Suggestion to the CBOE

[tomk96]

Quote from nitro:



Read the thread. The contract expires when the other options do. The contract is worth zero at expiration. It is by definition "pinned."

i missed the expiration part. but that makes your strangle and straddle worthless from the beginning. that's why i think you are looking for a futures type product. i think like the vix future and not the vix options.

that gives you vol exposure, no greeks, etc., however you can't really make them expire that the same time. vol goes to zero, so your future would go to zero if expiring on the same day. however having a different expir would still give you something to get the same exposure to vol.

 

[nitro]

Quote from JohnGreen:

Nitro, I really like your idea. Anything which allows a retail trader to simplify a process or customize his risk exposure is a good thing. In this case, if I were vega negative overall, I could simply choose to buy some calls to neutralize my exposure should I desire to do so.

It strikes me (bad pun, I know) that this is a far superior replacement product for the VIX, which many people think is a good hedge without realizing that the VIX does not really do exactly what they think it does.

To make this proposal more specific, I think the product should be index connected which would avoid the company specific blips related to earnings events. They could start with the SPX, using the closest put and call strikes in the nearest expiry month to calculate the volatility [suggested symbol SPXV] and expand it to the NDX, using the same methodology [suggested symbol NDXV] and the Russel 2000 [suggested symbol RUTV] when the demand arrives.

I would suggest that the product would be best to have the strikes set for one or two percentage point intervals. Right now the IV is about 21%, so they could start with a range between 15 and 30 having puts and calls. It would also be best if the product was European style, with the exact same expiry as the SPX, and obviously it would need to be cash settled.

Market makers in the new product could buy and sell ATM straddles in the underlying to reduce or increase their option positions depending on their position in the new product. This could be a bit tricky at times for them, but if the pits were connected, it shouldn't be much of a problem given the large volume of trading in SPX.

Yeah I like the idea too, but if it can't be hedged, all it does is turn underlying directional exposure into vola directional exposure. That may not be a bad product even with this flaw, but it would have to be understood that there did not exist a like contract hedge for the product.

If people did not mind that there was no direct hedge of this product, it would be extremely useful trading venue, imo.

 

[heech]

Quote from nitro:

Yeah I like the idea too, but if it can't be hedged, all it does is turn underlying directional exposure into vola directional exposure. That may not be a bad product, but it would have to be understood that there did not exist a like contract hedge for the product.

If people did not mind that there was no direct hedge of this product, it would be extremely useful trading venue, imo.

Just to be clear, I don't have a problem with the product. Like I said, I'd certainly use it. But I've just been looking at too many dead products recently... look at CBOE's VT, for example.

My belief is that a product won't succeed unless:

a) there's an arb-identical product with very high liquidity,
b) there's some *huge* unfulfilled pent-up demand/supply for this product.

By way of comparison, I think VIX futures are huge successes because it has both A and B. I think individual VIX futures are more difficult because it lacks A, and B is probably less pressing.

 

[nitro]

Quote from tomk96:

i missed the expiration part. but that makes your strangle and straddle worthless from the beginning. that's why i think you are looking for a futures type product. i think like the vix future and not the vix options.

that gives you vol exposure, no greeks, etc., however you can't really make them expire that the same time. vol goes to zero, so your future would go to zero if expiring on the same day. however having a different expir would still give you something to get the same exposure to vol.

So you are saying, don't do a CATMFS product, make it an index like the DOW that doesn't trade, and then do a futures on that index like YM on the DOW index.

Hmmm, that may work I have to think it through. My initial reaction is that all that does is hide in complexity, that this future on the CATMFS index is just exposure to directional vola moves. No different than my originally proposal. For example, there is no way to hedge this product either with a like contract. I guess you can have options on that future, but now this has gotten really messy. Still it may be a neat product.

 

[nitro]

Quote from nitro:

So you are saying, don't do a CATMFS product, make it an index like the DOW that doesn't trade, and then do a futures on that index like YM on the DOW index.

Hmmm, that may work I have to think it through. My initial reaction is that all that does is hide in complexity, that this future on the CATMFS index is just exposure to directional vola moves. No different than my originally proposal. For example, there is no way to hedge this product either with a like contract. I guess you can have options on that future, but now this has gotten really messy. Still it may be a neat product.

Maybe there is absolutely nothing wrong with this product, and the only thing we have to change is, "Suggestion to the CME" not "Suggestion to the CBOE". These would be Single Stock continous ATMF straddle index futures. A mouthful, but a badly needed product.

The product does exactly what I want it to do, directional exposure to vola without "underlying" (underlying of the underlying of the index) exposure.

 

[tomk96]

Quote from nitro:

Maybe there is absolutely nothing wrong with this product, and the only thing we have to change is, "Suggestion to the CME" not "Suggestion to the CBOE". These would be Single Stock continous ATMF straddle index futures. A mouthful, but a badly needed product.

The product does exactly what I want it to do, directional exposure to vola without "underlying" (underlying of the underlying of the index) exposure.

actually, i think one chicago or whatever that trades the vix fut would be a better fit.

 

[heech]

Quote from tomk96:

actually, i think one chicago or whatever that trades the vix fut would be a better fit.

vix futures are traded at CBOE. OneChicago is for single stock futures, another great idea with cripplingly low liquidity and wide spreads.

 

[tomk96]

Quote from heech:

vix futures are traded at CBOE. OneChicago is for single stock futures, another great idea with cripplingly low liquidity and wide spreads.

i was drawing a blank. i forgot they are on the cfe.

 

[RedEyeFly]

Nitro, nice idea.

I do wonder, however, if the product is so perfectly correlated to vola, and this has historically returned to a mean level, what would keep the product from getting distorted or over sold by the biggest money on the street. This could force a reverse hedge to the underlying ATM instruments and cause usual pricing in the ATM which would then be forced to trade this off somewhere in the market. Sounds like this could be problematic in fast markets like the VIX expiration of OCT 08.

Otherwise, its an interesting study. Retail traders could locally do the same with a gamma neutral options position which is made delta neutral by use of the underlying, but as aforementioned, it'll only remain neutral over a near set of strikes.

Could be neat to play this off a back month or leap set, or consider long your vola instrument and long calls - basically a vertical or diagonal back spread, but interesting and easier to understand.

 

[nitro]

Quote from RedEyeFly:

Nitro, nice idea.

I do wonder, however, if the product is so perfectly correlated to vola, and this has historically returned to a mean level, what would keep the product from getting distorted or over sold by the biggest money on the street. This could force a reverse hedge to the underlying ATM instruments and cause usual pricing in the ATM which would then be forced to trade this off somewhere in the market. Sounds like this could be problematic in fast markets like the VIX expiration of OCT 08.

Otherwise, its an interesting study. Retail traders could locally do the same with a gamma neutral options position which is made delta neutral by use of the underlying, but as aforementioned, it'll only remain neutral over a near set of strikes.

Could be neat to play this off a back month or leap set, or consider long your vola instrument and long calls - basically a vertical or diagonal back spread, but interesting and easier to understand.

All good comments.