Market Measures

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Buying Low Vol | /VX Covered Calls

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment reveals the results of a study on buying the /VX or /VX covered calls to determine if there is a mechanical strategy that works. The results of the study should be of interest to all traders. A bonus examination of market moves around FOMC meetings precedes the main topic.

A graph of the VIX was displayed. We see how the VIX occasionally spikes from low levels. How to benefit from this was discussed. One way would be to buy the /VX and using options one could make it a covered call. An example was shown.

A study was conducted using VIX futures and options from June 2008 to present. On the day of each VIX settlement, we bought a /VX future and sold 10 of the first out-of-money (OTM) VIX calls in the contract with 27-34 days until settlement. The usual 45 day target was not used because the liquidity is in the front month contract.

A table was displayed of all 88 trades, being long the /VX (VIX Future) as well as a /VX covered call. The table included the total P/L, average P/L, percentage of profitability, largest profit and largest loss.

A second table was displayed of all 32 trades when the /VX was trading below 17.50 The table included being long the /VX as well as a /VX covered call. The table showed the total P/L, average P/L, percentage of profitability, largest profit and largest loss.

A third table was displayed of all 16 trades when the /VX was trading below 15.00 The table included being long the /VX as well as a /VX covered call. The table showed the total P/L, average P/L, percentage of profitability, largest profit and largest loss.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways, the study results and other important information about understanding and trading /VX (VIX Future) as well as /VX covered calls in different volatility environments.

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