A Pairs Trade from last Week: SPX / VIX

Image

E-mini S and P futures versus the VIX cash index.

On Thursday June 6, a pair set up very nicely. Notice the extreme low correlation, which would suggest the high likelihood of a bi-polar trend.

Image

Note, too, that the SPY implied volatility (IV) measured over 50%– a percentage which can usually be shorted.

The trade?

There are several variations:

1. Short SPX puts. This is both long the S and Ps and short volatility.

2. Buy S and P futures and short VXX stock. This is a more leveraged trade. (At this point, TOS does not accept VIX futures orders.)

3. Buy SPY calls and buy VXX puts.

4. Sell SPY puts and sell VXX calls.

5. Sell SPY put spreads, and sell VXX call spreads.

6. Any combinations of the above.

The simplest is probably the best and most prudent: sell -25 delta or lower puts in SPX. It would have matured nicely by Friday afternoon.

Image

The brilliance and logic of the pairs trade is found everywhere in nature.

This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s