SPX Credit Spread Trader

I think one other thing to keep in mind is that VIX options are priced based on the VIX futures contract and NOT the VIX index. The future will expire at the vix index price, but the further out until expiration, the future typically trades at a significant premium to the spot vix.

for example, spot vix is 10. some unexpected event occurs and vix jumps to 25. So you say to yourself, "self, I just made BANK", right? Hang on a second, the vix future was trading at 16, and you only have a 9 point increase instead of the 15 pointer you originally thought. FYI
 
Pimp,

I do not think that is correct. Here is the info from the CBOE:

"CBOE VOLATILITY INDEX® (VIX®) OPTIONS
Symbol:
VIX

Underlying:
The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index."

Also, we are talking about major spikes in VIX due to nasty major drops in the market. So a spike to 20 is like post-Katrina. A spike to 80 is like post 9-11 which is what this insures against.
 
Anyway,

Coach, thank you for the Plan.

And you better stop disclosing such valuable info here or you put many pros out of business :D
 
coach,

i read an article when the vix options first came out regarding their use and the number one reason was hedging portfolios from 9/11 type events. Also, in that article there was an interview with some of the biggest hedge fund managers and they advised using these options for long term protection just like you specified in your post. In fact they said that this would probably be the ONLY use for these options.

I havent looked into it closely but it would seem that if a person is commited to this strategy like you are and opening put spreads month after month, it would make more sense to pay out the insurance for the whole year upfront, rather than do it month after month. For example, may 20 calls are .30 with 42 days of protection when the aug are .60 with 133 days of protection (2 times more expensive, 3 times the protection). Just an observation. If i was using a strategy like yours, i'd definitely use this insurance as it would guarantee my survival in a market crash because the next one is coming, it always happens, its just a matter of when.


I think this hedge is a major help for this strategy as the other hedges would only work with a gradual decline. I havent done any actual calculations but i would also agree that your put spreads would be covered or almost covered in a market crash.


Selling FOTM SPX spreads - $.80 ctredit.
Ensuring my peaceful sleep at night - PRICELESS :D
 
Quote from optioncoach:

Well if someone else did not share I would not have known. My advice is keep it within this Journal so only we know LOL....

Shhhhhhhhhhh
More...

now watch the VIX options premiums sky rocket within a few days as demand surges.

Barron's over the weekend has a cover:

"Demand for VIX options surges as forum junkies unveil a hedge secret"
 
Thanks! I will look into it. Even so, we are talking about spikes up to the 40s to 80s on major nasty nasty crashes and those few points will not change the end result we are trying to get at.

:D

Quote from dojiboy007:

Pimp,

I do not think that is correct.


Pimp is correct. There is a webcast at www.cboe.com that deals with this exact topic.
More...
 
Here is the most relevant answer that PIMP was alluding to and thanks PIMP for pointing that out. It is not based on VIX futures and that is why I though the info is incorrect. It is based on FORWARD estiamtes of VIX:

5. Will VIX options always reflect current, real-time, VIX values?

Probably not, at least not until you get close to expiration. The underlying for VIX options is the expected, or forward, value of VIX at expiration, rather than the current, or "spot" VIX value. This forward value is estimated using the price quotations of SPX options that will be used to calculate the exercise settlement value for VIX on the expiration date, and not the options used to calculate spot VIX. For example, VIX options expiring in May 2006 will be based on SPX options expiring 30 days later - i.e.; June 2006 SPX series. In fact, June SPX options do not even enter into the spot VIX calculation until April 17, 2006.

VIX option prices should reflect the forward value of VIX, which is typically not as volatile as spot VIX. For instance, if spot VIX experienced a big up move, call option prices might not increase as much as one would expect. Depending on the value of forward VIX, call prices might not rise at all, or could even fall! As time passes, the options used to calculate spot VIX gradually converge with the options used to estimate forward VIX. Finally, at VIX options expiration, the SPX options used to calculate VIX are the same as the SPX options used to calculate the exercise settlement value for VIX options.
 
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