Market volatility remains subdued as measured by the CBOE Volatility (VIX) Index. VIX is a real-time index that represents the market expectation for near-term volatility in the S&P 500 index.

Investors and traders have long used VIX as a measure of the level of risk, fear or stress in the market.

Today, we’re going to look at a long call butterfly using VIX options as a way to profit if volatility starts to rise in the next few weeks.

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 April 16 expiry, 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 for the trade would be $30 which is the most the trade could lose. The maximum potential gain is $470, which would occur is VIX closed right at 20 at expiration. The lower breakeven price is 15.30 and the upper breakeven price is 24.70. 

There are three general outcomes with this butterfly.

• VIX below 15 – Trade loses $30. 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 15 and 25 – Good for the VIX butterfly, but potentially bad for stock portfolios.
• VIX above 25 – Full loss on the VIX trade and potentially big drops in stock portfolio.

So VIX above 25 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 July. The trade can be placed relatively cheaply at $30 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.

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