Suggestion to the CBOE

[nitro]

Invent a product that tracks only the ATM volatility of all option-able equities for the front two month expiry options. So it is a product that doesn't need to be rolled as the underlying moves, and is constantly exposed just to the ATM vola.

The problem it solves is this. The underlying is trading at say 50. Among others, there are option strikes at 47.5, 50.0, and 52.5 trade-able for this underlying. Say you buy the 47.5 put, the 52.5 call. So you are long the ATM strangle. Now the underlying moves to $53. You are no longer just exposed to the ATM vola and you have to worry about underlying (delta) exposure. If there was a product that continuously made a market in the ATM vola, this would solve this problem.

 

[nitro]

Imo this would revolutionize volatility trading for the retail trader the way that penny pilot is revolutionizing vanilla option trading for the retail trader.

 

[total_keops]

It is an interesting concept but I am not sure it make any sense.
What is the faire value of this thing? Because this ATM vol does not exist. So you can't look at ATM historical vol to set the fair value price because the ATM options dont exist most of the time, unless that really are ATM (strike 75, price 75). You only have close to the money options to set the historical FV.

 

[nitro]

Quote from total_keops:

It is an interesting concept but I am not sure it make any sense.
What is the faire value of this thing? Because this ATM vol does not exist. So you can't look at ATM historical vol to set the fair value price because the ATM options dont exist most of the time, unless that really are ATM (strike 75, price 75). You only have close to the money options to set the historical FV.

It is not hard to compute. Take the ATM forward "strike", compute implied vola of that "strike".

All of that is precisely defined. It would be kept in line by arbs against the ATM call and ATM put.

 

[cvds16]

retail traders would not be interested in this stuff, only certain pro's would, it will never fly ...

 

[nitro]

Quote from cvds16:

retail traders would not be interested in this stuff, only certain pro's would, it will never fly ...

Retail traders are interested in trading options and futures on VIX, those two being inherently far more complex than the "continous" ATM forward vola.

What it does is it allows pure volatility trading without having to constantly worry about delta exposure as the underlying moves from the "position ATM strike" when you try to simulate it by using vanilla options. It is a poor mans volatility swap.

 

[gkishot]

Quote from nitro:

Retail traders are interested in trading options and futures on VIX, those two being inherently far more complex than the "continous" ATM forward vola.

What it does is it allows pure volatility trading without having to constantly worry about delta exposure as the underlying moves from the "position ATM strike" when you try to simulate it by using vanilla options. It is a poor mans variance swap.

Options with further out expiration can help you out.

 

[nitro]

Quote from gkishot:

Options with further out expiration can help you out.

Huh?

How does an option with further out expiration help? I want exposure to front month vola only, or next month out vola only. What does this have to do with any other month?

 

[cvds16]

retail people trading options on the vix are either gamblers pur sang or not your average retail trader. I used to be a market maker in equity options and I would hardly dare to touch those options ...

 

[nitro]

Quote from cvds16:

retail people trading options on the vix are either gamblers pur sang or not your average retail trader. I used to be a market maker in equity options and I would hardly dare to touch those options ...

Well I agree that trading options on VIX is hard. But the fact that retail traders flock to it, you are making my argument, not refuting it.

In fact, using this proposed product to trade only the volatility component of options and removing PnL from the directional moves the underlying (intrinsic value) may make would make it less gambling imo, not more.

Options are often touted by marketers as exposure to volatility as an asset class, when in fact all they are mostly used for is for leverage or insurance. This would open them up to the ultimate way to trade them.