OGTV Ep. 175 | Trading VIX Derivatives With Russell Rhoads (rerun) | 9.2.24

[Music] hello and welcome to options Guy TV my name is Brian Overby the author of the options Playbook but Today's Show is not about me we have special guest Russell rhods I'd like to think of him as uh the king of the Vicks in that he's written more books on the vix than anybody also wrote a couple of books on weeklys on some spread trading so uh very excited to have Russell we're going to talk about the seasonality of the Vicks today and we're gonna look at a couple of Russell's favorite trades to do in the vix and I'm G to explore and ask him a few about my favorite trades to do in the vix and see what his opinion is so let's do it let's light this candle [Music] hello everyone and hello Russell how are you doing today doing very well it's always great to see you um oh yeah a lot of people don't know that that you and I worked at the same place but not at the same time and you spoke nicely about me and I'm going to tell you something that I've never told you before uh you know I don't know if anybody out there ever grew up with a big brother that they're always compared to but there was a there was an older instructor at sibo that would always tell if I was doing something he didn't like he would always tell me how you did it and I should start doing things like you well I miss my days at the at the Chicago Board option exchange Russell and I both worked in the options Institute for aent and yes great place yes it was I really enjoyed my time there without a doubt um well well you know today and Russell I want to I want to bring up something that I I actually reached out to you through uh x.com formerly known as Twitter and uh we always keep in touch and I asked you to uh look at it look at the seasonality of the vixs going all the way back I I think how many years we went all the way back to uh 2004 actually is the chart that I have and I think I'm going to start by showing that and showing that screen so let me pull that up here a little bit and we'll go in presentation mode all right and uh this chart kind of excites me and surprises me a little bit um and I you can see my cursor that's good so I'm always kind of surprised and I've noticed this before when I've seen a seasonality quote unquote chart in the vix is the runup between March and April um this is is going back to 2004 from 2000 a period from 2004 to 2023 so the end of the year in 2023 um I don't feel like in March and April we get that Spike up in the vixs any thoughts on that typically uh April is the lowest average vix close I've done some things around that as well um here's my theory on that Spike and um it and and you know everybody gets EXC when you start talking about sarban Oxley right right um so but no in all seriousness I'm excited right now so um so back after the interet after the internet thing happened um the the the internet bubble we got some new laws because we always get new laws whenever things go wrong and one of them was um something referred to as regulation FD where companies really can't share material information with anybody including their Investment Bank Etc also if a company lies about their annual report the CEO and CFO who attest to those numbers being accurate uh they could they could face jail which is a new thing since the 2000s uh so uh and that's not true for quarterly earnings just annual earnings well that spike in vix coincides when we get a lot of annual earnings and we got a lot more honesty in those annual earnings so I personally think that I know we've had some macro events around that time as well uh but I do think that that's caused a lot of upward seasonality in March for some time and then once we get those earnings behind us uh everything just kind of drops off into April so I really I I that that's my theory on that one and I'd seen that Spike before uh probably some other good theories out there as well but that that's what actually what I think's going on there all right right so now realize that this is the VIX Index this is the spot this is everything that gets quoted on CNBC every day day in and day out and everybody likes to talk about it 30-day moving average in the S&P 500 uh option contracts volatility is what the vix is tracking and then I always agree that in July and August it's it's almost like it's just like we're rearing up to to get some volatility in the marketplace and I was actually a little bit mad in August uh when the vixs spiked all the way up to 60 because I'm like no that's supposed to happen in September and October why are you doing it now so I was a little surprised to see that that big jump up in the vix but we did talk about it here on options Guy TV and we did some bearish trades you know so we assumed that it was going to come back into the range uh why so high why 60 in the Vick any theories on that at all Russell oh yeah um and and that you know we we love sibo sibo was very nice to us but I'm I'm going to say a couple things that sibo won't be particularly excited about um you know sibo now quotes vix starting at 2 AM Chicago time 3:00 am eastern time and they're using SPX options that are trading in extended hours with less liquidity that print that we got in vix was about a half hour about an hour to a half hour before the regular Market open so I I think we want to put an aster next to that 65 uh during normal Market hours it was closer to 50 uh but but one of the things I found was about 40% of the daily highs for vix since they started quoting it with extended hours occur during that extended hour period ah you've got to take that that spot with a grain of salt if you if you're if you're like a lot of us and we wake up the first thing you do is is pull up you you you grab your phone you don't check social media you check what's going on in the markets you're relatively High spot vix print and it's six or seven in the morning uh yeah you some of that is going to be aided by the ill liquidity and the overnight SPX market so I I I I always say you want to be paying attention to the front month future as well because that's people actually putting money to work and FR much future did get up to around I think it got up to 3710 uh had that Spike but you know not not to the mid-60s not at all right and I remember the trades that that I got bearish with we did some bearish butterflies uh modified butterflies but uh the the vix was actually or the future was actually trading around 28 or 29 when we put on on those trades on the show um interesting so when did they do you have have an idea when they started using the after hours it's great you're gonna make me look around on my computer a little bit I feel like it was let just go with feel like feel like is fine in most 2015 2016 something like that okay all right but I uh I had I I like ran the numbers uh yeah vix extended versus vix regular I actually found the file and um goes back to goodness gracious goes back to 2016 April of 2016 okay that's where we're at all right so now April 15th of 2016 there's Pacific wow there you go that was to the point and that was quick that was quick moving on with that Mouse on that computer um if I look at this so here here we are in August so we're right about well we're going right into September a obviously today is the 26th of August 2024 so we're going into September and I actually kind of thought with the seasonality and I actually sent you an email about this I actually thought that September feels to me like it's a little bit more volatile than October uh but we got the more of the spikes here in October and even a little bit going into November because November we right about here um and that's the the high on the seasonality of the chart I still feel like September seems to be more overall in October but obviously the big Market crashes have always been in October well the ones of note right yeah no see I think this is part of the issue with vix and and you some of the things that you've been saying uh you've used the word surprise a few times with with August and you know Steve Sears uh he he gets the credit on Callin Vicks the fear index and I personally think that when you really got to get vix when vix really gets going there has to be a surprise component to it and everybody's braced for September uh you know if people already own insurance on the equity markets going into September uh then you're not going to see as much of a reaction when we get a selloff if people are prepared for it and and I'm right there with you I I I did not have on the kind of positions that I normally have on uh if I think that there's a possibility of a spike in Vick so I just totally missed this thing with with one little exception that we'll talk about uh but you know I felt like there was no rush uh I had been looking at doing something with the September and the October uh future and uh that that opportunity went away and then came back as well uh but I I I was like you going it early I was like darn it you know I expected some sort of Spike I didn't expect it this early and I think it was accentuated because a lot of people got caught off guard on that one all right all right let's pop back out for a second here guys just me go to me and here or well Russell that's fine no biggie we like to look at at Russell's mug too he's fine uh so in here I'm going to pop back out and then I'm going to pull up and let's just talk a little bit we're we're tossing out a lot of terms talking amongst each other here um I just want to kind of talk about the spot and what that means in the vix and the actual Futures so the only way that you can get actual Futures quotes for free uh without having a Futures account and this has always been a pet peeve of mine with the Chicago Board option exchange and as a matter of fact on the retail markets committee I actually got them because I used to be a part of it when I was working for a brokerage firm uh to quote the monthly vix Futures as an index on their exchange so uh I think we can go to the CBOE delayed quotes right now and when Russell said a couple of times we said the spot and I said the spot that's the actual VIX Index but now one of the biggest things to know about that is that that's not the driver of the option contracts that go out further in time so October November the underlying that drives those prices is the actual Futures Contract and that's because you can trade the Futures as a hedge as a Trader and you can't actually buy the spot you can't actually buy the uh index in in the vix so this is what the Traders are using the Hedge this is actually where the markets are at and before the show Russell kind of pointed out this is messy uh on the Chicago Board option exchange cboe.com if you type in laid vix quotes you can get here but these are the the normal monthly contracts and these are the ones that Russell and I would like to trade the most because they are the most liquid so you got vxu 4 that gets quoted VX V4 which is October October 16th and VX X4 which is November and you see that yeah people are are nervous about what going to happen in October uh two points in the Vicks is uh fairly big and I I guess I just wanted to get Russell's thoughts on that the um that October future has been been poking its head up for for a while uh and it's uh I I I got I gonna have to come up with a new phrase for it I I was referring to it as the Trump bump or the Biden bump because it's related to the election now we all know that the election is the first week in November but if there's still a lot of uncertainty and a lot of concern about the election and you know it can go that can go from people being very upset and misbehaving to uh somebody getting elected that you think may be for bad for the financial markets I ain't touching that one but uh the higher the risk the higher the uncertainty uh you're G to have increased S&P 500 Index option premiums for options that expire after the election and the o October future is going to settle into a calculation using those options and that's why the October contract uh is you know a couple of points higher than September right now I think I feel like and I do feel like September is getting neglected and a lot of people are looking past that uh which may create some sort of a surprise you know surprise price action uh if not this week shortly after Labor Day Before the uh before that expiration that expiration is is yeah September 18th so we still got three and a half weeks or so for that one um so we and and if you go back and you look at the curves for all the elections up to the last election you didn't see October poking its head up like that anymore but after 2016 when when the outcome was different than everybody thought uh We've suddenly started pricing more RIS risk into the election uh we saw this in 2020 but we also saw it flatten out uh as we got into mid October and if that follows again uh selling October and owning November might be a pretty pretty good trade right now uh they're only a 50 Cent difference now it widened out to about two bucks when we had that most recent Vick Spike and um I was you were talking about that the the butterfly that you did um I was I actually I I was actually able to uh short November and I'm sorry short October and by November and um when it was at 210 the spread was 210 I got out of it now that it's at 50 cents so that was that was that that that's just something to keep in the back of your mind and you can see with the volume and that everybody really does pay attention to the the the front month and I I I like to quote Ed Thorp who I trapped alone for 30 seconds and the only answer he gave me when I asked what he was looking at in the market was he's always looking where other people aren't well look farther out on that curve for opportunities you don't have to trade the front Mark all right so something always keep in mind and then I want to put one last caveat before I I leave the delayed quotes is that now realize that eventually the the spot matters so as we approach the actual expiration date the Futures Contract price and the vix index are going to come in come in line so if you really want to trade the movements in the VIX Index and you're just quoting the vix the only real way to do that is to do very very short-term options in the vix we're not saying that you should do that I'm just telling you that that's going to have the actual most uh effect on the uh option prices uh based off of the spot or the actual index okay so let's jump back out and now based off of the seasonality Russell that that we looked at and the chart that we had all put together you and I came up with a couple of Trades before the show and would you like to start should I jump into my trade right away or do you I mean you're the guest do you want want to go first or quick and um um what I what I did was I've been looking at going long September and short October let's R let's run to the trader pro software let's run there right now okay so so i' I've been looking at at getting a long position in September and a short position in October and this is not because I think we're going to see a volatility event it's in case we get a volatility event uh and because I because when we when we did before uh we saw September run up a lot more than October uh right now the September Futures at 16 and the Octo basically 1610 and the October Futures at 1815 uh my anticipation is if we see some sort of uh volatility event that happens before September expiration that it will show up in the September contract and we we'll go from really steep contango uh to to backwardation and um one way to trade that is to buy the September future and short the October future um however um I I I like to trade the options uh and what I did was I bought an in the money uh set September call I bought the 13 call for 330 uh the future was at 1610 at the time so my break even it's actually at 330 right now as you I know I uh look at me that might be is that is that volume is it is that all just my volume am I 100% of the volume there I'm kidding uh I can't answer that I don't have the volume up I just saw that little green bar there I was like is is is the volume one and it was me because it was a b one and then I went out to and then I went out to October and I bought the October 25 put and I paid $8 for that so my break even on October is 17 uh the VA the volatility on October options is much higher than uh September options and the time Valu is as well uh really it's just because uh October is a contract that a lot of people are keying off of uh but if we do get some sort of volatility event uh I'd be I I likely will take off the um that that long call on a spike because want right here yeah but if uh if nothing happens uh I feel like we'll probably see the O if nothing happens and vix drifts lower that October contract's going to drift lower as well and I feel like it would offset some of the losses on that long September call all right so right now if we put that trade on I just want to highlight it this is the trade in the order to did you leg into the trade or did you set it through it all as one yeah I I legged into it because um in reality the uh the September and the October uh vix uh options they have a different underlying yeah they it's a September underlying and an October underlying um and so I just uh I I tried to uh I got a little cute like you said I did good on on the option that I bought for or the call option I bought uh the put option uh probably could have waited a little while because vix has started grinding higher since then but um I'm happy with my trade go back and I'm gonna reference that in that it there's really not a lot of benefit to adding uh when you have two different underlines because you literally are trading they well they're two points different you know that's a lot on a 16p point index um there's really not a lot of benefit because the market makers can't hedge with the few with one future for that entire gaggle of trades for both legs of the trade so working it uh by just sending it down to the floor as individual legs is fine in the vix it right Russell just sum that up absolutely absolutely and um and and again the uh I don't think you know typically uh if you do a spread trade and this is a spread trade uh and you send it as the spread trade to to market makers uh if there's a lot less Delta relative to the underlying like you're doing a call spread or something like that it's cheaper for them to hedge it and you and you're more likely to get executed kind of in the middle uh because each of these each of these legs would be hedged with a different instrument it just it doesn't help to to to execute you can execute it that way but but I don't particularly see the benefit yeah you said that way better than I did I I yeah I get okay excellent so that is the trade it's is actually trading fairly close to where Russell put the trade on right now just right at the midpoint by putting them both in that uh order ticket but you were talking about some fun things that you've discussed on a few other shows uh about the uix so the uix is a I I I mean I'm just gonna call it as it is it's it's an ugly in ugly underlying it's hard to understand uh and it I don't know H how well does it tra how how much does the actual vix really affect the uix like how is the spot index represented in uix yeah what what's really funny about what you just said is and this is an intraday thing it's not a long-term thing um intraday uvix follows vix closer than any of the other etps and interesting it's a two times long and it's giving you exposure to the front two-month vix Futures but uh the folks behind uh uvix uh a while back uh just demonstrated that if you were it's the closest thing to day trading spot vix now the issue over time with uvix is uh the same thing I think a lot of people are familiar with VXX that gives you long vix exposure by owning the front two-month vix Futures uh however uh every day we're take we're we're selling a bit of the front month and buying a bit of the second month and right now with the September at a twoo discount to uh the October contract that that creates some negative performance uh the VXX folks talk refer to it as a negative rooll yield but I did find so you know over time it it's just going to grind lower and and it is a terrible instrument for that but I found somebody asked a question and and I started running some numbers uh I found if you buy uvix on the close every Friday and sell it on the open every Monday uh you you will lose uh you'll lose money a good portion of days but every once in a while you get a big Homer and I I found I I I came up with this in early January I'm sorry in early July and started trading it every weekend and um got really lucky uh with the October or the goodness gracious I'm on fire with months with the August fifth move um I uh and I was I was able to to score a really nice uh almost $900 gain off of a thousand purchase on that one oh my God but over time uh on average you would make 0.9% on that trade uh buying it on the clothes on which covers your commission which buys it buying on the clo on Friday and selling it first thing on the clo on the open Monday and it basically gives you a hedge against overnight risk uh there are a lot of theories as to why that works uh one is the market makers do take their um implied volatility inputs down on Friday afternoons especially when things are kind of slow uh so you know and maybe it's uh you know benefiting from a reflation of implied volatility on Monday morning uh but uh if you did that as a if you bought $1,000 worth of svx uh starting when it was launched SV or UV you just said SV sorry sorry uvix uvix yeah I get I I I apologize because I I do a lot with SV as well but U and both of those launched at the same time but if you bought it on the uh on the close on Friday and sold it on the open on Monday um and you just bought it that he did that with, dollar worth uh you'd have already doubled your money okay so basically what first of all it's an ETP which stands for exchange traded product uh uh some of them are notes but the one that's the most popular is an ETF right the spies are an ETF exchange traded fund but when you get into these weird things they call them exchange traded products so you can buy this and what Russell is really saying is most of the time you don't really get hurt on the downside that there's potential that you could if you bought bought it on Friday and sold it on Monday um but most of the time you're kind of break even on that and every once in a while you get that huge Spike up which happened with with what Russell says in August so and that also just in general if we have big down days most of the time go back in history the big down day is on a Monday and obviously you have a lot of news that hits the market on Monday morning from over the weekend while the markets were closed so so yeah I really like the concept of it just thinking about all the big down dayss you've had on a Monday and if you can break even most of the time and then every once in a while get that Black Swan event then bam I I love it overall you're on mute Russell I am well you can't hear me your lips were moving and we weren't hearing noise so I don't know what that means can you hear me now yes we can okay cool I think there's a I think I got to uh clear my throat and then the the microphone wakes up um you you you know we we talk before we do this nobody should be surprised at that and you did ask me about options around this one um the the thing is uh I I I've been I've been trading it uh and then I also will pay attention to different potential options and and the thing is you know the bit ass spread on the options is about a nickel or so and uh you do get a little bit of time Decay so it just doesn't work with options and then I also looked at well what about you know offsetting some of the cost and selling an out of the money call um one of the issues with that is if you do that if you sell like a weekly out of the money call uh you're G to give up some really nice profits and and and that you don't want to be capped on the upside this isn't something I I totally understand that yeah I uh I I did a uh uh dror strong down at LSU who's done a lot of work in the uh the option space I I wrote a CFA piece with him and he would always refer to covered calls as giving up The Sweet Spot of performance I think that's an overstatement but it is something worth pointing out well yeah and I agree you know a lot of people chase volatility with covered calls you know wanting to do it around earnings because there's juice and that's the exact time when I don't I don't want to do it if I'm trading something that has the potential to double or triple which would surprise the market I I just don't want to give up that upside so I I like that I like that little phrase that's fun that's a fun might use it at some point in time yeah and it does work with VXX as well but we won't dig too much into that not as well but has worked there as well all right so we are running a little bit up against the time and I do want to say that if you are on inside the trader Hub and you log in you can ask questions of Russell and myself and also if you're in the YouTube platform and obviously you're you're logged into your YouTube sign on you can ask questions just put them in the chat box we'll try to address them I'm going to bring up my trade which I was excited to to to share with Russell because first of all it it it worked when we did it on the downside when the vix was trading when the actual spot index was right around 28 29 and Futures were trading fairly close to that too so I'm going to bring up my trade and I'm going to do that because I got it all set up in the what if calculator and here uh me go and actually send this to the uh trade ticket if I can one second here takes me a second for some weird reason I gotta you I can't use my fake mouse to do this and then let's send that to the trade ticket and if we're in here this well this is the way it looks okay first of all I was going to do the September contract and it's the fact that the September contract is trading lower than the October contract is a reason another reason is with butterflies it's really hard to get paid until you get closer to that expiration date so if I'm looking at the VIX Index and let's pull that up that's what was kind of screwing with my head up there like why are these so low in price but uh if I look at the uh the contract that we're talking about is the 18th this and here's what I'm highlighting inside the trade your pro software is if you see the W here these are weeklys uh Russell and I already mentioned this kind of flippidy a little bit that they just don't have the volume the the markets are harder to trade this is the good oldfashioned uh VIX Index the monthly expiration from way back when it expired uh they stopped trading on Tuesday and then they have a settlement value called which is actually under the symbol vro and it comes out every Wednesday and so you want to look for these These are the contracts that we want to trade and Russell mentioned it's uh you know three weeks out 23 days to be more accurate September 18th so I obviously looking at the seasonality of the vix expect to get a little bit of a move to the upside uh and here's the way I set up the trade uh this is a butterfly now a standard butterfly if you're doing it you're here going uh six points wide so buying the 18 strike and this is the call side of things the actual spot index is right around here and actually the the actual future contract is is the Futures Contract is trading fairly close to that so we're going to buy the 118 go eight points out by the 24 and then from there we're going to go up to the 29 so we're not going to go a full eight points on the upside so we're stopping short on the butterfly we're making our short spread on the butterfly not as wide as the long spread and what it does and this is an index that I particularly like this on if we go back to the Whata if calculator and by the way look at the inex you know it's 36 Cents uh so $36 for every 1 by two by one that you put on and that's your maximum risk on the trade so if you just do one unit or one butterfly you're paying $36 for it and then if you go to the what if calculator what this does is you'll notice here here's the zero line let's pull this back down and there we're still there okay here's the zero line showing that the break even right now is about 1834 so you do need that movement up and it needs to substain all the way up until that September expiration maximum loss is going to be that 36 Cents it says right here and then on the upside though if we actually get the blowout move the Black Swan event above 29 uh you're looking at still making uh double almost uh I gotta Focus over here this is where the profit and loss is at but you're talking about $63 on a 36 Cent trade um and obviously you got a home run right in the middle and one of the things that we did uh with our uh one of the things that we did uh with our short version of this using puts is we actually ended up uh settling like within 50 cents of our short strike and that was on the actual settlement day these are cash settled indexes I love that that fact so just cash goes into your account where options used to be and there you have it and this is this is the trade that I'm looking to do based off of the seasonality of the vix and hopefully that seasonality stays true and we get a spike up ideally somewhere within the I'd like to be somewhere between the 20 and 24 range uh but we still got three weeks so it you only really get paid if we get closer to expiration this is as of today and it's not normally that's not going to be accurate um uh because you're based off of the Futures but the Futures straing fairly close to the spot so here's the difference as of today and as opposed to at expiration so big difference in that profit and loss graph all right so we'll leave it here I want to get Russell's last thoughts on this trade and if you have any questions we'll try to address them and if not this will be our last little fourway for a into the vixs going into September and October first off I really like the trade an awful awful lot um I think it's a great way to get long exposure to vix um I I see spreads periodically where if vix overshoots you've got some risk I love that if vix overshoots here you make some money um the the ri I I like using vix like this um let's just say between now and let's just say between now and let's just say this week the S&P 500 goes up a couple of percent just a hypothetical there uh if you had done some sort of trade guarding against a volatility event in the SBX all of a sudden whatever options you used are 2% farther out of the money vix holds its value a bit differently and it's wi spreads that and I think you said it in passing it's wi spreads that we don't like in a lot of other markets we actually do like in vix and it's just the behavior of vix and then finally I I I I like these sorts of Trades you know your risk is if vix is below 18 and and when I'm I'm doing the whole thing and I'm trying you know talking to a class and I'm trying to get them to say things out loud I'll say well what does it take for vix to go down well the S&P 500 to go up so if this is something that's mixed into a portfolio that has a long bias to it a long Equity bias it's a it's a great trade it's you know it's it you you'll make it up elsewhere it doesn't end up working out but it but it will also hold its value uh up until the last few days before expiration so if we haven't gotten the spike you probably be able to get out of it at a decent price as well yeah if you're hanging right around here by that September date just sell it if you got a week left right and you're probably gonna get out for 20 cents yep y all right so so would you say my grade was an A on my you you've done very well and you can uh I like now you can come guest lecture to my derivatives class at Indiana that's what I would love to do that I would love to do that I've Margaret smaller over in uh uh uh she was a good friend of mine that I worked with when I was at night Financial Trading Group and uh I lectured to her class A couple of times it was a lot of fun I really enjoyed it all right they love derivatives that would make sense since it's a derivatives class I I love that all right well that we are way over on the time and so uh that's wonderful thanks for coming I guess we got to do the I guess this is a once a year thing now Russell uh we got get you back a little bit more than that but uh with that said any last comments or or thoughts that you would like to share with the group just uh you know it it I'm I'm I'm eyeing that September future right now I just feel like I can't believe it's at a discount to spot vix right now now yeah I just can't believe that yeah yeah so and so like you know with that said gosh buy a buy a call option too that that's not that bad of a trade right now no VX is down around a 100 which is the vix of the vix You' like to have that down around 90 or 80 but heck the fact that you're getting such a discount on the on the September future just buying an in the money call or even speculating on an out of the money call isn't a bad trade either not at all all right well that's gonna be it for this edition of options Guide TV Russell thank you so much for coming on the show it's so much fun sure I totally enjoy it and uh we'll be back on Wednesday I am going to put this trade on in my my account the one that I that that that I just showed you today so we'll watch it through the month of September so if you want to come back and get some periodic updates on it definitely going to be doing it and uh see you this Wednesday for the next edition of options Guide TV uh 11:00 am Eastern Time inside the Hub on x.com and also in the trade your YouTube channel thanks for stopping in everyone [Music] you know how the financial World goes here comes the buzz kill please make sure to take some time to read this boring disclaimer we will owe you one