How liquid are VIX options?

D

darkshogun

I'm looking to hedge the volatility exposure on my SPY/IWM butterflies with VIX options. How liquid is this index? VIX is currently at 14.5. I want to buy an AUG4 call option at the strike price of 14. The bid/ask spread is 4.00/4.30. Open interest is at 71. Volume is at 83. Open interest and volume seem very low compared to the amount of contracts being traded on SPY and IWM. I have a few questions about it?

1. Is VIX illiquid?
2. I'm sure I'll have trouble getting filled at the midpoint. Correct?
3. When I want to liquidate the position fast, will there be enough liquidity in the market to get rid of it fast if I need to?
4. What if volume and open interest are at zero or close to zero on other VIX calls? Will the market makers create a new position in order to accommodate me at the desired back month and strike, when there doesn't seem to be another trader on the opposite side of the trade?

Thanks for any insight you can provide.
 
well how many do you want to do?
a floor broker could easily get 1-2 k off without changing things much. and all serious volume goes through the pit so that is your best bet.

getting filled mid-market? probably not. why would anyone do that?
 
kind of.
in general market makers aren't going to fill anyone mid-market. sometimes you will find a customer to take the other side, but that is unlikely that far out in the vix.
 
Just a question, how far out are your SPY/IMW butterflies? Because if VIX spikes, Aug vix will lag behind as the whole structure goes into backwardation, so you wont see much profit to offset losses if your SPY/IMW vol exposure is closer than Aug.
 
Keep in mind you're buying options on the August future, which is currently trading around 17.7, so those 14 calls are deep in the money -- 80 delta calls are going to be quoted fairly wide so that market-makers don't get picked off if the market gaps.

To figure out where yours would likely trade, figure out what .05 through mid-market would be on the puts and translate it to an equivalent call price using put/call parity. While there may not be a bid or offer displayed at that price, there is a good chance an electronic trading firm will take the other side once you show it.
 
TskTsk said:
Just a question, how far out are your SPY/IMW butterflies? Because if VIX spikes, Aug vix will lag behind as the whole structure goes into backwardation, so you wont see much profit to offset losses if your SPY/IMW vol exposure is closer than Aug.
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A month out. I'm interested in using further OTM VIX options, using them as temporary volatility hedges in the short term and cashing them in if the market moves violently against my position, or holding them if they go down in value and start losing money, until they become profitable again. I'm fine with the lag. It comes with the territory. I'm more concerned about liquidity and getting filled quickly should I need to close out the position fast. BTW I'm still using a demo, not playing with real money yet until I've polished my strategy and it's ready to roll live.
 
darkshogun said:
A month out. I'm interested in using further OTM VIX options, using them as temporary volatility hedges in the short term and cashing them in if the market moves violently against my position, or holding them if they go down in value and start losing money, until they become profitable again. I'm fine with the lag. It comes with the territory. I'm more concerned about liquidity and getting filled quickly should I need to close out the position fast. BTW I'm still using a demo, not playing with real money yet until I've polished my strategy and it's ready to roll live.
More...

I think what Tsk is saying is that in the event where you need to close it fast (i.e., because it spikes, and your other positions went against you) that you will be facing both wide spreads and much lower prices than you are expecting. Everyone expects mean reversion in the VIX, so a spike now is not going to affect Aug very much. Put another way, when/if you need to close it fast, doing so will likely not provide the hedge you are looking for.
 
The lower volatility of VIX futures in far months has little to do with mean reversion and more with term structure of skew. In short, most of the volatility of VIX futures (the underlying for VIX options) comes from the volatility of SPX - as the spot moves, it "slides" along the skew and chances the price of the fair forward variance swap that in turn determines the price of the VIX futures.

VIX+SPX volatility complex is pretty awesome - there are almost always some sort of opportunity hiding in there. Throw in VIX ETFs (especially the leveraged ones) and it gets especially fun.
 
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