Yesterday, the VIX index closed at 14.69, which is at the lower end of the annual range.

Today we’ll look at a long call butterfly that uses VIX options as a way to capture profits when volatility starts to rise next year.

A long call butterfly is created by buying a call option, selling two higher calls, and buying an even higher call.

The trade is completed with a net debit, meaning the trader pays to complete the trade. This burden also represents the maximum possible loss.

Normally a butterfly is placed around the money, but today we’re trying to place it outside the money.

Considering the January 21st expiration date, the trade would involve buying the 15 strike call, selling two of the 20 strike calls, and buying one of the 25 strike calls.

The cost of the trade would be $90, which is the maximum value the trade could lose. The maximum potential win is $410. This would occur if the VIX closes directly at 20 upon expiration. The lower breakeven price is 16.00 and the upper breakeven price is 24.00.

There are three general results with this butterfly.

• VIX below 15 – Trade loses $90. This scenario should be somewhat acceptable to most investors. While options trading suffers a total loss, stocks will hopefully remain stable or rise.
• VIX between 15 and 25 – Good for the VIX butterfly, but potentially bad for equity portfolios.
• VIX above 25 – Complete loss in VIX trading and potentially big drops in the stock portfolio.

So a VIX above 25 is the main scenario that hurts in this case, but how likely is that?

Using VIX options can be an easy and inexpensive way to hedge against a sharp selloff in stocks between now and January. The trade can be placed relatively cheaply at $90 per contract.

VIX options behave differently than 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 your hard-earned capital.

Please remember that options are risky and investors can lose 100% of their investment. This article is for educational purposes only and does not constitute a trading recommendation. Remember to always conduct your own due diligence and consult your financial advisor before making any investment decisions.