Using VIX Butterflies as a Tactical Volatility Hedge

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Outlook: Calendar Spread Screener Results for January 6thNasdaq Stock Keeps Rising - Is It Worth Buying NDAQ Now?Get exclusive insights with the FREE Barchart Brief newsletter. Subscribe now for quick, incisive midday market analysis you won't find anywhere else.Investors and traders have long used VIX as a measure of the level of risk, fear or stress in the market.Yesterday, the VIX Index closed at 14.75, which is towards the lower end of the range for the year.Today, we’re going to look at a long call butterfly using VIX options as a way to profit if volatility starts to rise next year.A long call butterfly is constructed through buying a call option, selling two higher calls and buying one call even higher.The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.Usually, a butterfly is placed roughly at-the-money, but today we are looking at placing it out-of-the-money.Using the February 18th expiry, the trade would involve buying the 15 strike call, selling two of the 20 strike calls and buying one of the 35 strike calls.The cost for the trade would be $250 which is the most the trade could lose. The maximum potential gain is $750, which would occur is VIX closed right at 25 at expiration. The lower breakeven price is 17.40 and the upper breakeven price is 32.60.There are three general outcomes with this butterfly.VIX below 15 – Trade loses $250. This scenario should be reasonably acceptable for most investors. While the option trade suffers a full loss, hopefully stocks have been stable or rising.VIX between 20 and 30 – Good for the VIX butterfly, but potentially bad for stock portfolios.VIX above 30 – Full loss on the VIX trade and potentially big drops in stock portfolio.So VIX above 30 is the main scenario that hurts in this case, but how likely is that?Using VIX options can be simple and cheap way to buy some protection against a sharp selloff in stocks between now and January. The trade can be placed relatively cheaply at $250 per contract.VIX options behave differently to regular stock options, so it is important that any trader using this product fully understands the risks involved. As always, do your own research and due diligence before risking any of your hard-earned capital.Terms and Privacy PolicyPrivacy & Cookie SettingsMore InfoS&P 5006,922.67 +1.74 (+0.03%)Dow 3049,283.78 +287.70 (+0.59%)Nasdaq23,469.56 -114.72 (-0.49%)Russell 20002,600.76 +25.34 (+0.98%)VIX15.56 +0.18 (+1.17%)Gold4,471.80 +9.30 (+0.21%)Trending tickersAPLD Applied Digital Corporation 32.05 +2.49 (+8.43%)LMT Lockheed Martin Corporation 517.56 +20.69 (+4.16%)INTC Intel Corporation 41.11 -1.52 (-3.57%)BTC-USD Bitcoin USD 90,531.00 -222.22 (-0.24%)BX Blackstone Inc. 155.00 +1.41 (+0.92%)PortfolioSign in to access your portfolioSign inTop gainersNEOG Neogen Corporation 9.60 +2.22 (+30.08%)ONDS Ondas Holdings Inc. 14.27 +2.09 (+17.17%)PBF PBF Energy Inc. 32.75 +4.51 (+15.97%)KTOS Kratos Defense & Security Solutions, Inc. 105.07 +13.63 (+14.91%)BE Bloom Energy Corporation 120.56 +12.56 (+11.63%)Top losersRGC Regencell Bioscience Holdings Limited 43.40 -9.48 (-17.93%)HYMC Hycroft Mining Holding Corporation 25.15 -4.59 (-15.43%)SIMO Silicon Motion Technology Corporation 104.98 -16.15 (-13.33%)AAOI Applied Optoelectronics, Inc. 33.18 -4.88 (-12.82%)AYI Acuity Inc. 323.22 -46.57 (-12.59%)Most activeNVDA NVIDIA Corporation 185.20 -3.98 (-2.10%)ONDS Ondas Holdings Inc. 14.27 +2.09 (+17.17%)F Ford Motor Company 14.42 +0.68 (+4.95%)APLD Applied Digital Corporation 32.07 +2.51 (+8.49%)PLUG Plug Power Inc. 2.3303 +0.0503 (+2.21%)Top economic eventsEarnings eventsMy earnings eventsEarnings events