Thoughts of a mechanical engineer turned programmer turned statistical investor. Here to save you from making mistakes I made at the beginning of my investing career.

VIX at 33.50!

The VIX, also called the “fear” index, above 30 is quite a rare occurrance, statistically, and for options traders who have spare cash is a great (!) buying opportunity, because options are correlated to the VIX. This means that when the VIX is high, the option premium is high, which means 2 things. First of all, if you sold options in a lower VIX environment, you will be showing a lot (!) of paper losses on your short option positions.

And honestly, my portfolio is bleeding quite heavily since last week (although so is the nasdaq). I will do a week summary at the end of the week (its only Monday, phew!), we’ll see how we did then.

But a high VIX also means that it can be very (!) lucrative to sell options in this environment. In fact, as an options trader, ideally the best strategy is to do NOTHING until a high VIX market, and then sell options when you get the right environment. The problem with that is that there can be long stretches of time with a low VIX environment, causing traders to be impatient and trade. In all honesty, proper, responsible trading SHOULD be boring. It should mainly be doing nothing, waiting for the proper environment, and then when that comes along, opening high probability positions, and then waiting for them to expire.

Here is the 1 year graph of the VIX:

So its cool to see that first of all the year 2022 has been a relatively high VIX year so far, which makes sense because it has been a down year, and when the market goes down the VIX goes up. Also, VIX this high isn’t usually sustained. So first of all its good to take advantage of it, and there are 2 ways:

  1. Sell shorter term puts on stocks you like, or shorter term ratio put spreads (for a net credit) if you’re worried of trying to catch a falling knite. Here is an example of a put ratio spread if you’re unfamiliar with the strategy.
  2. Do a short VIX trade. And better to do that with options. And there are plenty of different strategies you could choose, but a simple one would be a bear put spread (BPS), which I will be looking to open, especially if I can get it with the VIX above 30, even though its looking like it may not stay that high tomorrow.

GOOG, MSFT, V all reported this afternoon, so we’ll see how our earnings plays worked out tomorrow when the market opens.

I’ll also link to this interesting article from the collaborative fund (one of my favorite blogs that exist) about memory, fear, the filtering effect, and the benefit of hindsight. Its a bit long but totally worth it.

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