A 3.4% decline on Feb. 24, 2020, combined with the VIX closing near 25 -- “statistically too low” -- was a sell signal coming after a long period with no drops of that magnitude, Colas said. The current setup is similar, he added. Colas will be a buyer on a drop of more than 3% “if (and only if) the VIX closes well above 44.”
VIX Too Active
“Since Omicron has reared its head, markets have been chaotic and volatile,” said Tom Lee, co-founder of Fundstrat Global Advisors LLC, in a note Thursday. “However, we do think this is an interruption in a continuing bull market.”
“By some measures of VIX activity, the market panic has nearly matched the panic in March 2020,” Lee added. “Does that make much sense given that lockdowns are off the table and the population is immeasurably safer and better prepared than in that chaotic time? We think not.”
Reaping Premium
A VIX calendar strategy has been shown to deliver alpha systematically, according to JPMorgan Chase & Co. derivatives strategist Peng Cheng, in a note Wednesday, and may be good for medium- to high-volatility regimes like the current one.
When the VIX is above 20, an investor can sell a front-month 20 delta put -- with delta a gauge of an option’s price sensitivity to changes in the price of an underlying asset -- and buy the second-month 20 delta put, at a one-to-one ratio, Cheng wrote in a note Wednesday. “The trade is carried till the expiry of the front-month contract, and unwound if VIX is 20 or below, and if VIX is above 20, rolled into the same put calendar structure,” Cheng said.
-With assistance from Akshay Chinchalkar.
This article was provided by Bloomberg News.