How to play this spike in $VIX

August 10, 2017

Right now the market is having a little sell-off ($SPX down -28.02 or -1.13% at 12:55pm) and so that means that IV has spiked across the market and so has the $VIX and it's affiliated ETFs like $VXX, $UVXY, etc. This is happening because of threats of war from North Korea.

 

This will undoubtedly be covered in more depth on Sunday for This Week in Markets, but basically, North Korea makes threats and backs off. However it's still smart to de-risk if you're a fund manager, at least a little bit, on the off chance that this threat is not hollow.

 

A similar timeline of events took place back in April. The $VIX spiked to about 16, the markets dropped a tiny bit, and when it blew over the $VIX dropped and markets continued their melt-up. I think it is likely that the same thing will play out once more.

 

North Korea has stated that they plan to strike the US territory of Guam by mid-August, so, this bout of volatility is probably going to last until then. I personally wouldn't make any moves until early - mid next week, because again, it only takes 1 non-hollow threat to begin a war. You don't wanna jump the gun ... pardon the pun.

 

As of right now, here's the game plan for next week:

 

$EWY - South Korean stock market ETF. This ETF sunk quite a bit back in April, but quickly shot back up to trend - this market has been on a tear as of late. IV is rising quite high because of all this saber-rattling, so selling some puts underneath the market (~0.5 sigma / 0.25 delta) could end up being profitable in a short amount of time

 

$VXX - Short term VIX futures ETF. Because of how this particular product is structured, it tends to always go down except for when the VIX spikes ... which as soon as that is over, it resumes downtrend. Now it's pretty difficult to get any decent premium selling calls on $VXX because, as stated, it tends to drift lower over time and that would just be easy money for call writers. Instead, I will look to trade a dollar wide ITM/ATM put spread that would profit from a downturn back to 11/12, or where it just spiked from.

 

As of right now, IV is not high enough in US indices to warrant trading options on those or their ETF cousins. Instead, us this spike in volatility across the market to find high IV stocks and trade around those.

 

If anything changes from this plan come Monday, you will hear about it when I discuss next week's trade ideas. Until then, stay safe, and don't fall for good old FOMO! (fear of missing out) There will be time to make high-quality plays when this starts to settle down.

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