not the same concept as the VIX. The VIX is entirely unique in that respect, that when it goes high, literally everybody knows where it's going next so single leg directional high vega trades can't work.
@@heinrichklaus5717 Well "expensive" is always a relative term right? If volatility remains at these elevated levels for an extended period of time (which has some historical precedent by the way) then the current level of volatility could be considered average or even relatively low. It just depends what happens next. Compared to 2017, yes it's high vega right now. Compared to 1996-2000 it's quite low right now. It's all relative so it depends how you're applying the trades. For my VXX Put trades, they are just stock replacement so it's just simulating with roughly 0.6 delta factor a short VXX position. It's not meant to be an "options" trade per se, just a stock replacement so we don't have to borrow short VXX shares and take on the undefined risk. Now they are long vega trades so there is theta decay, but with our trades being 100+ days to expiration it's pretty low, and the directional moves far outweigh the theta decay.
Yes if you stick to spreads that have both long and short legs within it, Condors, Diagonals, Calendars, Straddles, Verticals, etc, it should work much better than purely long only leg options like Puts.
Could be, because then you're capitalizing on the Vega rather than get hurt by it. I'd definitely look to Option structures that don't get crushed by Vega if the VIX is really high.
Do you understand the concept of intrinsic value? It’s literally Strike Price - Stock Price on a Put, if Vix ever spiked to $75 then I am buying an at the money put. For each $1 Vix decreases i will be making $100 in profit no matter what. IV crush doesnt affect intrinsic value. You are buying a $30 Put on an equity sitting at $75. Thats way out of the money purely extrinsic value. This is just a bad example. If i buy a $75 Put on Vix and it drops from $75 to $30 I will have $4,500 of profit in intrinsic value no matter what.
No, that is not at all how options works. If you buy an at the money put when the VIX is 75, you certainly do not make profit just because it goes down. You would be paying an absolute fortune for that put option that the movement would have to overcome, which would be a huge headwind to the trade.
Did you buy straight put options? Vega is going to be EXTREMELY high today, given the VIX has spiked over 50%. My humble suggestion would be to use Vertical spreads instead. That way there is a long and short, and the impact of very high Volatility won't be nearly as much. Long Put Options on a day the VIX spikes are really hard to make any real money on. Not impossible, but there is a pretty big Vega headwind
You are buying way too far expiries for these vix strategies. If you do 30d puts 1 week expiry and run roll that strategy on VIX spikes you make 15:1 if you run it for 6 weeks after the spike
It's not a strategy, it's a backtest showing what happens after a spike. My own strategies are nothing like what you see in the video. I'm just illustrating why that basic stuff doesn't work, for education. A lot of people just wait for spikes and buy Puts, so the point of the video is to show why it doesn't work.
This guy's audio is so bad it reminds me of those Godzilla films with the old Japanese scientists sitting there talking but the audio doesn't tie to their lip movements.
You can tune in to my livestream today and see if my audio is any better these days, and yell at me if it isn't :) In the last few years I've tried to clean up the audio... ruclips.net/video/TyA6FW4Hjtg/видео.html&ab_channel=VTS-BrentOsachoff
this video is misleading, as option traders do not sit and let a position simply go to hell on them, you get out right away when its not going the way you want it to. I mean if you take anything away from this video its to not buy options soooo far out of the money, of course that whats going to happen!. theta is no joke, options have time decay, they are not stocks. If you would have waited untill vix peaked then bought an in the money put option, im sure it would have made a very nice chunk of change, now if u buy an in the money at 50, and are dum enuf to hold it all the way up to 85, then ride it all the way back down to 20, you really cant expect it to make much after all the time decay and changes in volotility. WHich is what he explains in the video. still good video but you can short vix if you do it correctly. its no different than any other stock at the end of the day.
I tend not to speak about what all option traders do :) I just present data, and people can extrapolate that to match their own situation. The point of the video was explaining why traders shouldn't buy into a Vega headwind.
ATM and OTM are always more risky then Deep ITM. when you wanna proof your point, of course you don't cover deep ITM theory and completely ignore rasonable explanation
It's not some big conspiracy I'm participating in, I was just making a simple point about buying expensive Vega. Next time around I'll choose a different point
He should have used a spread too. I don't think any competent trader would buy a 100% IV ATM put on the VIX and not sell a lower strike. The VIX has almost a permanent floor at 10 and wouldn't be expected to go below 20 after spiking to 50. There is no reason you wouldn't sell a cheaper put to create a spread.
My ideas are so revolutionary and destabilizing to the status quo that it's actually not safe for me to be allowed out in public, so they keep me isolated just this padded room, for your safety and mine. Consider yourself lucky that "they" at least let me make videos...
Great video, although I wish you covered ATM / ITM puts when VIX was at 75 instead of way OTM 30 puts.
The reason I didn't show that is it's just not efficient since the open interest was only at 6 that day, and also the cost of the contract could be prohibitive as well. The 75 put when the VIX was 75 would have been about 43.00$. And same thing, it hit a few peaks of profit along the way, but also had strong negative periods where it would have been down huge. If a person waited until that perfect day they could have made money, but I doubt in real time anybody would have waited until a few days before expiry.
Hey Brent Can you please talk about the delisting event, and what actions should investors who hold these ETNs(TVIX) take before the delisting?
Hi Brent, please talk something about the delisting and TVIX
Please do!
I may, but there isn't too much to say. Credit Suisse for some reason is exiting their ETNs. I don't think it has anything to do with volatility ETPs specifically, it's just their ETN business in general. So if you are holding TVIX, I'd look for an exit as soon as you can. Nobody should ever be trying to trade products when they are being delisted. There's plenty of other vol ETPs to trade. VXX, UVXY, SVXY...
VTS - Brent Osachoff Thanks Brent for the prompt response, I was thinking holding TVIX till the delisting date (12th) in hope to recuperate some of my losses (got in at around $220 for couple hundred shares), really appreciate your help Brent.
VTS - Brent Osachoff I have done research but couldn’t find the answer, when I decide to sell my tvix shares, do I sell it to the issuer or other investors? The reason I am asking this is that if I decide to exit on the 12th, would I be able to sell my shares right before the delisting? Thanks Brent!
There's something important you didn't mention: options on the VIX aren't on the spot VIX - they're on the relative future. So when you buy a put expiring in 3 months you're actually buying a put on the 3 month VIX future - which never even came close to $85.
Are you saying that instead people should trade /VIX or VIX2
No, you can trade vxx or some other derivative, but not vix
That is really interest. I was surprised about the 75 VIX , K=$30, and gain of only 18% if you timed it. Bookmarking this channel.
Thanks! Yes this type of analysis surprises people because people are led to believe that Options trading is about price. If VIX is 75 and you buy a put and it goes to 30, they think it should make money. But Options trading is just as much about the Vega, Theta, and Gamma than it is Delta. Price is only 1 factor of many
Nice video. Correct me if I'm wrong, but based on your comments about the effects of vega outweighing delta, it seems to me that a more efficient way of taking advantage of VIX spikes would be to sell both calls and puts. If you are aggressive, then selling naked straddles; if you are conservative, then selling hedged iron butterflies. Of the two, I would probably prefer the iron butterflies, because a straddle could hurt pretty bad if you don't catch the exact top. Is that right? I would love to see you run the same simulation but with selling options instead.
Yes selling straddles works well, I do them often on VIX Options, but you have to keep in mind that while it hasn't happened since the Oct 1987 crash, the VIX technically can go much higher than 82. In Oct 1987 the old VXO would have gone over 170 and closed over 150. So if you're opening naked positions like straddles, you do have to make sure you hedge them and understand the risks. I agree Butterflies are the safer choice, and those are also a common trade for me. Good risk reward
Really great comment, this is what I wanted to find seems to be so misunderstood. Thinking of playing more aggressive VIX option strategies in the future.
I've sold a lot of options, but I can't bring myself to buy options as the premium is so high, and a lot of things have to go right to be ITM worth anything. This math you use here applies not just to the VIX, but many quickly moving tickers.
Premium being high or low is a relative term, and long vs short premium is basically a wash so all that matters when trading options is to sell when it's expensive and buy when it's cheap. Again though, on a relative basis. Just because the nominal levels seem high, doesn't mean it's high relative to where we've been or where we are going. That's the trick in options, it's never about absolute values, only relative to the market you see playing out going forward.
Some ETFs are being delisted. What does it mean for TVIX, VIX traders? Can I still trade them after they are delisted? What are tha advantages or disadvantages? Thanks
I may make a video about something, but honestly there isn't a whole lot to say. They are being delisted, so while I can't tell anyone what to do, I would say it would be best to close out any positions if you have any, and just don't touch TVIX anymore. There's plenty of other ETPs to trade :)
Hey it is a really GREAT video and u explained so we'll . Can u do MORE of this kind of videos for other stocks ? While others are talking about the general market for what the index would behave during the recession . Or after interest rate hike .I think it would be a great idea to compare both before and during the recession of the popular stocks. Cuz no one just buy index these days and even the index are up . Don't mean all the stocks are up too. That way people would really see if certain sectors really Performs during or before the recession. Cuz when the recession occured the stock had already gone down there is no point in knowing that when it is already down
A lot of what I do is on indexes, as individual stocks are not predictable with any reliability anymore. In the past when the financial markets were less engineered that was possible, but these days there's no real consistency on pricing of individual stocks. It's mostly just momentum and influence, which is hard to develop systems around. So I do tend to stick to index trading whenever possible.
This shows the power of theta as well. Selling calls would have been better. But the cap req on naked calls would have skyrocketed as the underlying price went to 80.
Yes in this case it would have been better to sell the calls, but you have to remember, hindsight is 20/20. We are looking at it now and we know it didn't go higher than 82. But the VIX can go much higher. Using the old VXO it would have gone over 170 in Oct 1987 and closed around 150.
It's impossible to pick the tops and bottoms, so if a trader sold calls when the VIX crossed 50, thinking it only happens a few times per decade, they would have been in a world of hurt while the VIX is heading up over 80.
You can make money trading the etp’s like this, but during mini spikes and it has to be well timed. Put spreads are a much better option.
So what would be a good Vega and Delta for puts
would this happen on calls as well? VIX is 16 and you do a call for 18 for example.
Calls it's less of a Vega issue because presumably you'd be buying the calls when Volatility is low, so you wouldn't be overpaying in the same way. Buying Puts when VIX is super high is a massive Vega headwind. The issue with call buying is just getting the timing right. Volatility doesn't spike often, so you're usually left with a decaying position that eventually expires worthless. Basically, it's a tough trade on both sides :)
@@VolatilityTradingStrategies greatly appreciated!
wish you covered more spreads--seems selling a call spread or buying OTM put spreads could be better (as the short put should offset some of the volatility cost)? good video, though.
edit: should have watched to the end, i see you mentioned put verticals, lol.
What about selling calls when volatility gets crazy?
I assume you mean on the VIX? Most of the time that strategy will work pretty well since volatility is elevated and the VIX is medium term mean reverting so it will likely go down again before too long. The problem is, there's no ceiling to the VIX and it could just keep going. If you sell calls when you think the VIX is high, how do you define "high?" What if you sell your calls when the VIX is at 40 which historically speaking is extremely high, but it's on its way to 100? So the key would be to structure a trade that has a higher probability of success, while still being protected against worst case scenarios. At some point in your trading, you're going to be VERY wrong on direction. The key is to have those times not cost you too much, and typically selling naked calls will violate that rule. I'd personally recommend people stick to defined risk trades and avoid naked options.
Something I've wondered myself, very cool video!
So in other words, just use spreads instead, just make sure you're vega/theta neutral. So it really is that easy? So use bear put spread when it has spiked?
Well it's never easy because we don't know how long the volatility will stay elevated. But as far as choosing the structure of the trade, yes I think sticking with spreads on the VIX is a good practise. Paying up for those high Vega positions nearly always fails to pay off, so spreads are the way to go. As far as timing the entry, that's up to you :)
@@VolatilityTradingStrategies Thanks for the insights! Wishing you a happy Christmas and new years.
Then how about selling options on the VIX?
Hi Brent, I went to your website but its difficult to find the free trail, do you have a video to guide how to have access to the free trail.
Thanks for the interest. The free trial comes with all subscription levels, you don't get charged until you've already see a couple weeks of the service so you can just cancel it if you don't like what you see. If you happen to forget and you do get charged, just email me, I always give refunds no questions asked. :)
So what about selling covered OTM puts after a spike? Seems like that would actually be the easy money trade since Vega outweighs delta on vol puts?
I like that as well and do them often. I call it my "Wheel of Fun" strategy but it's essentially what you're saying, just cash secured puts when something is beaten down in price and volatility is high. Works well, but it should always be done cash secured of course. There's too many people who do those trades on leverage, and they end up in a position that if it continues to move against them, they don't have the capital in their account to take assignment of the shares, so they are forced to just lock in massive losses. It should ALWAYS be done fully cash secured :)
VTS - Brent Osachoff awesome and I really appreciate your response and your content btw! Seems like some very underrated/under utilized strategies for interesting investment strategies. I’ve gone down quite the rabbit hole of education thanks to your videos including your website and you probably have the most unique edge of any of the experts I follow online, keep up the great work!
VTS - Brent Osachoff one more question too if you have time, I noticed (thanks to you) that the VIX term structure is currently in a very unique state with the M1 being in the 99th percentile lower than the M2
Does this mean that the vxx and UVXY will for sure rise to the value of the M2 between now and expiration of the m1?
And if so, wouldn’t that mean it should be perfectly safe to sell some deep ITM covered weekly puts over the next few weeks? I noticed there are some contracts with 5 figure premiums that, if I’m not mistaken, should decrease dramatically as we move toward the current m2 transitioning to the M1, meaning that could be a pretty large amount of weekly premium to collect in this unique timeframe...
Am I missing something?
thanks for the vid, great explanation of something i was suspicious about but couldn't find the data to confirm.
Very good video. Exactly the answer I was looking for online.
Question, would the inverse trade be profitable? Writing the put option instead of buying to open?
Selling the puts would likely be better, but the issue there is how far OTM and at what low level of premium would you accept? If the VIX is over 50 a lot of people think that selling a 30 or something would safe, but then there are times when it can go well below that. So then if you accept a much lower premium it hardly makes the risk worth it. I typically find the best entries come after waiting a while for it to settle back down, and then getting into new trades. Trying to trade the long or short side when it's very elevated is tricky. For those I much prefer just defined risk trades like verticals, butterflies, even calendars. But straight buying or selling puts, not great when the VIX is near it's highs.
Hey Brent, what about buying puts on VXX when VIX hits 75 instead? When VXX was trading in the $50 - $60 range during this time?
The problem there is that the VIX futures are in serious backwardation, so there's a massive headwind. Now obviously hindsight is 20/20 and this time around it would have been successful, but in the moment it would not be wise at all to short volatility ETPs when the VIX futures are in the lowest percentile of backwardation.
how about Calls on the VIX, trying to time a call might seem stupid but if you did, I'm assume the opposite results? as in highly profitable?
Correctly timing calls is much more profitable, but it's not very likely which is why the payoff is better. Correctly timing volatility spikes is nearly impossible, mostly just luck when it happens. I think it's best to look for higher probability trades.
what about selling OTM call spreads when the volatility spikes?
Yes, anything to do with spreads that hold both long and short legs are going to be more successful because the volatility aspect of the trade is reduced. As long as the strike gap between them is small, then the issue of high volatility is less of a problem and you can have success fading very high volatility levels. All the same rules apply though, don't over-allocate just because you think it's a good set up :)
Brent: another great video. I wished you made this video years ago. You could of saved me some money :-). How about instead of buy a put option when vix spikes, we do a straight short of VXX when it is 75. By the time it gets down to 20, it would be a 350% gain.
The problem is the VIX futures at that point are in massive backwardation, so even if volatility does settle back down the VXX can continue to stay flat, or even still go up more. The only reason it looks like a good trade now is because hindsight is 20/20, and we saw one of the fastest recoveries in S&P 500 history. We can see that the trade "would have" worked this time around. But in general, it's a really bad idea to be shorting the VXX when VIX futures are in massive backwardation. The last few years have been a "buy the dip" environment, but trust me, that's not always the case and we could easily see the volatility ETPs go up and stay up for much much longer than people thought possible...
@@VolatilityTradingStrategies VXX lags the VIX and has decaying factor due to rolling forward and contango, isn't buying VXX LEAPS PuTS 9 month - 12month a good bet if VIX rises and especially after fear capitulation and money flowing back in?
Personally had a 6 month VXX Put that went ITM to 800% after entering on the day VIX was the highest. I did take profits before then
@@sedul2006 I don't know what you mean by VXX lags the VIX. The VXX tracks VIX futures, the VIX tracks S&P 500 options, they aren't the same underlying. As to the LEAPS, you're still paying the huge up front Vega and the duration doesn't save you from that. When the VIX settles back down in the future, the contracts that you paid a lot for will be priced a lot lower. Also we can just use the ThinkBack for VXX LEAPS purchased on March 16th, and those contracts still didn't do very well, even bought at the absolute peak. They were losing trades up to the 30 strike, and then ok profit up to the 50 strikes, and only the in the money trades did well, but even then they maxed out at about a 60% profit. And that's bought at the absolute top and waiting 5-6 months for profit. The markets had the most V shaped recovery ever, and those leaps still didn't do what people would think they would. That's what happens when you pay too much for an option. Even when the result goes perfectly afterwards, they still don't make that much. Options trading isn't about direction or price as much as it is about volatility and fair value.
@@VolatilityTradingStrategies Thanks Brent. I meant VXX pricing wise seems to lag the VIX in terms of change in price. But because they track different underlying/ structured differently, this is probably a non-relevant observation.
I see - so for LEAPS VXX Put when the VIX Futures in backwardation, will likely have very high Volatility due to market crash (2009, 2018, 2020), and since they are LEAP options, the sensitivity to Volatility change will be very high. And if they are too expensive, the delta change may not outweigh the cost of Volatility dropping and you have Theta Decay against you (especially short term contracts). Reading your other comment replies, may be better buying VXX Puts when Volatility calms down.
If I understand you correctly, this higher vol price premium paid for LEAPs apply to other underlying's, simply, high vol LEAP is not great because the option trading as you said it's not just about Delta, it's about the Volatility which could drive up the price.
What about OTM delta 4 delta and LEAP to JUN 2021, JAN 2022 at that time if it was available? And waited for 6-10 months?
Curious, then at MAR 2020 peak VIX, and really high backwardation of VIX futures, are we saying there is no good way to profit from shorting the VIX using VXX LEAP Put Options? How about selling call credit spreads on VXX in addition to buying the LEAP Put, to simulate shorting the VXX (without actually shorting the VXX?) (Risk reversal) to pay for some of the premiums. Additionally, you mentioned that Bear Put Debit Spreads are safer since you're selling a bit of high volatility.
Otherwise, what other options are there - don't play it entirely in such a fashion when the market is at really high VIX, wait for it to settle down then enter on the spikes that come after (i.e. JUNE 2020)
And not to mention, conversely, if the market were to crash and VX Futures trade up really high, the VXX Leap Puts may lose value really fast right?
@@sedul2006 There's definitely plenty of ways to profit from the eventual crush in volatility, I'm just saying that a bad way to do it is highly vega sensitive trades like Long Puts. I've made other videos talking about better ways to do it, and that usually involves spreads that have both a long and short vega component to them like verticals, butterflies, iron condors, even calendars. If there's long and short vega then the volatility component is less of a concern and then you can absolutely profit when volatility goes back down, or the VXX starts to decay again.
Brent, you’re the man. Thanks
what if you bought a ATM put debit spread when it was above 75..? edit: nvm you talked about it at the end woops
King explanation!
Hi Brent, would a trader still get IV crushed if they were day trading weekly VIX puts? (assuming you play the intraday movements)
I'd have to know the details of the trade, I'm not sure what "day trading weekly VIX puts" means.
@@VolatilityTradingStrategies puts that expire within a week
So they're not great for shorting, but this does make me think that they're actually great for hedging. It seems like the IV increases as the option ages making them a little tricky to use. I would think, if you could handle a little mismatched volatility upfront, that theses would be good hedge for VXX options. Like you could start out with a long call, lower priced, lower IV VIX option, and a short VXX option, make some initial profit, but in the end wind up completely hedged.
Yes, that's true of all trading. The trader themselves can set their strikes anywhere they like. But the mathematics of the Options market makes them identical trades. Of course if a person wanted, they could do an OTM, ATM, or ITM Vertical put spread or call spread, or any variation they want. But they are the same thing :)
Absolutely superb thanks for your time and making such great content
What about call options? Is buying call options better than the actual shares?
It's a different risk reward profile, since holding the shares doesn't lose money if the stock stays flat. The call option will lose its premium if that happens, so on the flip side there is an additional potential gain to compensate. So they are directionally the same, but risk reward is a little different. It's not about which is better than the other, it's always situational and based on your trading hypothesis and how it fits in to the rest of your portfolio. Personally, I don't like long calls AT ALL, but I also don't buy and hold. I'm always looking for defined risk option spreads instead of shares or calls.
my white label broker of IB seems to stopped Support for vol etps, even Options.
So the strike selection was incorrect for the put option. A trader should always choose a strike ATM or DITM when buying puts?
I would say no, that's not the lesson to take away. If I wanted the video to be 2 hours long I could have shown all the strikes and the result is about the same. Buying into a massively high Vega headwind is a losing strategy, period. Of course I have to make choices though to make sure the videos aren't way too long. Bottom line, don't buy into massive Vega, make sure you structure trades with higher probability like verticals, butterflies, condors etc.
@@VolatilityTradingStrategies I understand. Would buying puts on VXX instead be profitable during the downturn in March 2020? I saw your videos on this explanation.
Shorter expiration dates might help since those have higher IV. They react more to movements and follow the underlying (VIX) closer.
best youtuber out there !!
I think your title should read "Here's why buying VIX Put Options don't work". Adding in "Buying". I just stick to selling calls & puts, and pocket the premium. I had always thought to simply sell calls after the peak, but it seems selling puts would be nearly as successful too based on these numbers, even though conceptually it doesn't make sense!
The problem with selling premium is that you never know how far something will run so just be aware of that. It's definitely the higher probability trade and you'd do much better long term to be selling the puts. But they aren't without risk so just make sure you allocate conservatively and understand your pain points :)
Wouldn't the results be better (on the back test) by using long put verticals instead of single puts on the VIX?
Yes, verticals would work far better than straight puts, that's what I tried to say in the video. Verticals use both long and short strikes so there is no vega headwind. It's a much more efficient trade.
Could you just short the VXX (at between 50 and 75), and just wait for the thing to revert to normal levels?
Do you mean short the VXX when the VIX is 50-75 and just wait? You could, but there's a few issues. First, the VIX doesn't get to 50-75 more than once per decade or so, so it wouldn't be something you do often. Secondly, and more importantly, what's to say that when the VIX gets to 50-75 the next time, that it doesn't just keep going to 100 or 150? Remember the old VXO calculation using S&P 100, which tracks very very closely to the current VIX went to 172 intraday on Black Monday 1987. People often think the VIX has.a ceiling, but it actually doesn't. Volatility can just keep going higher for a longer period of time. So it would still be very risky to try to pick the top and short something like VXX which is a very risky trade. You'd want to make sure your allocation size is small, and you have hedges and a risk management plan, and by then it may not even be worth it. Might just be better focusing on making your short vol profits during better more stable times, and being more trend following. Contrarian trades trying to time reversals is a very hard to trade to make money with long term. I personally much prefer trend following...
@@VolatilityTradingStrategies I really appreciate your reply, and I do agree completely with it. It appears that one would be better off by just shorting the position instead of buying the put, as the short position cannot be affected by time decay and volatility premium. Is this assumption right?
Thank you so much for all your help.
what about shorting calls on the VIX at strike price of around 40? Wouldn't that work in the long timeframe as VIX always pops back lower??
But what happens when it goes way WAY above 40? Like on Oct 19th, 1987 when it would have hit 172 intraday? That short call will have huge convexity and would almost certainly margin call the entire account. Now it won't happen often, but remember, you only have to blow up your trading account once to blow it up. One single day mistake, at any time in the next 10-20 years will be enough to ruin everything that was gained before that. That's the reality people don't ever calculate. Sure setting at 40 will work well "most" of the time, but it only has to massively fail ONCE :)
@@VolatilityTradingStrategies Thanks Bro. I immediately felt uncomfortable... even as I was typing it out.. Ended up closing the short call the next day! :P
It's my understanding VIX options lack put-call parity since the underlying cannot be directly traded so there is no arbitrage opportunity. Could this also make the puts too rich in premium for a profitable long?
In general, there is no arbitrage for any options. Back in the 90's and early 00's even, when the markets weren't as sophisticated there were far more opportunities for systematic harvesting of premium. These days they are far more efficient, and that applies to VIX, volatility ETPs, and ETF and equity options. It requires far more of an edge than simply knowing that VIX mean/mode reverts, or that volatility ETPs decay, or that equity options have skew.
What r ur thoughts on selling VIX PUTS as a hedge?
It's not really a good hedge because there's no convexity to selling options. The reason hedges are used is because a small allocation can provide protection against a relatively larger portfolio, because long volatility (long vega) has convexity and can go up very quickly in a crisis. But short volatility can only make the premium collected, so it doesn't provide any protection.
Short volatility is generally used as a stand alone profit generating strategy, where as hedging should be long volatility.
What about if you bought the long put option before the VIX spike? I'm guessing it would have been super profitable if you bought ATM put options lets say... a week before the VIX spiked??
Sure, but there's a lot of things that would be very profitable if it was predicted a week in advance :)
@@VolatilityTradingStrategies What do you think about buying VXX shares then? I mean we know it's going to go up in price at some point right? What are your thoughts on selling calls for VXX/VIX?
@@keoniborge2498 The big problem with the shares is they are based on a methodology of rolling VIX futures contracts. Roughly 85% of the time there is positive roll yield in the futures, so the VXX tends to decay most of the time. If you hold it long term the odds are high that you'll just be holding a decaying product, and when it finally does pop (which of course it will at some point) by then you'll have bleed down so much that it may not even pop back up to the break even price let alone an actual profit. Insurance always costs money, there is no way to game the system. That's why so many traders focus on being on the short side of the trade. Obviously that comes with massive risk that needs to be reduced somehow, but that's the reason why.
Great video , thanks for the explanation
Thanks buddy, appreciate it
You've shown some examples of extreme levels but what about the rest of the time
Individual call and put buying isn't something I do often. It's just not a very efficient trade and really just comes down to speculation. I'd still recommend people try to structure their options in the form of spreads to try to reduce the amount of speculation and make it more structured risk reward.
I lost 6k in those days thinking it was going to about 100k based on my analysis 🤣 you are right. I was never positive.
Actually I do bear spreads 1 month out and so far it's been pretty safe imo. I don't use a lot of collateral tho, more like side money.
It's a good trade since it's capped, much safer :)
Aren't VIX options European style exercise as opposed to American style exercise like most options?
Yes and you can't actually own the VIX or take assignment, it's cash settled. But I'm curious, what does that have to do with the video? Did I miss explaining something?
This question has nothing to do with volatility. What about short selling meme stocks right before their earning reports are released? Would it be hard to borrow the shares since everybody would be trying to do that?
Could be hard to borrow yes, but even doing it with options I would say is risky. Do you have any extended data that shows they tend to go down after earnings or is it just something you've observed? Sometimes our cognitive biases get in the way, so I'd first want you to actually test the data.
OK, I get it I think but, if you boungt the VIX at -400 and sold it at 85.47 wouldn't you make a significant profit?
I'm not sure what the -400 or the 85.47 means.
Isn't that the case for EVERY high IV options buying?
In general yes, but options trading specifically is about buying underpriced options and selling overpriced options. The reason the VIX is even more specific to the problem, is because of the mean reverting nature and the fact that when it's very high, literally everyone knows it will go down. They don't know the time frame specifically, but everyone knows the future direction, so the problem of buying high priced IV is even worse in the VIX than other assets.
@@VolatilityTradingStrategies makes sense, so everyone are buying puts, when you should be selling puts :)
What about vix calls? Difficult timing but better reward? Delta and Vega increase
In general, yes. But I've not found timing VIX spikes to be a very high probability trade so I don't really both with those either unless it's for hedging purposes.
@@VolatilityTradingStrategies A trader called '50 cent guy' does just this. He was down 200M before volpocalypse and went +400M for a net +200M.
@@theguvnr3364 Unfortunately the myth surrounding "50 cent" on those VIX calls has been greatly exaggerated :) In actual fact it's almost certainly just hedges against a broad long portfolio. Very likely those profits on the calls were all offset and more from the losses on the portfolio when stocks go down. It's a fun story, but it's not reality :)
@@VolatilityTradingStrategies 50c plays are certainly hedges against a broad long portfolio. I actually think they're quite effective and could even be EV+. I however don't like them because of low win rate - win rate matters psychologically, as low win rate strategies are very difficult to stick with long-term.
As always, brilliant explanation! Thank you!
Thanks Brent!
You can still make money with vix puts most of the time. But it is like trading anything else, the price is the expected value
When doing it from an elevated level, no that's not true. In order for the contract to make money, the move down has to be an outlier, by very mathematical definition. So it's not most of the time, it's rarely. That's the point of the video. It's not opinion, it's a fact based on the way contracts are priced in high volatility. It is by very mathematical definition a low probability trade. The trader would be well advised to choose a better structure that doesn't have the large Vega headwind, or better yet, has the Vega advantage. Then they really can have their VIX trades work most of the time.
@@VolatilityTradingStrategies I meant more of what you're saying. It's possible, you just need to have an edge to win, unlike covid crash where you could nail the trade and still lose money
If buying put options don't work, then selling puts should work, which works for me. I trade the VXX using the power of time decay, it proven profitable to me.
I would be careful on that logic, because when the VIX is that elevated, neither buying puts nor selling calls works. Buying puts doesn't work because you're paying too much Vega and it's hard to overcome it. Selling calls doesn't work either because eventually the VIX will spike even higher and wipe those out too.
Now obviously selling calls has a much higher probably of success and most of the time the VIX will quickly fade and those positions will be profitable. But one day the VIX will go high, and keep going, and keep going. Remember in Oct 1987 it went to 172.
Careful picking up pennies in front of the steam roller :) Defined risk spreads are always best.
@@VolatilityTradingStrategies Thanks for the input. I trade the VXX and you are correct and not to trade it when elevated. I sell calls they are covered, I can't trade naked in a IRA account so my gains would be limited. Yes you correct as selling naked calls (which I don't do) can be risky. I use selling weekly options on VXX to either profit from calls or puts expiring worthless. As a starting point I use Delta of.30 to sell calls and --.30 to sell puts. Also looking at weekly support and resistance levels adjusting accordingly. Current looking to sell the covered calls at 29 for 1.15, will adjust according as the week progresses. .
@@VolatilityTradingStrategies Although the short call on the vix may have been blown out at the peak of 2020, but couldn't you have rolled it out in time several months with an eventual profitable trade?
@@kamran6336 The problem is, there is no cap ceiling on the VIX. Using the old VXO calculation the VIX went as high as 172 on October 19th, 1987. So the issue with those types of undefined risk trades is that you'd have to put such a TINY percentage of your capital in it that it wouldn't even be worth it.
Please remember, shorting volatility isn't about what simply works and makes a profit. There's dozens of strategies that if done right can make a profit. The only thing that matters is what is the MOST efficient and MOST profitable long term.
Selling undefined risk options and then "rolling them out" if you get in trouble might work if you use a small enough amount of capital and you are extremely patient in how long you have to wait for it to get back to break even. Sure, that "might" work. But it's definitely not the best way to short volatility, so why bother?
Defined risk options that protect capital FIRST and chase profit second are always going to be more efficient and profitable long term. Focus on the best methods, and ignore the rest. Undefined short vol trades aren't worth it.
@@VolatilityTradingStrategies Let's say, hypothetically, if I were to sell an otm call credit spread which was tested, how would I be able to get a scratch and turn it into profit? Just wait for volitility to collapse? Credit spreads are much more difficult to roll out in time.
Not sure about this. March 18 had a low of 1.25 yesterday. High 2.20 today. Can’t go too far on expiration date as futures roll monthly. I’m in the trade now, expecting close to $3, avg $1.93 with 18 contracts. Intrinsic should beat all the greeks when VIX (VRO) settles under 20.
It's best to view all options as net zero, and the only way a trade makes money is if your thesis plays out faster or larger magnitude than what's already priced in. So in the case of trying to fade VIX spikes, a long put option is the net zero edge trade, and the only way it makes money is if the speed and direction outpaces the already very high Vega that's priced into the contract. As the example shows, that time it did not, and the long puts would not have made money even though the VIX dropped to the 20's quite quickly. It didn't drop fast enough, and the high Vega won. That's not always the case. There are times when it does in fact drop so fast that it can outpace the Vega. The point of the video is, be very careful buying into high Vega trades. It's far better to just eliminate that variable by simply using spreads that have both long and short vega legs in them. That way it is more of a directional trade, and you can make way more money way easier. Single leg long Vega trades are very hard to make money consistently on. Low Vega spreads are better long-term.
Great video.... thx..
Brilliant!
Super Video !
Please show us what would have happened if you sold a call rather than buying a put in the same scenario. My guess is the outcome would be very different. Also, you are comparing an options contract with a far out expiration (months) to a contract with 1 week or less..
Selling naked calls and buying long puts aren't the same risk reward profile, so it's not an either or type of comparison. Clearly if you sold a call and timed it well, it collects the premium and you make money. If you sell the call too early, you can get smashed if the underlying keeps going up. In the case of the VIX, the vast majority of people who sell naked calls start doing it around VIX 30 or 40, so obviously if it goes over 80 you're going to get destroyed. I don't consider it even remotely realistic to wait for the VIX to hit 80 and then sell a call. Obviously that kind of market timing isn't even worth running backtests on. And don't forget, even if you did have the unbelievable patience to wait a decade and sold a call at the exact high of the last 10 years, the VIX can still go higher. In October 1987 the old VRO would have gone over 150. So how fun would that be? VIX goes to 80, you sell a call and think you're genius, only to see it go to 150 and you still lose your account.
Just, don't :) Selling naked calls on volatility instruments of any kind, whether it's VIX, or VXX / UVXY, it's a terrible idea. You may get a lot of easy wins in a row and think it's easy money. But eventually, the market will do something crazy. Eventually, there will be a flash crash of some kind. Eventually, the naked call sellers will have to pay back all those easy wins, WITH INTEREST :)
Great content
Great video Brent, but let's reverse the roles here. If buying VIX puts during heightened volatility doesn't work, why not sell VIX puts? After all, we trade in a - two-sided - market. Assuming the spread and liquidity are appropriate, we can take the opposite side of the trade if we believe one side of the position is unfair.
Yes, better use of the Greeks to your advantage, but be VERY careful and make sure you're hedged, because there's nothing saying the VIX couldn't go significantly over 100. Keep it small, keep it hedged, and then yes strategic shorting on the short vega side would work out better.
I'm confused 😂.
I bought puts on vxx today, 240+ contracts
4 separate strikes and 2 different expiration dates. I was up on every single one of them.
I also know someone who made a 2000%
return doing the same exact thing, so how is
Video even right?
Are you trying to suggest that one trade during one market environment disproves the concept of Vega headwind? I'm confused how you could think such a small sample size is relevant.
The 170 vix print in 1987 lasted just three weeks. If you were to buy ATM puts every ten points from 30 till 170, in which it surged in just one week, your average basis would be 100 points. You would've made profit if you held it for two more weeks. Assuming you bought contracts several months out.
@@kamran6336 That's not how options trading works, unless you're talking about a tiny account or something. Anybody with any reasonable level of capital doesn't risk 100% loss on lotto ticket trades. Now of course feel free to do so, but no that's not a viable way to manage a portfolio. When people have something significant to lose, that's when they need to have intelligent strategies that focus on risk management. You can't compare a YOLO 5k account with what someone does with their net worth.
+NnotOF remember he took an extreme case where the covid crash happened, which increased the volatility a lot, and once it started dropping Vega decreased in this case theta+ gamma outperformed Delta which the contracts will definitely lose their value, however, if you buy those contracts during more stable times( like the whole period after the crash till 2022) you can definitely make that %, however, the probability to make money will be much lower since you're buying OTM options.
@@seropelmayan3032 The same concept applies in all of options trading, it's not just Covid. If you buy into massive Vega headwinds, it's a very inefficient trade. To be successful long term trading options, you have to use the Greeks to your advantage. When Vega is high, you sell vol, you don't buy it. When vol is low, you buy vol, you don't sell it. What that original poster was doing was taking an outlier example and trying to extrapolate to everything, which is obviously false. Buying high vega on the long side is just asking for trouble.
Awesome!
The Crushhhhhh! 🤘
With the VIX was at 75, wouldn't you buy a put at 60?
That's the point of the video, to illustrate the massive cost of Vega when the VIX is high. When the VIX was at 75, the 60 put was still a premium around 32$. You're paying a fortune for those contracts.
@@VolatilityTradingStrategies got it, thanks! What about selling a call at strike 50 and an expiration of 3 weeks?
Hey Brent, since VIX options DON'T realistically work, so why are you still recommending VXX puts? It doesn't really work either (due to very HIGH premiums incurred).
VXX and VIX are entirely different. VXX is not a mean reverting index, it's based entirely on a freely traded VIX futures market so the options in VXX is a fair and balanced market on both the call and put side. VXX options are just about balancing the vega/theta and directional risk. Not the same concept as the VIX. The VIX is entirely unique in that respect, that when it goes high, literally everybody knows where it's going next so single leg directional high vega trades can't work.
@@VolatilityTradingStrategies But I've recently noticed that the premiums for VXX/UVXY would be too expensive for anyone to buy puts on.
@@heinrichklaus5717 Well "expensive" is always a relative term right? If volatility remains at these elevated levels for an extended period of time (which has some historical precedent by the way) then the current level of volatility could be considered average or even relatively low. It just depends what happens next. Compared to 2017, yes it's high vega right now. Compared to 1996-2000 it's quite low right now. It's all relative so it depends how you're applying the trades. For my VXX Put trades, they are just stock replacement so it's just simulating with roughly 0.6 delta factor a short VXX position. It's not meant to be an "options" trade per se, just a stock replacement so we don't have to borrow short VXX shares and take on the undefined risk. Now they are long vega trades so there is theta decay, but with our trades being 100+ days to expiration it's pretty low, and the directional moves far outweigh the theta decay.
Short Vix calendars should work...
Yes if you stick to spreads that have both long and short legs within it, Condors, Diagonals, Calendars, Straddles, Verticals, etc, it should work much better than purely long only leg options like Puts.
Sounds like Selling the Put would be the way to go...
Could be, because then you're capitalizing on the Vega rather than get hurt by it. I'd definitely look to Option structures that don't get crushed by Vega if the VIX is really high.
Do you understand the concept of intrinsic value? It’s literally Strike Price - Stock Price on a Put, if Vix ever spiked to $75 then I am buying an at the money put. For each $1 Vix decreases i will be making $100 in profit no matter what. IV crush doesnt affect intrinsic value. You are buying a $30 Put on an equity sitting at $75. Thats way out of the money purely extrinsic value. This is just a bad example. If i buy a $75 Put on Vix and it drops from $75 to $30 I will have $4,500 of profit in intrinsic value no matter what.
No, that is not at all how options works. If you buy an at the money put when the VIX is 75, you certainly do not make profit just because it goes down. You would be paying an absolute fortune for that put option that the movement would have to overcome, which would be a huge headwind to the trade.
After a few tries, I stay away from options and VIX. LOL.
Keep in touch, when my options course launches there's a specific strategy in there on VIX options. I guarantee you it will change your opinion :)
Oh Behave!
Shit just done this today 😅😅😅
Did you buy straight put options? Vega is going to be EXTREMELY high today, given the VIX has spiked over 50%. My humble suggestion would be to use Vertical spreads instead. That way there is a long and short, and the impact of very high Volatility won't be nearly as much.
Long Put Options on a day the VIX spikes are really hard to make any real money on. Not impossible, but there is a pretty big Vega headwind
@@VolatilityTradingStrategies thank you sir. I closed it out straight after your reply. Imagine if I sold VIX calls 🔥☠️.
You are buying way too far expiries for these vix strategies. If you do 30d puts 1 week expiry and run roll that strategy on VIX spikes you make 15:1 if you run it for 6 weeks after the spike
It's not a strategy, it's a backtest showing what happens after a spike. My own strategies are nothing like what you see in the video. I'm just illustrating why that basic stuff doesn't work, for education. A lot of people just wait for spikes and buy Puts, so the point of the video is to show why it doesn't work.
This guy's audio is so bad it reminds me of those Godzilla films with the old Japanese scientists sitting there talking but the audio doesn't tie to their lip movements.
You can tune in to my livestream today and see if my audio is any better these days, and yell at me if it isn't :) In the last few years I've tried to clean up the audio... ruclips.net/video/TyA6FW4Hjtg/видео.html&ab_channel=VTS-BrentOsachoff
this video is misleading, as option traders do not sit and let a position simply go to hell on them, you get out right away when its not going the way you want it to. I mean if you take anything away from this video its to not buy options soooo far out of the money, of course that whats going to happen!. theta is no joke, options have time decay, they are not stocks. If you would have waited untill vix peaked then bought an in the money put option, im sure it would have made a very nice chunk of change, now if u buy an in the money at 50, and are dum enuf to hold it all the way up to 85, then ride it all the way back down to 20, you really cant expect it to make much after all the time decay and changes in volotility. WHich is what he explains in the video. still good video but you can short vix if you do it correctly. its no different than any other stock at the end of the day.
I tend not to speak about what all option traders do :) I just present data, and people can extrapolate that to match their own situation. The point of the video was explaining why traders shouldn't buy into a Vega headwind.
ATM and OTM are always more risky then Deep ITM.
when you wanna proof your point, of course you don't cover deep ITM theory and completely ignore rasonable explanation
It's not some big conspiracy I'm participating in, I was just making a simple point about buying expensive Vega. Next time around I'll choose a different point
He should have used a spread too. I don't think any competent trader would buy a 100% IV ATM put on the VIX and not sell a lower strike. The VIX has almost a permanent floor at 10 and wouldn't be expected to go below 20 after spiking to 50. There is no reason you wouldn't sell a cheaper put to create a spread.
Hmmm, actually... the question I have is: Why would I take anything seriously coming from a guy talking in a literal padded room?
My ideas are so revolutionary and destabilizing to the status quo that it's actually not safe for me to be allowed out in public, so they keep me isolated just this padded room, for your safety and mine. Consider yourself lucky that "they" at least let me make videos...
I can't listen to someone who doesn't realize mean is the average
ruclips.net/video/3LLYwh8ZPWo/видео.html&ab_channel=VTS-BrentOsachoffruclips.net/video/kIo4tRoM8qM/видео.html&ab_channel=VTS-BrentOsachoff
1. Buying puts isn’t shorting.
2. This is how morons ‘short’ the vix.
This is a good video but the title is misleading.