IV increase of SPX otm puts

B

ben111

Hello,

for the last weeks/months there was always an increase in implied volatility of the SPX (deep) otm puts as market went continuously up.
The slope of the vol curve steepens with time decay.
e.g. IV of SPX May10 1065 put increased over the the last four months about 10%.

Is there any possibility to hedge the IV increase of that put?

Thanks and regards
 
The IV of the 1065 put increased over the past 4 months because the market went up and the put moved along the skew curve (i.e. it is now further OTM than it was 4 months ago).

To partially hedge it you can convert the put into a put spread.
 
Quote from ben111:
----an increase in implied volatility of the SPX (deep) otm puts as market went continuously up.
----The slope of the vol curve steepens with time decay.
----IV of SPX May10 1065 put increased over the the last four months about 10%.
----Is there any possibility to hedge the IV increase of that put?

Thanks and regards
More...
1) You have "small" premiums that barely budge with the upside price movement. The implied volatility would increase in order for the premium to remain firm.
2) If you feel like doing some "heavy thinking", you may be able to hedge somehow with VIX options. :cool:
 
Quote from nazzdack:

1) You have "small" premiums that barely budge with the upside price movement. The implied volatility would increase in order for the premium to remain firm.
2) If you feel like doing some "heavy thinking", you may be able to hedge somehow with VIX options. :cool:
More...

There are many potential ways to play the VIX futures and options against the SPX futures and options. Hedging implied vols in the teenies is not one of them.

When you get far enough OTM, the options stop being functions of volatilty and become moreso a function of capital requirements. Traders pay nickels and dimes (or more) for worthless puts so that they can lower their haircut, and thus make a return doing something else with that capital.
 
My preference is to stay away from VIX options unless its in the final week before expiration when their moneyness is more standardized.
 
Thanks for all your replies!!

Hedging with VIX doesn't work. The VIX mustn't behave like the IV of the deep otm puts. It happens often that VIX decreases and at the sametime IV of SPX otm puts increase :-(

Another question about pricing SPX options correctly:
Is there any dividend in the SPX index?
Where can I get information about how high it is and are the options priced with continuous cash payout?

Thanks
 
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