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The VIX Jumped From 17 to 28 in Two Hours. Here's What Usually Happens Next.
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ticker lesson
Breakdown
0:00lesson
Volatility contraction opportunity
- Volatility does not want to live on higher end of range
- Volatility wants to contract back to historical average
- Sell volatility to benefit from contraction
- Put credit spread in S&P as candidate
1:38lesson
VIX behavior and volatility spikes
- VIX spikes then contracts back down
- VIX typically lives lower after spikes
- 3 weeks of VIX between 20-30 is unusual
- VIX at 20-22 is manageable for premium sellers
3:19lesson
Credit spread positioning in S&P
- Sell credit spread 40-42 days out
- Probability of profit around 55%
- Credit collected around $320
- Risk-return relationship depends on width
5:06lesson
Adjusting credit spread width
- Moving strikes up increases credit collected
- Probability of profit slightly decreases
- Moving strikes down increases probability
- Risk-return relationship deteriorates
6:46lesson
Risk-return tradeoff in volatility selling
- Risk of losing more increases with lower credit
- High probability but low reward
- 30-40% width of strikes as reasonable starting point
- Balance risk and reward for optimal position
8:35lesson
Volatility seller mindset
- Volatility expansion is opportunity for sellers
- Volatility contraction is key to success
- Tasty research supports volatility contraction
- Be bullish, bearish, or neutral based on market
10:30lesson
VIX and option pricing relationship
- VIX responds to out-of-the-money option prices
- Low VIX indicates low demand for options
- Volatility spikes due to increased buying activity
- VIX drop after election due to options coming off books
12:14lesson
Volatility selling risks
- Selling volatility futures or naked calls is risky
- Volatility can spike rapidly
- High probability but low reward
- Recovery from losses can be difficult
14:03lesson
VIX vs. forward volatility relationship
- VIX is spot volatility, forward/VX is futures volatility
- Normal relationship: forward/VX > VIX (contango)
- Current situation: spot volatility > forward/VX (backwardation)
- Backwardation indicates chaotic market conditions
16:00lesson
Backwardation and market reversion
- Backwardation indicates market pressure to revert
- Volatility typically reverts to normal relationship
- Backwardation doesn't last long
- Use backwardation as indication for long positions
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