Monday, November 21, 2011

That thirties show. Trade the VIX 32.50 IRON CONDOR

That thirties show.  Trade the VIX 32.50 IRON CONDOR

In a recent post, we pointed out that our market range expectation for year end is 1175/1225  Now that we have challenged this zone, we have a reference point for a VIX level coming from 1275 level into this zone.  For path dependent options, it’s very important to understand how the vix behaves in a downward market.  Interestingly enough, the market is still selling off on the bad news tape, however the 2% moves are totally acceptable to the VIX and it see’s no reason to gap up violently.  In addition, this is in the face of funding stress in Europe, spreads blowing out on bonds, etc.  So with the market digesting all this information over a Turkey/Black Friday/US Debt Debates/Christmas Season - we believe the VIX will simply do nothing from here and kiss 32.50 ish.  From a supply/demand point of view, we don’t imagine any desk shorting this into year-end (forcing no future squeeze) and no desk getting long at these levels as we get into snooze territory.  This can clearly be seen as the market dropped over 5% and the VIX barely budged ( a perfect short delta, short vol trade)

To express this view, we are trading the following Iron Condor on the VIX


We believe the risk reward is excellent for this trade - take in a 4$ credit for a maximum 1$ loss (5$ range). - Break Evens set 28.5/36.5

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