Using VIX Butterflies as a Tactical Volatility Hedge

Core Viewpoint - Market volatility is currently low, with the CBOE Volatility Index (VIX) closing at 14.75, indicating a low level of risk and fear in the market [2]. Group 1: Market Conditions - The VIX Index is a real-time measure of market expectations for near-term volatility in the S&P 500 index [1]. - The current VIX level is towards the lower end of its range for the year, suggesting a stable market environment [2]. Group 2: Trading Strategy - A long call butterfly strategy using VIX options is proposed as a way to profit if volatility increases next year [2]. - The trade involves buying a 15 strike call, selling two 20 strike calls, and buying one 35 strike call, with a net debit of $250 [3]. Group 3: Trade Outcomes - The maximum potential loss for the trade is $250, while the maximum potential gain is $750 if VIX closes at 25 at expiration [4]. - Three potential outcomes are outlined: - VIX below 15 results in a loss of $250, which is acceptable for most investors [4]. - VIX between 20 and 30 is favorable for the butterfly but may negatively impact stock portfolios [4]. - VIX above 30 leads to a full loss on the VIX trade and significant declines in stock portfolios [4]. Group 4: Risk Management - Using VIX options is a cost-effective way to hedge against a sharp selloff in stocks, with a trade cost of $250 per contract [5]. - It is crucial for traders to understand the unique behavior of VIX options compared to regular stock options [6].