Buy VIX calls to play oil spikes
The guest argued that buying out-of-the-money VIX calls is an effective proxy trade to express a bullish view on oil spiking to $150.
The argument
There is currently a strong positive correlation between oil and equity volatility (VIX). If oil spikes to $150, it will exacerbate credit issues and inflation, likely sending the VIX to extreme levels like 80.
The thesis, stress-tested
✓ What validates it
- ✓Crude oil breaking out toward $100+ per barrel
- ✓VIX rising in tandem with daily oil gains
▸ Risks discussed
- ▸Oil prices stabilize or drop, causing the VIX-oil correlation to break down
- ▸High decay/theta on out-of-the-money VIX options if the spike does not happen quickly
Hear it yourself
"So, normally, if the VIX was at, say, 80, you would see a big fat vol premium. Right? Because the VIX is at 80. But in this case, the VIX is only about 25, but there's still a ton of vol premium, which tells us that even though people are worried, the underlying market really hasn't started to move yet."
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