How does VIX influence options trading?
The answer is: VIX has significant influence on options trading!
VIX affects options prices in the following ways:
1) Increased VIX increases the prices of options
2) Existing put options that were sold will likely show a loss
3) Higher VIX means that there's an expectation of higher future volatility
4) It's actually LOWER RISK to sell options during periods of high VIX because the available premium is higher AND stock prices have already come down
5) Combining VIX with VVIX is a great way to gain insight into market trend and stabilization
Can you trade VIX options?
Yes, you can, however, I probably wouldn't recommend selling naked calls on VIX unless VIX is trading over 50.
The reason is that there have been times when VIX has spiked.
You can trade VIX in the futures market as well, however it can be dangerous because VIX can spike ~40% in one day.
In March 2020, VIX spiked to around 84.
In February 2018, leveraged VIX ETFs collapsed. SVXY had to modify its pricing and I believe it went from $120 to $15 in one day.
Even so, I think it's fine to trade call spreads on VIX.
You can even sell a few naked contracts on VIX when VIX is trading above 50.
Selling a ~$65 or $70 call options on VIX is a high probability trade, as long as you can withstand having VIX spike to $100 without getting a margin call.
This VIX trading article is a good source of information if you'd like to learn more.
How do you use VIX in options trading?
When VIX is below 20, I'm very careful because a ~5% pullback in the S&P can cause VIX to spike above 20.
When VIX is elevated, I'm able to sell options and collect a significant amount of option premium.
As Warren Buffett says, it's best to be fearful when others are greedy, and greedy when others are fearful.
VIX is a measure of the fear in the overall market.
VVIX is a measure of the panic in the overall market.
When fear and panic are high, that's a good time to sell options and / or take ownership of large capitalization stocks with strong brands.
When fear and panic are low, and the market is in a euphoric uptrend, that's a great time to BUY OPTIONS and reduce future portfolio volatility.
How does the VIX affect options?
As VIX increases, options prices increase.
If you sell a large number of options when VIX is low, and then VIX expands, then your existing options will likely show a loss.
Additionally, because VIX tends to increase as the market decreases, your existing put options will likely have to be managed, and they'll also use up more buying power.
This is called options sequence risk - where your existing positions will become problematic and require additional buying power during a market selloff. As a result, you may be forced to close out positions at the most inopportune time if you run out of buying power.
Can I use VIX to time the market?
Yes, you can use VIX to time the market, but remember that indicators are never 100% accurate.
You can have personal trading rules that you trade small when VIX is trading between 15 and 20.
VIX is a major contributing factor in my decision to enter a trade.
I explain how VIX influences my trading, in detail, in the Options Trading Education Course at Options Trading Course.
Does the most successful options trading strategy use VIX?
The most successful options trading strategy definitely uses VIX when trading.
It's been said that, "If the VIX is high, it's time to buy". And I agree with this.
It's best to be contrarian.
And if the VIX is very high then it means that market participants are too bearish and that the market will likely bounce back and the VIX may revert back to the mean.
Conclusion: VIX and Options Trading
VIX and VVIX are some of the most important indicators when trading options.
It affects the amount of premium you collect as well as the overall sentiment of the market.
Through his BestStockStrategy.com platform, David Jaffee educates beginners and advanced traders on how to trade options and profit from the stock market.
David Jaffee provides a step-by-step guide to trade options and earn a profit.
Instead of encouraging his students to trade too frequently like other options courses, David Jaffee teaches you how to act like an insurance company.
Options trading course reviews for BestStockStrategy.com speak for themselves, with countless students experiencing real-world success.
Learn more about call and put options by enrolling in David Jaffee’s options trading course or follow his actual trades with real-time trade alerts.
Frequently Asked Questions (FAQs)
How to buy VIX call options?
You can buy VIX calls options or VIX futures. You can even buy options on futures.
You can trade VXX as well as other VIX derivatives.
How to trade VIX?
You can sell options on VIX (puts and calls) as well as VIX futures, or options on futures.
What does VIX measure?
VIX measures the expected volatility in the S&P 500 index.
What is VVIX?
When trading, VVIX measures the "panic" in the S&P 500 index.
VVIX is a good indicator to gauge market sentiment.
What is the most successful options trading strategy?
This blog post explains the most successful options trading strategy
How does VIX affect options prices?
As VIX increases, the price of options increases.
If you've sold options previously, and the VIX increases substantially, then it's likely that those positions will show a loss.