The VIX recently sprung to life briefly and almost as quickly died back down. The question is how do you trade the rise and fall of volatility? It is very difficult to trade the VIX itself simply because the options have European expiration, so even if the option ends up $20 in the money, it will be priced as if it is only slightly in the money.
The better way to trade a spike in volatility is to use an option position that benefits from the collapse in volatility. In other words, it is very difficult to know when a spike is going to happen, but it is easy to identify after is has occurred. When volatility has risen sharply it is very unlikely that it will continue to climb at the same pace, resulting in a minor collapse in volatility.
My favorite way to trade a spike in volatility is with a long butterfly. The price of the butterfly at the peak of volatility will be much lower, therefore making it cheaper to purchase the long butterfly. Once volatility drops back down the long butterfly (which usually makes money from time decay) makes money very quickly. I was able to do this twice in the past week. Both of the positions made 0.40 plus in a matter of 30 minutes. Usually I would have to wait a couple of days to make that much on a long butterfly while waiting for time decay to melt away. You can do this with 5, 10, or even 15 dollar spacing on the butterfly, depending on what stock you choose to do it on. I did it using AAPL options. No particular reason I chose AAPL, other than it was what was on my screen at the time. You could easily do this with SPY or anything else that shows a spike in volatility. Remember that the spike in volatility doesn’t need to be across the entire market – it can be on an individual stock.
I am putting together additional in-depth training videos on this topic. They will be available on the StockWizKid membership site under the “SWK Training” tab.
Karson Keith’s interest in trading started at a very young age. By age 13, he began trading and managing his father’s money. Today, his passion for trading has attracted a following of like-minded income traders seeking his help in taking their trading to the next level.
Karson specializes in cutting-edge options strategies, volatile markets and small trading accounts. He not only has single-handedly grown several small accounts into large portfolio margin accounts within just a few months, but he has also helped countless people achieve the same results.