A Guide To Trading Volatility (Preview)

By Lawrence G. McMillan

Over the years, we have discussed a lot of volatility-based trades. Since volatility is high now, a number of them are apropos, so for newer and older subscribers alike, this article is a condensed summary of what the primary implied volatility trading strategies are, and how and when to use them.

With the war in Iran still in an uncertain state, professional traders are worried. Those worries are expressed through increasing put‑call ratios and an increase in volatility‑related indices and products. Traders hedging stocks are buying equity puts, and that increases the equity‑only put‑call ratios. Meanwhile, traders worried about the broad market are buying puts on the S&P 500 index ($SPX), which in turn translates to an increase in $VIX (the Cboe’s volatility index) and all of its related products: futures, options on those futures, and volatility ETFs and ETNs. These are increases in implied volatility, not necessarily realized volatility.

We have been talking about these increases for some time, because they began last December. It’s not a new phenomenon, but now things are reaching a state where there are some opportunities arising for volatility traders to act. The various products that can be traded are $VIX futures, $VIX mini‑futures, options on the $VIX futures (traded at the Cboe), volatility ETFs and ETNs (which generally own $VIX futures), and options on those ETFs and ETNs.

Simple volatility speculation

If you think implied volatility is going to continue to increase ($VIX rose as high as 60 last year, 65 the year before, and 85 in 2020), there are plenty of products to buy that rise along with implied volatility. The simplest is to buy call options on $VIX futures or on a volatility ETF (VIXY or UVIX – the “double‑speed” $VIX)...