As I stated yesterday I think that the VIX spike is a little over done. While certainly the market has moved over the last 4 days as if it deserved a VIX of 27.31 (55 points in 3 days is nothing to sneeze at), I do not think this pace will continue. The market is much more orderly than it was two years ago. There are many investors who are very skiddish, this is causing the spike. Let’s quickly run down the facts
1. Calendar spreads have gone from a negative skew of 2 points to even, with the weekend being taken out Friday they may actually be positive.
2. This is the highest VIX level since November 5th.
3. The market has given up just under 5% from the very top on Tuesday
As a trader what is my approach? Before moving on, please take the time to read the article below. It goes over my thought process of selecting a negative vega spread. http://www.option911.com/option-education/how-to-select-a-negative-vega-trade-strategy-based-on-implied-volatility-spikes/
There is one factor that the above article does not address, intermonth IV skew. Very few of the past IV spikes have seen the volatility spreads tighten up this much. Knowing this, what do you traders think approach I would take if I wanted to:
1. Get short Vega
2. Take advantage of the Intermonth volatility spread
3. Have room in the trade to avoid the actual volatility of the underlying.
If you traders said a Double Diagonal set up as a flat to negative vega spread, you hit the nail on the head congrats.