VIX ‘heat map’ chart & covered calls on a REIT
This week as the market bounced and volatility once again dropped back toward normal levels I made only one options trade. It was to adjust some covered call options on a losing position that I’m looking to weed out of my portfolio (see below).
In the meantime I was intrigued by a post by Alex over at My Trader’s Journal about selling naked puts on VXX. VXX is the iPath S&P 500 VIX Short-Term Futures ETN, which offers exposure to futures contracts on the CBOE Volatility Index (the VIX) and reflects the implied volatility of the S&P 500 Index “at various points along the volatility forward curve.”
As Alex points out, selling put options against VXX and/or going long it when it’s at low levels could offer an indirect hedge against other naked put option positions in one’s portfolio. I’ve been considering a similar strategy with VIX options and recently created a colorized VIX “heat map” chart of the S&P 500 to help visualize the recent historical relationship between the VIX and the S&P 500:
Blue and grayish areas represent periods of low volatility. As volatility “heats up,” the colors gradually change to brown (“normal” volatility) and then to orange and eventually bright yellow, representing extremely high volatility.
I prefer selling put options on equities during periods of high volatility (orange and yellow areas on the chart) when option premiums are high. When volatility goes “cold” and drops to low levels, selling option premium – what there is of it – becomes much less appealing. At the same time, that would seem to be a perfect opportunity to consider a strategy of selling put options on the VIX or VXX, and in an upcoming post I’ll take a closer look at these two instruments to see what each has to offer.
Closed/Adjusted positions:
Developers Diversified Realty [[DDR]] – On 7/7/10 I rolled out and down the October 12.5-strike covered call options I’d sold against my long position in DDR on 4/5/10 for $1.50 by buying them back (for $0.25) and selling some January 10-strike covered calls at $1.20. (This is the second time I’ve taken profits on – and rolled out – covered calls in this losing position. I considered selling the January 12.5-strike call options rather than rolling the position down, but at this point I’m increasingly looking to simply exit the position and move on.)
