68: VIX Index - How To Trade Volatility w/ Mark Sebastian from OptionPit.com
Oct 31, 2016
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Former floor trader and hedge fund manager Mark Sebastian discusses trading volatility with the VIX index. Topics include the history of the VIX, pricing, VIX futures term structure, and simple strategies for trading volatility with higher success probabilities. Mark shares insights on back spread and hedging strategies, trading VIX options, and finding and trading companies around earnings.
To select companies for earnings trades, focus on big, liquid names and look for high implied volatility setups.
Options provide more flexibility and require less active management compared to futures contracts.
Choose strategies based on the level of implied volatility and pay attention to the term structure of volatility to determine potential trade opportunities.
Deep dives
Trading Strategies for Earnings
To select companies for earnings trades, focus on big, liquid names. Look for high implied volatility setups and adjust your strategy based on the level of implied volatility. As implied volatility increases, consider more aggressive strategies like short straddles or iron butterflies. Make sure to set your breakeven points outside the expected move to increase your chances of success.
Options vs Futures: Why Choose Options?
Options provide more flexibility and can be cost-effective compared to futures. Options allow you to set where your hedge is, and you can choose specific strategies tailored to your risk preferences. Options also require less active management compared to futures contracts.
Using Volatility to Determine Strategy
Choose strategies based on the level of implied volatility. As implied volatility increases, consider more aggressive strategies like straddles or iron butterflies. Remember to set your breakeven points outside the expected move to increase odds of success. Also, pay attention to the term structure of volatility to determine potential trade opportunities.
Trading VXX and UVXY
VXX and UVXY are volatility products that can be challenging to trade. Due to the structure and decay of these products, it may be more profitable to buy puts rather than sell calls. Be cautious of trading calendar spreads as VXX does not behave like other underlyings due to its structure.
Trade Example: Netflix Post-Earnings
After a significant move in Netflix post-earnings, it may be a good opportunity to sell a vertical call credit spread. Take the bearish side of the trade because the stock has made a large move and may face resistance at recent highs. Trade high-probability strategies and ensure breakeven points are outside expected move. Consider the liquidity and size of the company when selecting trades.
Naturally, if you’ve started trading options for any reasonable amount of time you’ll run across the VIX index. Or as it’s commonly referred to, the “Fear” Index. And while the concept of tracking and trading volatility with the VIX might sound intimidating at first, trust me, it’s not all that complicated and just requires a little common sense.
In today’s podcast, we’ve brought on a very special guest, Mark Sebastian, a former floor trader, hedge fund manager and the guy behind OptionPit.com. What’s great about Mark is that not only does he have a lot of experience as an options trader, but he’s also got a lot of specialized knowledge when it comes to the VIX and volatility products like VXX, UVXY, and VXZ that I know you’re going to love.
During the show, we’ll talk about the history of the VIX, how the index is priced, how the VIX futures term structure accounts for mean reversion and some simple strategies you can use to trade volatility with a higher probability of success. So, don’t be afraid to dig into this podcast this Halloween - Mark and I have some yummy volatility treats waiting for you (okay I just had to throw that in there given the release date).
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