While the VIX closed last week at levels not seen since February, I prefer to use the VVIX (or the vol of volatility) to see where there may be a “floor” to vol. The VVIX closed below 90 on Friday, and when looking at the chart (see below) we can see that it has bottomed in the low to mid-80’s the last two times vol was this low (late March and then again in mid-May). What we saw in May a few weeks ago was that even as the market kept rallying, vol stopped going lower. I believe we are setting up again for a similar type move in vol at current levels. This would be an important distinction, since it is fair to assume we would get a decent move higher in vol should stocks turn lower from here (after their sharp 2-month rally off the lows). Therefore, I believe owning vol (via VIX calls or wide call spreads) is an attractive way to get long vol at current levels.
VIX index closed at 16.77 on Friday – the lowest weekly close since February
VVIX is also just above the recent lows. Back in May I highlighted the move higher even with stocks continuing higher
If, in fact, vol has reached a quasi-floor, then VIX calls/call spreads would hold up better than say index puts should we see a continued bid to the market. This is because when you own index puts the delta on the puts would move lower should the index keep rising. With VIX calls if vol were to stay constant on a continued rally, then the delta of the call you are long is likely to not move meaningfully lower (which would support pricing).
As far as which VIX structure I would suggest owning here I like the following trade:
Buy VIX July 23 calls
Sell VIX July 45 calls
Costs ~ $1.15 (VIX July futures ref of 20.15)
Trade Details:
- Buying the wide VIX July call spread with vol back to levels where it has bottomed the last few times it traded this low
- Like owning vol here since a continued move higher in markets may not translate to a much lower move in vol (VIX calls will hold their value better should that happen)
- VIX call skew also back near the highs – selling the 45 calls will cover ~ 20-25% of the cost of owning the much closer to the money 23 strike calls
- Trade has the potential to offer as much as a 18x to 1 max payout on the limited-risk structure
- Please contact me or the 22V sales team for updated pricing and execution capabilities
VIX 10d/40d call skew back near the highs (why I prefer the call spread to outright calls)
Updating my SLV idea following breakout last week
Silver (SLV) finally broke out this past week, something I thought could be brewing (here). That being said, I am still somewhat surprised that vol hasn’t moved up even more. The bigger move in vol has actually been on the further upside (lower-delta) calls. This dynamic can be seen when we look at the July 10d/40d call skew (see below). With the breakout in the futures above the 36 level (corresponding to the 32 level in SLV) I still think we can see further upside in the shorter-term for silver (as it also plays catch-up to gold). Therefore, I would suggest capturing the favorable call skew and even adding “new” July call spreads at current levels.
Here is a trade I like to play for continued strength in Silver:
Buy SLV July 33.5 Calls
Sell SLV July 37.5 calls
Costs $0.75 (SLV 32.69 Fri closing ref)
Trade Details:
- Buying the July upside call spread in SLV after the technical breakout last week
- The at the money SLV vol remains attractive, while we have seen a larger bid to the out of the money calls
- Call spread starts less than 2.5% above spot (SLV was up 9% last WEEK) and offers a nearly 4.5x to 1 payout on the limited-risk bet
- Trade can be added to an existing long silver position, or as an entry-point trade following nice technical breakout last week
- Still a fair amount of open interest in the June and July upside calls (could see a continued gamma chase by dealers should they come into play)
- Please contact me or the 22V sales team for updated pricing and execution capabilities
Silver futures with a breakout last week above the $36 level (Oct and March highs)
We saw upside call vol move up relative to the closer to the money calls in SLV on the breakout (why I like the July call spread here as an “add-on” trade)
