Further understanding of VIX options

[i960]

VIX options will be more tied to VIX futures rather than VIX cash

Just forget about VIX cash/spot with the options. Your underlying is the futures and hence there's a term structure involved. If in June, the term structure stays as it is today (which is doubtful) then VXM8 should end up 20+ as it slides up the curve. In reality the curve could go back into contango but with a new "floor" established, also helping your further out options.

Wouldn't be the first time the back months were priced up 20+ either. Here's a chart of rolling 4th expiration future:

 

[i960]

Also, I'm not 100% clear on the relationship between XIV and VIX options

XIV is an ETF/ETN with a constant maturity 30 day vol accomplished by their balance of front and back month VX contracts. It's not a CBOE product and there's nothing "official" about how it tracks VIX or not.

 

[beerntrading]

XIV is an ETF/ETN with a constant maturity 30 day vol accomplished by their balance of front and back month VX contracts. It's not a CBOE product and there's nothing "official" about how it tracks VIX or not.

Well, I understand that much. It does indeed track the VIX, if not officially. I'm asking more about how VIX options would interact with it. Specifically, if I was right on this thread when I said that, subject to having sufficient margin, OP was unlikely to lose any additional if held until expiry (being that it's already 'ITM').

 

[ironchef]

You're on the right track, but not quite. It's not the euro style exercise alone, it's actually the contango of the futures contract (presumably the very reason you're in XIV). But they don't have true 'intrinsic' value when the VIX goes 'ITM'--in short because there is no value that underlays it. But there's an expectation that this will revert back down prior to the June expiry--the only way that VIX options will exhibit price movement vs. the underlying similarly to equity options is when the expectation is that this will not come back down prior to expiry (i.e. people believe it will flat line from here).

All is not lost though, as long as you can swing the margin. If you don't mind holding this until June, you can wait till it reverts to lower values, and if it doesn't your calls will become worth something as they near expiry, and on expiry should be very close to you expected value.

I suspect that the trade will be a total loss from this point anyway since you're locked into it, and anything you pick up on XIV will be offset by the premium losses on the long calls...but you'll do better than trying to close it while the VIX has run away from you.

Chalk this one up to a lesson well learned for relatively cheaply.

I learn something new from you today. Thanks.

A question for you and Saltynuts: What is the rationale for taking both a long and a short positions on volatility?

 

[Saltynuts]

ironchef, for example, you expect volatility to move up a good bit, so you go long volatility, but to protect yourself if it craters you buy a put on volatility. One of probably many examples.

 

[Saltynuts]

Or, this trade I was talking about - you purchase XIV or SVXY, so you are short volatility. To protect yourself from a total wipe-out (as pretty much occurred), you might have purchased a VIX call (probably good bit out of the money so you can make money over time from the overall position). The idea is that XIV and SVXY might go up significantly, but as long as you can avoid a wipe-out scenario like that which occurred sooner or later they will catch back up. That would be the idea, but a bad one it seems given the mechanics of XIV and SVXY.

 

[beerntrading]

I learn something new from you today. Thanks.

A question for you and Saltynuts: What is the rationale for taking both a long and a short positions on volatility?

Wow...looking back at my post you quoted was strange--it seems like it's from ages ago because of how much I've picked up about the workings of VIX ETNs. It was 48 hours ago...lol. Also, it's totally untrue that the value of that will recover (I was under the impression the ETN was options based when I said that). So...try not to learn to much for that post, I've said better things about it since on the other VIX threads (seriously, this is like bitcoin--we damn near need a whole forum for it! )

But that rationale depends, goes from hedging to outright speculation to hedging a hedge. The one place I use the VIX (net long call ratio spreads) is to hedge against the very beginning of a small (or large) shock systemic down move.

Here we go...amended post with the inaccurate stuff grayed out.

You're on the right track, but not quite. It's not the euro style exercise alone, it's actually the contango of the futures contract (presumably the very reason you're in XIV). But they don't have true 'intrinsic' value when the VIX goes 'ITM'--in short because there is no value that underlays it. But there's an expectation that this will revert back down prior to the June expiry--the only way that VIX options will exhibit price movement vs. the underlying similarly to equity options is when the expectation is that this will not come back down prior to expiry (i.e. people believe it will flat line from here).

All is not lost though, as long as you can swing the margin. If you don't mind holding this until June, you can wait till it reverts to lower values, and if it doesn't your calls will become worth something as they near expiry, and on expiry should be very close to you expected value.

I suspect that the trade will be a total loss from this point anyway since you're locked into it, and anything you pick up on XIV will be offset by the premium losses on the long calls...but you'll do better than trying to close it while the VIX has run away from you.

Chalk this one up to a lesson well learned for relatively cheaply.