Suggestion to the CBOE

[kxvid]

Nitro, what about basis?

You are assuming that the option contract would track ATM Volatility with no basis. In reality, this is impossible. The market would price the option at a premium or discount depending on the market expectations for the ATM Volatility of the underlying equity option contract. The basis spread would make it much less effective of a hedge.

 

[RedEyeFly]

If we can't swap vola, can we at least swap gamma?

 

[nitro]

Quote from kxvid:

Nitro, what about basis?

You are assuming that the option contract would track ATM Volatility with no basis. In reality, this is impossible. The market would price the option at a premium or discount depending on the market expectations for the ATM Volatility of the underlying equity option contract. The basis spread would make it much less effective of a hedge.

Well, how can there be a basis? If there were, there would be an arb by buying and selling the vanillas from which it is comprised, no? Any differences from the vanillas would have to be due to financing or some other weird thing that differentiated from vanilla options, I think.

 

[nitro]

Quote from cvds16:

my point remains though: unless done on an index you won't see critical volume in this because most retail traders won't touch it and even a lot of pro's won't trade it ... on an index might be good idea, but market makers might have a hard time trying to hedge this ... so it becomes a question of the chicken and the egg ... which comes first ...
EDIT: and like you said yourself this would probably be attacking an allready succesfull product: the vix ... not very likely the CBOE is going to do that ...

http://www.cboe.com/data/variancestrips/intro.aspx

 

[heech]

Quote from nitro:

http://www.cboe.com/data/variancestrips/intro.aspx

... wow.

Trading in SPX variance strips will be fully electronic. No quoting will be permitted; only “limit” and “day” orders will be accepted. Market and GTC orders will not be accepted.

...

And you ended up with a strip of options. I get the idea, and it makes sense in theory... but I mean, who wants to end up with a long strip of options (perhaps with far OTM stuff) they have to manage?

Say you sell 1 var strip on day 1... and end up with options ranging from 900-1400 in strike. Prices move down 5% over the next 5 week... and if you buy back 1 var strip, now you buy back.. what, 850-1350? So now you're long 850-900 and short 1350-1400?

 

[RedEyeFly]

Almost seems to be a product catered not toward traders but rather the banking industry.

 

[sle]

Quote from heech:

... wow.

Trading in SPX variance strips will be fully electronic. No quoting will be permitted; only “limit” and “day” orders will be accepted. Market and GTC orders will not be accepted.

...

And you ended up with a strip of options. I get the idea, and it makes sense in theory... but I mean, who wants to end up with a long strip of options (perhaps with far OTM stuff) they have to manage?

Say you sell 1 var strip on day 1... and end up with options ranging from 900-1400 in strike. Prices move down 5% over the next 5 week... and if you buy back 1 var strip, now you buy back.. what, 850-1350? So now you're long 850-900 and short 1350-1400?

This is mainly targeted to sell-side traders/MMs who are managing variance books (which I did for a few years). It's not as big of a deal as you think, I've had variance basis positions of millions of dollars in vega notional. The main pain is managing the deltas.