The VIX Trader's Handbook

The history, patterns, and strategies every volatility trader needs to know

Russell Rhoads

• Publisher: Harriman House
• Year: 2020
• eBook ISBN: 9780857197122
• Topic: Business
• Subtopic: Stocks
• Index: Business

Russell Rhoads is one of America's leading experts on VIX, the Volatility Index.In The VIX Trader's Handbook he takes a deep dive into all things associated with volatility indexes and related trading vehicles. The handbook begins with an explanation of what VIX is, how it is calculated, and why it behaves the way it does in various market environments. It also explains the various methods of getting exposure to volatility through listed markets.The focus then moves on to demonstrate how traders take advantage of various scenarios using futures, options, or ETPs linked to the performance of VIX. Finally, a comprehensive review is presented of volatility events that shook the markets, including the 1987 crash, Great Financial Crisis, 2010 flash crash, and the 2020 pandemic. By understanding how VIX behaved leading up to these market shocks, and reacted afterwards, traders can better equip themselves ahead of future events.A wide variety of strategies that are implemented in both bearish and bullish equity markets are introduced and covered extensively throughout.The VIX Trader's Handbook is essential reading for all those who are intending to trade volatility—from those who wish to gain an understanding of how VIX and the related trading products behave, to those intending to hedge equity exposure or take advantage of the persistent overpricing of option volatility.You won't want to trade volatility without it.

Part 1: Instruments and Markets

Chapter 1: Implied Volatility and Option Pricing

The Cboe Volatility Index or VIX is a measure that depicts the market’s expectations for volatility over the next 30 calendar days. VIX is determined using the volatility expectations of a wide number of S&P 500 (SPX) index options, so it is worth going over the basics of option pricing and implied volatility. After doing that, Chapter 1 goes on to look at the inverse relationship with the S&P 500 and the S&P 500 put/call ratio.

Option pricing factors

The price of an option is determined by the marketplace. If there is more buying pressure, the price of an option rises. And if there is more selling pressure, the price of an option drops. Although the structure of an option is more complex than a stock or exchange-traded fund (ETF), the price discovery that occurs on an exchange is basically the same.

Option pricing models allow us to determine the theoretical price for an option based on a handful of factors. Underlying price, strike price, interest rates, dividends, time to expiration, and volatility are the inputs used in pricing models. An option pricing model allows us to solve any of those variables if we know the price of an option.

When you look at a quote screen and see an implied volatility or volatility number next to the option price, that figure has been backed into using the current market price of an option. VIX works the same way, but with man...

Table of contents

• Contents
• About the author
• Introduction
• How this book is structured
• Part 1: Instruments and Markets
• Part 2: Trades and Strategies
• Part 3: Historic Volatility Events
• History lessons
• Publishing details