VIX Call options Nov 16 ’16 and Dec 16 ’16 – target election date and FOMC year end event
Sept 23, 2016 – This is a play on probability of market volatility. By tracking the history of VIX, I have found out that the period of VIX <12 is quite rare, and our current market VIX is ~12. Therefore, I plan to buy VIX Call options Nov 16 ’16 and Dec 16 ’16 when VIX is close to 12.
Here are my findings: in year 90, 91, 92, 96, 97, 98, 99, 2000, 2001, 2003, 2004, 2008, 2009, 2010, 2011, 2012, 2013 and 2015, VIX was always larger than 12. So the probability of VIX > 12 is at least 17/27=63.0%. In addition, in yr 2016, the period that VIX<12 is less than one month; in yr 2014, the period of VIX<12 is less than 2 months; in yr 2005, the period of VIX<12 is less than 1 month (two times); in yr 2006, he period of VIX<12 is less than 3 months (1 time) and 2 month (1 time); in yr 2007, the period of VIX<12 is less than 3 months (1 time). Given the short time duration of VIX < 12 and the maximum time frame is mostly less than 2 months, just in yr 2006 and 2007, there are 2 time period that VIX< 12 held for longer than 2 months but less than 3 months. So the probability of 3 months with continuous VIX <12 is 6/(27*12)=1.85%.
Given the upcoming known events of: 1. Presidential Debates, September 26, October 4, October 9, and October 19, 2016; 2. Budget negotiation of the Sept. 30 deadline. 3. OPEC conference from 09/26 ~09/28; 4. continuous Econ data and Fed speeches: http://mam.econoday.com/; 5. Election date: Nov. 08, 2016; 6. FOMC meeting: Nov. 1-2, 2016 and Dec. 13-14, 2016. I think there is a good chance that the VIX will pop way up from current historical level of 12.
I cannot figure out exactly how high the VIX will jump, but given the sept 13 ~ 21 Fed event, the VIX was 18. The significance and the volatility of upcoming events should be higher than that of Sept 13 ~ 21. Therefore, I think the VIX will jump at least to 18 if not too high.
My plan: I plan to buy Nov 16 2016 calls ATM with strike price = 17 (estimated average return = 69% if VIX jumps to 18), or Nov 16 2016 calls OTM with strike price = 19 (estimated average return = 76% if VIX jumps to 18),or Dec 16 2016 calls +10% OTM with strike price = 19 (estimated average return = 44% if VIX jumps to 18), or Dec 16 2016 calls +10% OTM with strike price = 20 (estimated average return = 46% if VIX jumps to 18).
Risks: the biggest risk if I do not sell VIX options until it is 18, then I might have past the expiration date before I sell it.
Mitigation: watch out the VIX price, if my return is 80% and I still can see higher volatility is coming, then sell 50% and wait for another chance. If I think the possibility of higher VIX is reduced, then I need to sell out my positions.
update: 09/26/2016 – VIX jumped by 16% to ~ 14.00 when market opened, I therefore missed the chance to buy in.
