Long vol through short ITM VIX puts
- Thread starter guspenskiy13
- Start date
Quick update - interesting vol observations.
At roughly ~30 trading days until expiration, /VX May appears to be extremely cheap (13.48 at the moment). The 5th percentile at this DTE is 14.6.
I've looked at the distribution of /VX prices at this DTE and it looks quite interesting:
Current M2 price is the second lowest in recent history, also notice the gap between high 12s all the way up to 14+. The absolute lowest /VX price @ 30 DTE happened to be for /VXQ4 (August 2014). I've marked the occurrence:
It also happens to coincide, that in March we have reached the record of 4 consecutive VIX settlements sub-13; just like in 2014:
It seems important to me to focus on the /VX prices relative to DTE, instead of simply using the averages for each M1/M2/etc. Because a situation when M2 is @13 right before the roll is quite different, when M2 is @13 with 20 days prior to the roll.
These are just observations, but it is clear that the VIX complex is very, very cheap - in a combination of the price values and VVIX. And this is not just M2 (May) - the August contract, which currently trades @15.54 - is 1 point below the 5th percentile of all values. Interestingly enough, all of the three lowest prices for this DTE happen to be for: /VXX4, /VXZ4 and /VXF5 (11/14, 12/14, 01/15) - all around the low vol of summer 2014. Two of them haven't seen prices below of 14.7.
Overall, the prices are at extreme lows all around the curve. Let's see, how it plays out.
At roughly ~30 trading days until expiration, /VX May appears to be extremely cheap (13.48 at the moment). The 5th percentile at this DTE is 14.6.
I've looked at the distribution of /VX prices at this DTE and it looks quite interesting:
Current M2 price is the second lowest in recent history, also notice the gap between high 12s all the way up to 14+. The absolute lowest /VX price @ 30 DTE happened to be for /VXQ4 (August 2014). I've marked the occurrence:
It also happens to coincide, that in March we have reached the record of 4 consecutive VIX settlements sub-13; just like in 2014:
It seems important to me to focus on the /VX prices relative to DTE, instead of simply using the averages for each M1/M2/etc. Because a situation when M2 is @13 right before the roll is quite different, when M2 is @13 with 20 days prior to the roll.
These are just observations, but it is clear that the VIX complex is very, very cheap - in a combination of the price values and VVIX. And this is not just M2 (May) - the August contract, which currently trades @15.54 - is 1 point below the 5th percentile of all values. Interestingly enough, all of the three lowest prices for this DTE happen to be for: /VXX4, /VXZ4 and /VXF5 (11/14, 12/14, 01/15) - all around the low vol of summer 2014. Two of them haven't seen prices below of 14.7.
Overall, the prices are at extreme lows all around the curve. Let's see, how it plays out.
Just ignoring roll down and gamma for a moment, what if he shorted the vix put and held it through the eventual spike in vega? If he sizes his position properly and buys maybe a tiny amount of vix calls in case of a disaster, would he be able to survive? I'm asking because the vix vega seems to drop within a week or two after the event. Unless we have another 2008...
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I'm not really sure what type of conditions and VIX Put prices do you imply, that you would need to 'survive'. The highest price of 13P over the past year ~ 1.9; achieved on the settlement day.
One way or another, /VX has a floor and holding to expiration is just a bet on the settlement price. Closing out earlier, if an opportunity presents itself - would likely perform better, as 3-5 days prior to VIXpiration tend to be bloody for long-VX.
Just looking empirically at some examples...
9/7/2016: /VXU6 @13.24; 13P @0.50
9/9/2016: /VXU6 @16.45; 13P @0.15
I don't know, whether it's a mispricing or something else; but when I see VIX 12P trade @0.7...there must be something wrong.
I'm talking about the increase in Vix vega in the event of a crash. A 0.05 Vix option can be worth 10.00 in a crash. If vol of vol spikes, the value of otm puts will increase as well. I believe that is what sle is referring to in his previous posts.
Crash of the market and VIX spike, or crash of the VIX/VX down to 10s? Not sure I'm following, as I've said - we must be talking about different things.
A VIX 12P simly can't be worth more, than $2.00 at the settlement - which would imply settlement at 10.00.
See above. It's less about them blowing up and more about them not losing value as fast as the delta implies (so you don't get that happy feeling on a vol spike).
As I've said in the example above, it depends on the /VX Month and DTE, plus the price you've sold it at.
It just seems, that people want to be "rewarded @100%" with the correct timing of VIX spike; thus, suggest using long calls and paying premium for them.
Well, timing a VIX spike is foolish in this environment, at least for now. We can just look at /VX May, which is extremely cheap.
12P @0.5 bid (11.5 b/e @settlement)
14C @1.3 ask (15.3 b/e @settlement)
At expiration or not - I personally see a much higher expectancy for selling the 12P @0.5. The odds are in your favor and you can do it with size.
Current probability of expiring <11.5 (assume max loss): 4%
Current probability of expiring >12.0 (assume max gain): 92%