The VIX is currently trading at 39.76.  Volatilities have risen across the board ahead of both GDP numbers and Ben Bernanke's Jackson Hole speech due out tomorrow.  Right now we can see the VIX cash trading above the VIX futures or in backwardation.

For this play we will look to short the 65 VIX September Call for a .30 credit.  Trading the VIX for a credit allows us to take advantage of double decays which is something not seen in normal options.  With VIX in backwardation it will decay or sell off to meet the future price.  The September futures are VX U1-CF, in the above chart, or 34.75.  That means the market is pricing in a drop of 5 points (39.76 - 34.75 = 5.01) by expiration.  Then we also have the usual time decay involved with options which will not be discussed here.

 

Why the 65s?

We have a habit of selling deep out of the money calls/puts to raise our probability of success.  The 65s allow us a good premium, .30, which gives us a 7.45% return.  Our cushion to breakeven is around 65%.  They also have a good open interest/volume which will allow us to get in and out of the position as needed.  The probability of expiring in the money is approximately 7%.  So we are looking at a 93% probability of a 7.45% return.  Now this isn't a no lose play.  The main thing with the VIX is that in can take off in either direction putting in moves of 20-30%.  One of the biggest moves we've seen in the VIX was around 50% so this strike puts us way outside that level. 

Let's see how it goes...

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