Instead of messing with the vix, here is an alternate strategy to protect your Positions. I will use aapl since it's the wall street darling as of late:
* say I own 100 shares of apple; current price is 600. It doesn't really matter where i bought; what matters is that i want to continue to own it but am a little nervous about a sharp decline. I can stomach a little drop but not a woosh down.
1) I can buy April 1xaapl 580 put. This give me the right to sell my stock at 580 even if it drops to 0. this will cost me $12.5x100= 1250. That's a lot of money just for protection. I am going to make it cost me nothing by
2) To finance step number 1, I sell April 1xaapl 620 call. This obliges me to sell my stock at 620 regardless of what market price is in April. for this i will collect $12.5x100=1250.
So between the money i paid to buy the 580 put (protection) and the money i collected for selling the 620 call, this combination cost me NOTHING.
Possible outcomes:
1) aapl goes nowhere (stays between 580 and 620): both the put I bought and the call I sold will expire worthless. Not a waste of time since i slept better knowing that i limited my downside risk holding my apple stock.
2) aapl drops below 580: my loss is limited to 580 ($20) and i can exercise my right to sell it at 580 (even it is dropped to 550, 500 or 100). hidden fast money trade here: If aapl drops to say 575 and i feel like it's a temporary drop rather than an exodus from aapl then i may decide to sell my protection since now it would be worth 1000% more than i paid for it and keep the stock waiting for recovery. The 620 call i sold will expire worthless (didn't need to use it)
3) aapl runs to 650 700 or 1700: i may be forced to sell my stock for 620 like i promised when i sold the call. Big deal since this means that I got my protection for free and participated another $20 up in price appreciation.
Btw, if you like these posts spread the word, folo @racernic & peruse the rest of my post including the sides (if you know what I mean ;-). I do these post for free and have no subscription pitches etc.
TRICKS: in the above example I can get more creative. take the exact scenario BUT if i feel that aapl is toppy and won't break 615 before 30days from now, i can buy the 580 put BUT sell the april 615 call instead of the 620. why? the 580 put cost me 1250; the 615 call gives me 1423 so i actually make money putting on a safety trade.
As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.
THIS IS NOT A RECOMMENDATION OF ANY KIND. I ONLY INVEST MONEY I CAN AFFORD TO LOSE.
