Use VIX to Adapt in Extraordinary Times

There is a toxic cocktail that traders are forced to swallow. The pandemic, election, lockdowns, and divided House and Senate comprise a nasty drink.

The current trading environment is extraordinary and challenging on normally reliable strategies. As traders we must adapt. When volatility is at lofty levels, regulating risk and profit targets requires adjustment. Setting risk and profit projections are integral for all traders.

The equity index daily ranges this year are almost 3 times what they were before the pandemic and election. The CBOE Volatility Index (VIX) spent nearly the entire year below 38 and above 22. Now, average range comes into play. If VIX is near the upper band, set targets and risk at 1.5 times benchmark levels. If the average day range is 20, project a 30-point move. On the other hand, if VIX is near 20, use a 14-day and 9-week average to set targets and risk.

When VIX is high, credit spreads should pay, and debit spreads may be best when it is below 25.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.