The chart below displays the VIX. The annotations indicate that the VIX may be putting in a rounded bottom on the daily chart over the last few trading days. This comes after the whole fiscal cliff political game of chicken. After a ‘resolution’ was released, the VIX dropped and the market popped. ‘Resolution’ being code for political failure to get anything constructive done. Investors witnessed a historic drop in the VIX…this could be a basement window trade.
A basement window trade is essentially plunging into an asset with defined support below it, like jumping out of a basement window and hitting the ground…minimal damage done. There are many ways to execute such a trade, for example a call fly going out a few months with a middle strike at $17 in the VIX. The $17 level is the middle of the post fiscal cliff gap down.
Some sort of long volatility trade could be advised when one is mostly long in the market. A call butterfly is a cheap way to get long the VIX, if one is inclined to do so. Most can agree that the ETFs like the VXX are not a long-term hold. It is also interesting to note that the current implied volatility in the SPY is below its 20 year historical.
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