OCs Implied Volatility Trading Journal

uglyboy,

you cannot model vix options PnL scenarios using any of the conventional software packages out there. The graph that you have posted is wrong. I have traded vix options since May and i can guarantee you the PnL graph of your trade is quite different in practice. There is a ton of negative edge in the trade you posted. If the VIX spikes to 18-20, you will be losing your shirt. Ok, maybe not your shirt but you will lose atleast 5 handles on the short calls while your longs gain a couple at best. When you compare that to the rewards, you will see what i am talking about.

I am yet to find a software package that models vix options properly due to the forward variance embedded in them. If you must trade these spreads I suggest sticking to being long in the front months and short in the back months at these levels. Or better yet, just do SPX put backspreads.

Good luck.
 
rally, thanks for your insight. I've been trying to get the optionvue people to give me a straight answer about modelling VIX options. Do you have any papers/models that help?

Not that it invalidates your point in the least, but I bought the longs over the last week (vol of VIX lower) and have just started selling shorts today (higher vol of VIX), so the damage probably is minimal - so far.

I've been looking at these things thro' the historical data set I have. I'm thinking about selling otm puts in the same months I'm long (synthetic long). Any advice on the reasonableness of this?

What has been your impression of how these trade? Particulary, how about just holding a simple long posiotion (OTM and ATM with near to far expiries)?

Thanks,

Ugly
 
Quote from uglyboy:

rally, thanks for your insight. I've been trying to get the optionvue people to give me a straight answer about modelling VIX options. Do you have any papers/models that help?
A straight answer? Most of them may not even know what vix futures are. LOL
To answer your question. No i do not. No retail software can currently do this and a few professional ones i've seen cant model it either unless you solve for the tenor skew and the forward variance. Perhaps, someone can share if they know of any. I havent seen it. To understand how to model these you need to understand the vix futures term structure and how they are priced.

What has been your impression of how these trade? Particulary, how about just holding a simple long posiotion (OTM and ATM with near to far expiries)?
I see nothing wrong with this besides a slightly negative edge compared to the spx options. The VIX paper gets priced off the VIX futures and those rarely move in isolation of the SPX price even when VIX spot indicates otherwise. Also, the further out you go, the less volatility you will see is implied by the futures ergo the lesser gearing of the back month options. So if you simply want to go long calls or puts, you might be better off with the SPX.
More...
 
I got out of the Vix options over the last couple of days with a 20% net profit. Lucky, lucky, lucky.

Rally, you were right about their behavior, it didn't conform well with my model's predictions. OptionVue has maintained radio silence on this issue...

I think that I'll stay away from these 'til I've learned a lot more about them. I learned a lot just watching the behavior of my various calls and shorts...I suppose there is some intuitive sense to the "forward variance" - as VIX rises, the likelihood of them rising more declines, thus the otm values don't rise as much as you would "expect". Does that make sense?

Thanks for your input,

Ugly
 
Coach,

I'm working on these strategies as well. Here's my two cents:

1. These can be done for theta ie., choosing the long months well beyond the expected earnings dates. You then use the nearer term vol spikes to roll (sell calendars) and collect more premium. The ratio of long to short would be lower than under scenario 2 below. The ratioing would be used just to raise the sides of the risk graphs in extreme moves. This feels more like a calendar with some wings.

2. Mostly vega oriented. Buy longs in the month most likely to surge from IV spike - the first expiry after the event. Here I expect to sell the smalles number of straddles that will give me more or less neutral theta. I'm using theta to buy vega.

The question becomes: what option, if any, do you maintain as short just prior to the event date. Example: Earnings to be announced Feb 10. You want to be long the Feb straddle. There are no interim months to sell to maintain positive theta, so do you suck it up and pay the vig between Jan expiration and the earnings date?

I'm looking at these quite seriously lately. Any comments appreciated.
 
Coach,

I did DNA as well. I was short Jan and long March with the intention of exiting prior to earnings (which I did today). I found that I should have bought Jan - or even Feb's.

the IV on my short Jan's went from 20% to 36% while the IV's on my long March's went from 25% to 27%. Overall, I broke even and made lots of money for TOS. (I had origianally sold December and rolled to Jans for a decent credit.)

By comparison, the Febs were at IV's of 29%

Thoughts?
 
Hi there OC,
I would like to know how you screen for stocks that you use for your RCD trades? Do you use platinum software. It would be helpful as well for us to know the preselection process that you use to filter out stocks before you consider them for the trade.
Thanks
 
Sorry for the delay as I I have been prety busy lately. One downside to this strategy that I find which has to be adjusted is getting in too early without waiting for the option series of the month where the earnings will be announced to open up. WHen I opened some of these up in NOV, the JAN series and FEB series were not listed and that is when the earnings were being announced. Therefore, the long months in MAR or APR do not see as much vol increase whereas if you short a month where the earnings come, the vols can spike.

The way I handle this is that when I roll from the DECs forward, in this example, I wait for earnings to get closer to sell the inflated IV. SO you cannot just roll immediately knowing earnings is coming in JAN, for example. Best to wait as earnings approaches and sell that month short right before earnings to get the highest infalted IV as possible and then profit from the crush more than you get hurt in the later months.

My advice on these as I have learned, is to wait until earnings are close before putting on the position and sell the shorts when IV gets ramped up. Otherwise you suffer weeks of theta as I have seen in my positions waiting for the IV ramp up.

So the better time to add these is around 6 weeks after the earnings announcement where IVs crush and 6 weeks before the next earnings announcement where IVS begin to pick up again. Err on the side of waiting an extra week or two. I am trying to test this now on historical charts which is not the best way but at elast you avoid a lot of theta time decay.


Quote from Eric99:

Coach,

I did DNA as well. I was short Jan and long March with the intention of exiting prior to earnings (which I did today). I found that I should have bought Jan - or even Feb's.

the IV on my short Jan's went from 20% to 36% while the IV's on my long March's went from 25% to 27%. Overall, I broke even and made lots of money for TOS. (I had origianally sold December and rolled to Jans for a decent credit.)

By comparison, the Febs were at IV's of 29%

Thoughts?
More...
 
I find that the IV's drop to its possible lowest within the first 48-72 hrs post earnings and when entering the trade during this time if we are vega heavy the trade should ride on the slight rise of the IV's in the longs. in the risk graphs of the ratio diagonals your theta zones for profit is slightly out of the money and the stk would need to drift towards the strk price of the shorts to make theta money. have you tried using the PCCRC's that Juan uses? its not as vega heavy but if the stock gaps in any direction post earnings it may stay in that zone for a while and you can collect some theta from the shorts there. if not the only time the position is hurt is IV crush or the trade drift into the saggy bottom of the risk graph depending on whether you are bulllish or bearish in the positioning arcitecture.
 
MASCO (MAS) has nice vol skew between FEB and MAR expiration months. Earnings to be released on Feb 14th (feel the love).

Decided to do a SMALL double calendar since it was so cheap to test the waters:


STO 5 FEB $30 Puts @ $0.30 (62% IV)

STO 5 FEB $35 Calls @ $0.40 (56% IV)

BTO 5 MAR $30 Puts @ $0.50 (35% IV)

BTO 5 MAR $35 Calls @ $0.65 (33% IV)

Net Debit = $225

Max Reward (modelled on vol estimates) = ~ $400

Expiration breakeven points (modelled) are ~$28 & $38 but this does not take into account different vol changes in MAR after news so take it with a grain of salt.
 
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