Do you have VIX trading strategies to use? As many traders know, the CBOE Volatility Index (VIX) can be extremely valuable when gauging current market risk. Because the VIX is derived from the S&P 500 Index option prices, it is a forward-looking indicator. But it can also be utilized on an intraday basis as well.
Many of us at Bullish Bears are fans of the TTM Squeeze. The updated version is now known as the ST_SqueezePRO. The TTM_Squeeze comes bundled for free with ThinkorSwim.
The above 5-minute chart shows that SPY traded within its 5-minute Opening Range for the vast majority of the day. With abnormally long squeeze conditions lasting more than half of the session. In the last 2 hours of the day, we saw a volume increase accompanied by a volatility increase. For the trend trader, it’s a very difficult day. But only if you weren’t paying attention to VIX
Vix Trading Strategies Introduction
The VIX is a great trading tool. As a result, VIX trading strategies can be incredibly beneficial to traders. Especially if you know how to read charts, make sure you spend the time needed to learn how to trade the VIX and use it as a tool.
You can use the TTM Squeeze with VIX trading strategies. To be brief, the Squeeze indicators show us when the Bollinger Bands have entered the Keltner Channel on the chosen time frame.
This tells us there is consolidation in price and a reduction in volatility (commonly called “compression”). The PRO version gives us three different levels of compression. At the same time, the standard TTM version gives us one.
These conditions are likely to be followed by a greater-than-expected move. Since VIX can only be traded via options, you might think a technical setup will not likely play out as expected.
However, it’s quite the contrary. VIX technical setups, especially squeeze, can be a powerful confirmation, filtration, and indication method.
Especially when trading S&P-500-related products such as SPY (including options), SPX options, and E-mini S&P-500 Futures.
Futures and VIX Trading Strategies
You can also use VIX trading strategies with futures trading. This method can be used when trading products such as QQQ, E-mini NASDAQ 100 Futures, and individual large/mega-cap stocks.
But it’s IMPORTANT to note that the strongest correlation is tied to S&P products because the VIX is derived from the S&P.
Other products should be constantly reviewed to ensure that they are inverse to the VIX and correlated with the S&P product of your choosing.
Quick Pro-Tip: You can do this in ToS by adding the “Comparison” study on your VIX chart. Type in the desired symbol and ensure it’s moving AGAINST (AKA inverse) the VIX, just as the S&P products would. Today, we will only cover a product tied to the S&P: SPY.
Check out our example from Tuesday, August 11, 2020, below. This is using the VIX as a filter and indicator for SPY 5min.
10 Minute VIX Chart
What’s the best way to trade it using VIX trading strategies? Typically, it’s by buying ETFs and ETNs. These need to be tied to the VIX. There can be a lag with the VIX, however. Make sure you’re paying attention to that.
Let’s look at using a specific chart with our VIX trading strategies. This 10-minute VIX chart shows that squeeze conditions weren’t met until the second half of the day.
VIX price trended upwards, as seen in the stacked Cyan-21EMA and Purple-34EMA. It would be reasonable to anticipate SPY making a new high at the marked new low point.
However, we can see it did not (Figure 1). This is a clear indication that there is no notable concentrated buying pressure on the S&P. Sellers flew in shortly after, and this long-awaited squeeze finally fired bearish.
This was a great learning opportunity for bulls and bears. For the bulls, standard squeeze trading rules would demand taking a long trade on SPY because the 8, 21, and 34 EMAs are stacked bullishly (Figure 1).
This is a scenario when the VIX chart acted as a filter for the setup. If you were bullish, VIX wasn’t moving inversely with SPY, a clue that it’s not a good time to go long.
If you were already long SPY, it was a great chance to kill the trade on the failure to make a new high. In this same scenario, if you were bearish (and should have been because of the VIX chart), the VIX acted as a solid confirmation indicator.
It tells us that the bulls were running out of steam and that this SPY long setup had a notable probability of failure. The selloff offered two short entry opportunities (Figure 3 below) based on key price levels.
How Do You Trade Volatility?
VIX trading strategies can help with volatility. Volatility is the bread and butter of traders. Especially for day traders.
Have you ever tried to trade without volatility? It can be like watching paint dry unless you’re swing trading as a part-time job. Then, volatility isn’t necessarily needed.
But if you want volatility, using the VIX can help. Check out our example below on using it for a short.
Short Entry 1 would be a highly aggressive entry based on the break below the 5-minute Opening Range. Short Entry 2 would be the more conservative, confirmation-oriented entry based on the first swing low from the 5-minute Opening Range. These were both low-risk entry opportunities, allowing for tight stops for those with low risk tolerance.
Example of Vix Trading Strategies
Let’s look at VIX trading strategies in action. This 5m SPY chart shows that prices attempted to push above the 5m Opening Range up to 8:30, then quickly came back down.
Bears almost appeared to be taking over, and then buyers came in to push above the range again.
A clean, long setup was formed, offering an A+ quality entry opportunity near the Cyan-21EMA (a common line used to determine mean price levels) and being right on top of the 5m Opening Range. The 10-minute VIX chart below (Figure 5) confirms this setup.
TTM Squeeze for Bearish Confirmation
The stock market doesn’t only go up, right? While it might seem like it does, especially now, there are bearish days.
As a result, we need to use VIX trading strategies for bullish and bearish trading. What do you do if you see a rounding bottom pattern, but everything else is bearish?
Get confirmation of the bearish move on a bullish pattern. However, we can see in the example below that there was no confusion about direction. We like those moves.
Here, we can see that the VIX chart was bearish. There was no way to argue against or second-guess the sentiment here. The bulls had obvious control of the S&P at this point. This made the long setup on SPY a very high-probability trading opportunity with incredibly low risk due to the optimal entry point. This is the kind of trade setup that should make a squeeze trader’s mouth water
Final Thoughts on Vix Option Trading Strategies
Hopefully, after reading this, you have VIX trading strategies ready. Of course, it’s always important to remember that nothing is 100% in the financial markets.
However, hindsight is 20/20. As I mentioned earlier, you should always be able to compare the chart against the VIX to make sure they move in the opposite direction.
A key rule many follow is quickly identifying the setup within seconds. If you need to stare at a chart as if you were deciphering code, there’s probably not a good setup.
At that point, it would be wise to walk away until you have a better setup to see clearly in the day. To all you squeeze traders out there: Stay Green.
