Long call options, short volatility



Near-term volatility is likely to be dampened once again, as people revert to buying the dip. Shorting volatility by buying call options on the SVXY is a safer asymmetrical play than being outright short VIX futures.

The risks are:
US equity selloff ends up being much more sustained than we have seen so far, or it just takes longer for the market to bounce back. At the end of the day, our risk is capped at our premium outlay.

The SVXY index – which is a short VIX index – moves in the opposite direction to the VIX.

For the last five years, it has done a relatively consistent job of rallying every time we’ve had a pullback (spike in the VIX).

In fact, the only other time that we’ve had a such a big break as the one we are in now was in the third quarter of 2015

Management and risk description

For the Tactical Book, we are long out-of-the-money 72.50 strike calls, with a September 16 expiry, risking 25 bps, paying 4.70 in premium to get a +50-200% return on our premium.

From the example below, assuming the option is held until maturity, the underlying rallies back to 92 (pre-break levels) and volatility drops by 50%, the option should be worth 19.71, or about 4x the premium. And trust me, I will not stick around waiting for 4x, 2-3x would be enough to get me to the beach. 


 Source: Saxo Bank

SVXY 2-year chart

Source: Bloomberg

Source: Bloomberg 


— Edited by John Acher

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here

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