Issue 63: Use VIX Term Structure to Front Run the Bear Bounce - Masters in Trading Digest

Use VIX Term Structure to Front Run the Bear Bounce

Welcome to Issue 063 of Masters in Trading Digest.

In today’s issue, we cover risk, specifically the term structure of the VIX and how traders can benefit from tracking this information.

We also discuss options, but not the options you would expect. Instead, we’re sharing an option on A futures trade that was heard in our Discord.

Enjoy,
Jonathan

How Traders Can Anticipate Changes in Volatility To Frontrun the Bear Bounce

The CBOE has been publishing the VIX since 1990, but it is a little known fact that the CBOE actually maintains separate indices for the near-term month VIX (VIN) and the far-term month VIX (VIF). 

Just pop those tickers into your streaming quotes and you too can watch not just the VIX, but the two components used in the VIX constant maturity blend.

Right now, for instance, I show a VIX of 32.70, a VIN of 32.53 and a VIF of 32.71. 

  • VIN = Near term 23-day volatility 
  • VIX = 30-day volatility
  • VIF = Far term 37-day volatility

This is considered a flat VIX Term Structure.  The term flat is used because the prices of each different time frame are nearly identical; they are connected by a flat line.

If the near term VIN was lower than the far term VIF, this relationship is referred to as a “normal” curve, and can be connected using an upward sloping line.

When the VIF trades higher than the VIN, the curve is now “inverted,” pricing in more risk for shorter amounts of time.   

Today is riskier than tomorrow = curve inverted. 

VIN (23d) BLUE  VIF (37d) GREEN

The VIX measures expected volatility over the next 30 calendar days, not historical volatility. In other words, it measures how much movement traders expect the S&P 500 to make rather than how much it has moved in the past. It reflects real-time expectations about the level of U.S. stock market volatility over a short-term horizon—a view into investor sentiment regarding near-term movements within equities.

The VIN measures the expected volatility over 23d.
The VIF measure expected volatility 37d out.

S&P 500 Futures
VIN – VIF = Green Line

In the chart above, we are now looking at the difference between VIN and VIF.  The red line is the “zero line” – the point where the VIN and VIF are trading exactly the same.

Notice the behavior of the S&P 500 Futures when this spread goes inverted (trades above the zero line).

We track VIX Term Structure Daily Using the Masters in Trading VIX Trading System.

Watch this video to learn more about the VIX Trading System.

Masters in Trading Digest - Issue 63

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HEARD IN OUR DISCORD

The Futures traders have been searching for more opportunities using Futures on Options.

With the insane amounts of volatility, having the luxury of buying options with a fixed amount of risk is a comfort to Futures traders.  

Especially if you’re trading BONDS!

Congratulations to all Masters in Trading Futures members!  Great call, Pablo Lucena!

Are you interested in becoming a member? Membership starts as low as $147/month – Join Now.

FINAL THOUGHTS

WHAT TO EXPECT IN THE NEXT MIT DIGEST

We will wrap up an extremely volatile week in the markets.

Go ahead and watch this presentation on the VIX.  If I can have you learn one thing, I’d ask you to follow VIX Term Structure to protect against these types of violent market moves.

Keep your feedback coming into support@mastersintrading.com. We’re excited to share your feedback along with fantastic suggestions for upcoming issues.

Until then, trade smart and always manage your tail-risk.

Thanks for reading,
Jonathan Rose

P.S. There’s Not a Trading Signal We Have More Confidence In.  There’s a PDF Included in the VIX Demo so You Can Follow Along with the Back Tested Trade Results.

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