Here's why VIX Put Options don't work

welcome back everybody to volatility trading strategies so I've got a good one today that I think all of you volatility traders out there really going to enjoy because I can't tell you how many times I've heard someone say but in order to make money all you have to do is wait for the VIX index to spike up really high and then you buy a bunch of put options if I had a nickel for every time I've heard someone say that I'd be making this video from my yacht in the French Riviera unfortunately everybody in there dog already knows that the VIX index is mean reverting now it's more accurate to say that it's mode reverting because as you can see here the VIX does spend the majority of its days with a twelve thirteen or fourteen handle but the point is everybody already knows the VIX index reverts back downwards after a big spike why would there be any edge in a trade that everybody already sees coming a mile away and I see the same thing being said all over Twitter about volatility et PS as well everybody already knows that those long volley tepees do trend downward over time so there's no edge and just blindly shorting them I know it helps those people get followers on Twitter by just saying hey look the uvx why goes down let's sell some spreads let's sell naked calls week after week it's easy money but I'm sure you've noticed none of them ever actually show their performance because trading doesn't work that way in order to make money you need an actual edge above and beyond just noticing that volatility et B's tend to go downward or that the VIX index reverts back to the mean after a big spike so today I'm gonna go over several examples of this most recent VIX bike where it went into the 80s and see what would have happened if someone did actually buy those put options so subscribe to the channel and please do smash that like button for me these videos are pretty time-consuming to make but I do like to give you your volatility fix so let's talk about VIX index put options [Music] so let me dive into my thinkorswim trading platform and actually answer the question would buy and put options after a Vic spike actually work so just for some context here this is the VIX index since it launched about 27 years ago now the long-term mean is nineteen point three seven the long-term median is seventeen point one seven and the long-term mode is about thirteen so when we ask what's an average VIX price of course that depends on what type of average you're talking about but just taking those three metrics we can say that the average VIX is about fifteen give or take so it's natural for people to assume that all you have to do is wait for one of these big Vic spikes and then go hard on the put options now the question is does that actually work in order to actually find that out we're going to use the function and thinkorswim called think back it's a function that you can use to see what a trade would have done had you taken it so we'll just check out the VIX index for just 2020 here and it actually set the record for the highest closing print that the VIX has ever seen even higher than at the height of the financial crisis in 2008 on March 16th 2020 the VIX index closed at 80 to 69 so the first test I'm going to show you is what would have happened if a trader waited until the VIX index crossed over 50 and then bought a put option we can see here the VIX crossed over 50 for the first time on March 9th 2020 so we'll go back to the think back option and put the VIX here and then we'll add in that date of March 9th you can see it here March 9th 2020 the VIX index closed at 54 46 so seemingly a great time to start buying put options the VIX very rarely gets over 50 so we'll go down to the expiration months here we'll give ourselves plenty of time for this trade to materialize and we'll select this 17 June 2020 99 days to expiration now I'll show you what happened on a couple of these strikes but the first one we're going to do is right at the money they're the 50 put option we're gonna buy to open a single long put now remember because each one option contract represents 100 shares of the underlying this put option costs about two thousand three hundred and twenty-five dollars now down here is what's so great about this think back option we can see how that contract performed during its life cycle now as we know the VIX didn't at 50 it actually went over 80 so one week in here you can see it's already down eleven hundred and twenty dollars that's down forty eight percent in just a week but fortunately for this put buyer there was an epic stock market recovery afterwards in fact one of the strongest in the history of the S&P 500 now of course that's exactly what you would want to happen if you bought this put option when the VIX spiked upwards so the first point of interest here is right here on the 3rd of April this is when the VIX index crossed back below 50 for the first time and we can see on this day that contract is still down 660 dollars that's 28% of the value of this contract gone even though right here the VIX is at 46 80 and we opened this when it was over 54 but it's already taken a substantial loss and it actually took the VIX index getting down to about 25 has happened on June 5th for this put option to finally break into the profit range and you can see not by very much at all up a hundred and fifty dollars that's just a 6.5 percent gain on this contract it was down the entire time at most about 50% loss and on the very best day it was only up six and a half percent and then of course immediately afterwards it's back down into negative and then a week later the contract expires for a loss of six hundred ninety-two dollars a total loss of 30% imagine that a trader waits for the VIX index to get to fifty which only happens a few times per decade by the way and then gets one of the most epic stock market recoveries in history that's a dream setup and yet there was only one day where that trade was even profitable and only by a hundred and fifty dollars overall that trade lost 30% as I said that's what happens when everybody in the world already knows about an expected outcome there's no edge there okay so let's clear this 50 strike off obviously that one didn't work out very well and let's do something a little more out of the money so we'll see what happens to this 30 strike when we buy to open a single put option for 610 remember that 610 dollars of capital outlay if we go to the think back down here and we expand it well we can see this one is actually even worse within a few days this one is actually down 60% and then at no time during the life of this contract was it ever actually up money not even on that single day where the VIX shocked us from the 80s to below 25 as low as 23 54 on this day and this contract was still down $50 and just like the first one a few days later it's right back into the negative and this time a complete loss of capital it is totally out of the money and it loses 100 percent of its value now you may be shocked to see this at first but if you think about it it does make sense right the options market is very efficient especially in the volatility space these are not rookie traders playing with VIX options these are sophisticated investors deploying advanced hedging strategies why would a trade that everybody knows about work in an efficient market the answer is it wouldn't okay now let's get really silly here let's pretend that a trader put on one of the most well timed trades in history they waited until the VIX index spiked to over 75 before putting on their trade which of course outside of the financial crisis has never happened before so that would have been a very high level of discipline to wait that long but let's go forward until the 12th we can see on this day the VIX is at 75 47 will clear this one off and just for consistency will use the same month 17 June 2020 96 days to expiration that's well over three months should be enough time to see a big profit right well we'll buy to open one of these 30 strikes which of course is well outside of the money this thing costs 475 dollars remember you always multiply by a hundred with options trading now if you put yourself in a position of a trader like this this would be an unbelievable long shot and you'd probably expect to get paid very highly for it Vic's over 75 and you buy a 30 strike put option if it gets there it should be a big win but when we expand this down below we can see that it wasn't a big win a week later of course right out of the gate sits down a massive amount of capital and it really didn't do much since then right here not very long after the contract was opened the VIX is already in the 30s yet the contract is still down money goes way negative again and then if you're ultra patient you get another opportunity to close out the trade for a $5 profit on this day the VIX is now in the 20s closing at twenty seven fifty seven and you can scoop up your $5 profit and of course if you just let it go right to the very end as it turned out there was that day when the VIX dipped as low as 23:54 that the contract was actually up 85 five dollars perfect timing unbelievable patience and discipline for an 18% profit and then just like the others it goes on to expire worthless so before watching this video be honest how many of you would have been surprised if you bought a 30 strike put when the VIX index was over 75 and then you got a really fast recovery where it went all the way into the 20s and you still lost money a lot of people just don't understand how option trading works now before we get into the reason why it's happening despite that dream setup shameless plug here but beyond managing the VTS service I do also manage a dedicated option service called VTS options if you're confused and you actually want to learn about these things hint hint there's a free trial on the website go check it out but anyway why is this happening how is that even possible well the short answer is long put options are what's called Delta negative and Vega positive traits Delta is the Greek symbol that represents the option sensitivity to price or direction of the underline so Delta negative means the position gains value when the price of the underlying goes down and Vega is the Greek symbol that represents the option sensitivity to volatility long puts our Vega positive meaning the position gains value when volatility Rises and loses value when volatility goes down so when the VIX gets to those extremely high levels volatility is by definition through the roof and that means those contracts when you buy them or as expensive as they get so even if the VIX does go back down as you want it to because your Delta negative it means that despite getting the direction of the trade absolutely correct it can still lose money in the case of VIX options oftentimes the effects of Vega outweigh the effects of Delta that's how you can end up with a trade that was perfectly well timed absolutely correct in the direction and still lose money because that Vega got crushed now that's not always the case sometimes you can eke out some small winds here and there but the point is it's very far from the slam-dunk trade that many people out there think it is I did another video back in March right at the height of the crisis and in it I talked about two ways to successfully short the VIX you can check that out here after one of them was a put vertical spread and the other one was a butterfly both of those trades can work out a lot better because the Greeks are more well aligned and if you understand position sizing on how to add layers of risk management then you could also consider short strangles or long calendars and diagonals those are all trades that have a better chance of making you money when you're shorting a Vic's bike now if you don't know what those things are just yet that's totally fine you can learn if you're intrigued you can claim your free trial on my website and see if the VTS community is right for you see you next time so if you're interested in options trading go claim your free two week trial on my website in that time frame you'll definitely see a wide variety of trade types iron Condor strangles calendars earnings plays pairs trading I have many profitable strategies that you'll be interested in come join the BTS community

Channel: VTS - Brent Osachoff

Views: 13,420

Rating: 4.9122086 out of 5

Keywords: brent osachoff, volatility trading strategies, vts options, volatility, volatility trading, trading, options, options trading, VIX, VXX, UVXY, TVIX, SVXY, VIX index, vix contango, options trading basics, iron condor, sharpe ratio, day trading, investing, investing for beginners, vixcentral, stock market, stock trading, thinkorswim, thinkorswim tutorial, vix put options, put options, short vix, shorting the vix, recession 2020, robinhood, robinhood investing

Id: D0WXGBZxkKw

Length: 11min 39sec (699 seconds)

Published: Thu Jun 25 2020