I agree... And thanks for taking one for the team.
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
I agree... And thanks for taking one for the team.
Looking at these charts I still dont believe that the vix will jump more than 100% within a 30 day window('87 crash notwithstanding), and even if it does i think the MM's will skew the pricing but like you two said, lets not beat that horse any more. And as far as the next black swan event, i am sure it will happen, i just dont know when. Let's hope you are not in put spreads when it does.
hmmmmmmmmmm
sell 100 1220-1230 may put spreads at 0.3 (n/a-1.15) $3,000
buy 100 vix may call spreads 17.5-20 @ 0.15 (n/a-0.2)
************may 1st********black swan**********
vix to 25
get intrinsic -30% (1.75-.15)*100 = $16,000
vix falls back to 15
spx bounces back
~19% on margin - comm
good month
sell 100 1220-1230 may put spreads at 0.3 (n/a-1.15) $3,000
buy 100 vix may call spreads 17.5-20 @ 0.15 (n/a-0.2)
************may 1st********black swan**********
vix to 25
get intrinsic -30% (1.75-.15)*100 = $16,000
vix falls back to 15
spx bounces back
~19% on margin - comm
good month
Rallymmode:
I am confused because your charts DO show that VIX can jump 100% or close to it in 1998, 2000, 2001 and 2002...
It stays low in bullish trends (1990s) but in the few years we a huge fall occurs, I want to have some insurance to protect my account somewhat
Since I cannot predict Black Swan events there is a good chance I will be in a put spread so the VIX options are one means to provide some insurance. The slightly OTM calls will increase in value, how much is the unknown. But purchasing them for $0.30 leaves a lot of room.
I am confused because your charts DO show that VIX can jump 100% or close to it in 1998, 2000, 2001 and 2002...
It stays low in bullish trends (1990s) but in the few years we a huge fall occurs, I want to have some insurance to protect my account somewhat
Since I cannot predict Black Swan events there is a good chance I will be in a put spread so the VIX options are one means to provide some insurance. The slightly OTM calls will increase in value, how much is the unknown. But purchasing them for $0.30 leaves a lot of room
.I never said 100% arent possible but coach, 100% will net you a few bucks at best, is that going to be enough to cover your spreads?Quote from optioncoach:
I am confused because your charts DO show that VIX can jump 100% or close to it in 1998, 2000, 2001 and 2002...
To cover your loss, you need more like a 200-300% jump.
combining the puts and the vix options would perhaps be the best way(but quite expensive month after month), in which case you would rather see a black swan event that is as severe as possible because the more the SPX drops, the more you make on your puts while your long strike within the spread will limit your losses on the spread.
so when the black swan happens, you would want it to be aka '87 and not just 9/11
Ahhhh but we are speaking apples and oranges here. A VIX move to 20% from 11% is not a Black Swan event... Post-Katrina had VIX up to close to 20 and the market really did not crash all at once are even immediately
Remember we are talking BLACK SWAN EVENT. If a dirty bomb goes off or a series of subway bombs explode across the United States, the market could drop sharply and VIX could seriously spike. I am talking about 5% SPX drops in days (~60 points). Or a 1987 or July 2002 scenario occurs and VIX could hit 30 very fast (200% increase). You have to realize the kind of crash we are talking about insuring here.
Also, I never meant to imply 100% coverage on your position. If all I get is a few dollars of movement, I could bring in $40,000 from the VIX. Assume I had to take an $90,000 hit to get out of my position on $300,000 spread. That is a HUGE hedge. Also if I convert my position into a Prego FLY (Skip strike FLY) and my net debit is $50,000, then the VIX hedge makes the position a marginal loser as opposed to a huge potential loss. This is what a hedge does.
You cannot dismiss a few dollars of profit on 100+ contracts. A $40,000 profit can finance an adjustment or take a huge chunk out of loss and allow you to recover much faster. No hedge is perfect in this strategy but for huge stomach turning ccrashes, a VIX spike is almost guaranteed. What is unknown is the value of the deep ITM calls on such a spike. But even a few dollars is huge given the $0.30 cost
Risk management is key. If I could hedge completely my spreads, well they would be risk free and earn 4.50% a year. The point is to reduce or limit losses on severe market crashes. When I mean severe I mean SEVERE fat tailed events that are completely unexpected. Unexpected events cause volatility to spike (1998, 2001, 2002). Those are the times when insurance is needed.
Looking at past sharp crashes, VIX spiked 100% at a minimum but we are in a new VIX environmen right now. We are no longer at 40% but at 11%. I think the leap up in VIX on terrorist activity or severe economic news will result in greater than 100% spikes. We could see spikes to 40 in days.
I am not pushing for a specific right or wrong answer. Just the opinion that a severe IV spike is a given on a black swan event and that is the only event which could damage my positions and I think I now have a way to reduce those effects somewhat
EDIT: Since tone is hard to pick up from writings, I want to let you know that I take this as an enjoyable debate on an issue and open discussion and not an argument to get to a right or wrong answer. Just want to be clear since tone is not easy to pick up
Remember we are talking BLACK SWAN EVENT. If a dirty bomb goes off or a series of subway bombs explode across the United States, the market could drop sharply and VIX could seriously spike. I am talking about 5% SPX drops in days (~60 points). Or a 1987 or July 2002 scenario occurs and VIX could hit 30 very fast (200% increase). You have to realize the kind of crash we are talking about insuring here.
Also, I never meant to imply 100% coverage on your position. If all I get is a few dollars of movement, I could bring in $40,000 from the VIX. Assume I had to take an $90,000 hit to get out of my position on $300,000 spread. That is a HUGE hedge. Also if I convert my position into a Prego FLY (Skip strike FLY) and my net debit is $50,000, then the VIX hedge makes the position a marginal loser as opposed to a huge potential loss. This is what a hedge does.
You cannot dismiss a few dollars of profit on 100+ contracts. A $40,000 profit can finance an adjustment or take a huge chunk out of loss and allow you to recover much faster. No hedge is perfect in this strategy but for huge stomach turning ccrashes, a VIX spike is almost guaranteed. What is unknown is the value of the deep ITM calls on such a spike. But even a few dollars is huge given the $0.30 cost
Risk management is key. If I could hedge completely my spreads, well they would be risk free and earn 4.50% a year
. The point is to reduce or limit losses on severe market crashes. When I mean severe I mean SEVERE fat tailed events that are completely unexpected. Unexpected events cause volatility to spike (1998, 2001, 2002). Those are the times when insurance is needed.Looking at past sharp crashes, VIX spiked 100% at a minimum but we are in a new VIX environmen right now. We are no longer at 40% but at 11%. I think the leap up in VIX on terrorist activity or severe economic news will result in greater than 100% spikes. We could see spikes to 40 in days.
I am not pushing for a specific right or wrong answer. Just the opinion that a severe IV spike is a given on a black swan event and that is the only event which could damage my positions and I think I now have a way to reduce those effects somewhat
EDIT: Since tone is hard to pick up from writings, I want to let you know that I take this as an enjoyable debate on an issue and open discussion and not an argument to get to a right or wrong answer. Just want to be clear since tone is not easy to pick up
The real question posed here is if you own the MAY 17.50 Call at $0.30 and VIX spikes to 30%, will the Call be worth something close to intrinsic value or be discounted heavily for future expectation of VIX pullback.
It would be worth intrinsic value + same-strike-put + carry based upon the print on the matching tenor in VBI futures.
I meant to delete my last as I was quoting stale quotes when looking at the atm parity example. If the options are priced to futures then the pricing is a simple matter. If priced to cash it would be very difficult to price these options and would reflect the local vol swap rates. The added valuation uncertainty would likely add a risk premium to the options. A move on VIX to 40-50 would revert, but when? It's certainly plausible that the VIX synthetic contract(+/- 100d) would trade under cash VIX on a macro event, provided the options are priced to the cash strip with no fungible offset.
OT: The reason puts are discounted as tenors increase is due to the implied forward.
Cool..... now I am really looking forward to the English version. I am assuming that somewhere in there was the answer that it would be within a stone's throw of intrinsic....