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I need to warn you about something that could save you thousands — and it’s not what you think.
Most traders know that when the CBOE Volatility Index (VIX) spikes, options get more expensive. That’s basic stuff. But what they don’t understand is the deeper problem that kicks in when VIX crosses above 20, which it did on Friday before settling lower this morning.
It’s not just that premiums go up — though they do, and dramatically.
The real issue is structural. Your options become mathematically disadvantaged in a way that most traders never recognize.
The Hidden Mathematical Headwind
Here’s what’s really happening behind the scenes…
Market makers don’t trade directionally — they want to make sure they don’t lose money. So when volatility spikes, they price options on both sides to cover themselves if the market moves against them at certain levels.
The problem? Your option has to gain above the level that market makers are expecting the market to move, or you lose money. It’s a double hurdle that creates a mathematical headwind most traders don’t even know exists.
Think about it…
An at-the-money option that normally costs 60-90 cents suddenly requires much larger moves just to break even. The options get so expensive that they’re pricing in expected moves your trade must exceed to be profitable.
When to Step Away — And What to Do Instead
Here’s the thing — 90% of the time, VIX stays below 20, so this isn’t usually an issue. But when it spikes above that level, you need to be really careful with your option strategies.
Though back down to 18 this morning, it just hit 21.69, and that’s exactly when these conditions kick in. When VIX crosses above 20, traders must be really, really careful about their option plays.
My solution during these periods? Consider E-minis instead. They don’t have implied volatility premiums baked in, they move point-for-point with the underlying, and there’s no time decay eating away at your position.
Don’t let the VIX trap destroy your trades. Sometimes the best play is knowing when not to play at all.
I hope that helps!
Roger Scott
Roger Scott Trading
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