If VIX is a measure of implied volatility in S&P options...

[Saltynuts]

Wouldnt the obvious strategy be the buy options, probably super long term ones, when VIX is low, and sell them when VIX is high? Anyone know of any studies on this? Thanks.

 

[Saltynuts]

By the way, for you experienced option guys, do yall know a pretty high correlation between VIX prices and options on individual stocks, as opposed to the S&P? Thanks.

 

[Scataphagos]

Any trader with half-a-brain understands the best and easiest trade would be to "buy the VIX when it's cheap, then sell when it spikes". Problem... you can't simply buy the VIX. You have to buy some other "VIX-based derivative"... all of which are subject to time decay.

 

[Saltynuts]

Any trader with half-a-brain understands the best and easiest trade would be to "buy the VIX when it's cheap and sell when it spikes". Problem... you can't buy the VIX. You have to buy some other "VIX-based vehicle"... all of which are subject to time decay.

Sorry, i wasnt clear. I was talking about buying and selling options on the s&p500, as this is what the VIX is tied to.

 

[Lee-]

VIX options aren't cheap, but the bigger problem with your idea is the fact that they're european style, which makes timing very difficult. In case you're not familiar, american style options can be exercised anytime whereas european can only be exercised on the expiration date. The impact of this is huge when it comes to market timing.

Consider the impacts on a stock option:
Stock is at $100, buy $120 strike calls with 3 month expiration. Stock rallies a week later for some reason, it's at $130 now. Those options now have $10 of intrinsic value + IV. However, if they were european style exercise and the market expected the price to come down prior to expiration, then the price of the option may not move much if at all -- and this is the primary issue with VIX options timing.

Generally VIX spikes are temporary. So if you bought a call option 3 months out, and VIX spikes the next day, your options probably won't move much in value at all because the market will expect the spike will have subsided by expiration.

So how do you solve the timing issue? Buying tons of options with different expirations, but once you start adding up the cost, you'll find that it would take a massive VIX spike just to break even. What happens if it doesn't come for months or years? Sure you may get a pay day 3 years from now, but if you run out of cash before then, you're screwed. People with deep pockets and strong stomachs can afford such a strategy.

 

[Saltynuts]

haha Lee, i fooled you too! i was referring to s&p options. buying then when vix is low, selling when high, trying to remain as netral as possible over time.

 

[Lee-]

haha Lee, i fooled you too! i was referring to s&p options. buying then when vix is low, selling when high, trying to remain as netral as possible over time.

So buy low, sell high? Sounds like a great strategy!

 

[cdcaveman]

Naivity

 

[Scataphagos]

So buy low, sell high? Sounds like a great strategy!

I've heard of that.

 

[newwurldmn]

VIX options aren't cheap, but the bigger problem with your idea is the fact that they're european style, which makes timing very difficult. In case you're not familiar, american style options can be exercised anytime whereas european can only be exercised on the expiration date. The impact of this is huge when it comes to market timing.

Consider the impacts on a stock option:
Stock is at $100, buy $120 strike calls with 3 month expiration. Stock rallies a week later for some reason, it's at $130 now. Those options now have $10 of intrinsic value + IV. However, if they were european style exercise and the market expected the price to come down prior to expiration, then the price of the option may not move much if at all -- and this is the primary issue with VIX options timing.

Generally VIX spikes are temporary. So if you bought a call option 3 months out, and VIX spikes the next day, your options probably won't move much in value at all because the market will expect the spike will have subsided by expiration.

So how do you solve the timing issue? Buying tons of options with different expirations, but once you start adding up the cost, you'll find that it would take a massive VIX spike just to break even. What happens if it doesn't come for months or years? Sure you may get a pay day 3 years from now, but if you run out of cash before then, you're screwed. People with deep pockets and strong stomachs can afford such a strategy.

American vs European has nothing to do with anything.