$148.67 in 1 Friday! – Trading VIX Index

Last Thursday (6/11/20) was the hardest day for the stock market since March with a large 1850 drop in the Dow Jones Index. The market can be very unpredictable right now due to the economic recovery with COVID-19. It’s recommended to update your strategy to minimize your losses and to increase your gains.

There is a lot of volatility in the market right now with the temporary shutdown of the economy and social unrest that it is hard to accurately predict the future. One way that people hedge, or taking strategies to minimize their financial risk, is to follow and/or invest in VIX related indexes.

Friday (6/12/20) was my first day ever trading the VIXY; I made $148.67 trading the VIX Index VIXY on 6/12/20. Being able to make money despite a downed market is one of the benefits of stock options; lots of different strategies and flexibility are available with trading options which is why it is my preference.

VIX Fear

What is the VIX Index?

VIX is the ticker symbol that stands for the CBOE Volatility Index, also known as the “fear index” on shows like CNBC because the ^VIX usually rises with a decrease in the stock market, specifically measuring the volatility of the S&P 500 options. People use this to measure the bearishness of the market, or the rate at which the market is expected to decline.

The VIX is a valuable tool for traders as they use it to hedge their losses through trading its options and futures. This is one way that even if the market goes down, you can either make money or use it to limit your losses. It is most famous for being known to be around a level of 20 in September 2008 and then jumped up to almost 90 the next month when the stock market crashed.

VIX and the S&P 500 – What is the Relationship?

Some analysts suggest that on average, the VIX rises 16.8% on days when the S&P 500 drops 3% or more. It may or may not always be the case, especially depending on if you are measuring the change solely from open til close or the daily volatility of the index.

On 6/12/20,

^VIX opened at ~$37.68, hit a high of ~$44.16, it a low of ~$34.97, and closed at ~$36.09

44.16 – 34.97 = 9.19

(9.19 / 36.09) X 100 = ~ 25.5% change in daily volatility

The VIXY opened at ~$31.50, hit a high of ~$36.93, hit a low of ~$30.72, and closed at ~$31.73.

36.93 – 30.72 = 6.21

(6.21 / 31.73) X 100 = ~ 19.6% change in daily volatility

The S&P opened at ~$3,071.04, hit a high of $3,088.42, hit a low of ~$2984.47, and closed at ~$3,041.31

3,088.42 – 2,984.47 = 103.95

(103.95 / 3,041.31) X 100 = ~ 3.4% change in daily volatility

VIX trade

How to Trade the VIX Index?

We sold call options because we expected the market to recover somewhat and for the VIX to decrease in price throughout the day on 6/12/20, and we ended up being correct. It also coincided with what we had learned about the relationship between the VIX and the S&P 500.

Two strategies used by some professional traders when they expect the VIX to go up and the stock market to decline include using a Protective Put Spread and a Bear Put Spread.

In a Protective Put Spread, you simultaneously buy a put option and offset the cost of the premium by selling another high cost put.

In a Bear Put Spread, you simultaneously buy a put option and then sell a put option at a lower strike price with the same number of underlying shares and same expiration date.

$148.67 in 1 Day with 1 Trade

Here is what we did.

On 6/12/20, VIXY was trading at roughly $34.17 with 4 hours until the market closed.

At that time, the VIXY was paying a $0.75 premium to Sell a June 12th $35 strike Call.

We purchased 2 contracts which underlies 200 shares receiving the $150 premium.

The break even was then set to $35.75.

If the market price went below $35.75, we would keep the premium.

If the market price went above $35.75, we would need to sell 2 contracts or 200 shares to the buyer of the call by the end of the expiration at closing on Friday.

The VIXY closed at $31.73 so we ended up closing our call and collecting the $150 adjusting for the cost of processing the trade.

VIX Safety

Conclusion

Using the VIX is one way to hedge your investments during uncertain times. It is also good to include the VIX in your watch list as it can be an indicator of the future rise or fall of the stock market. Because the ^VIX itself cannot be traded, only options and futures are available on a short-term or mid-term basis. They are typically used in the short-term as every time you buy a contract, you are paying out a premium for the volatility index of which there are no actual shares.

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One Reply to “$148.67 in 1 Friday! – Trading VIX Index”

  1. Hi Sonia,
    This is an interesting explanation. I watch the VIX for the reasons you say. As I understand it is a measure of the open interest in the options market and is a compound measure of the amount of money tied up in bid-ask spreads. It goes up in times of volatility and when the VIX is high options are expensive. It does look like something that would be very precarious to trade – so I admire your nerve. As you say it tends to hover around or below 20 and collective wisdom has it that when it goes over 30 that is an indication there are a lot of short sell positions out there. I have heard of a strategy that takes positions in ZIV which is an ETF that reverse tracks the VIX.
    A very interesting and topical subject.
    Thanks and best regards
    Andy

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