Verticals - OTM vs ATM vs ITM (time decay and volatility decrease)

[MasterAtWork]

Dmo,

Another way to look at negative interest rate is that you can't really lend and borrow money at the same rate as assume in the black and scholes world, in the binomial world, in the trinomial world...and generally written in books.

The second point is that sometimes you have to pay annual fees to your broker. Hence, as long as you hold a position, or don't, the fact that your account is opened leads to costs.

Another way to look at a delta >1 is this one.
Imagine you're on a perishable asset, like tomatos. As long as you hold a real position on tomatos, you need a warehouse. This is a storage cost. Assume that cash price stays fixed. How do you think future on that commodity would react with time ? Hence for a call on that future ?

About the skew, it was just in response to your statement.

Dmo, you are a clever guy. Please open your mind. Nothing is a given especially on derivatives. And the correlation you talk about between VIX and SPX is correlation between VIX and SPX. Not between volatility(ies) and SPX. Of course you will generally have a behaviour like you state for a very short term volatility. This is one month volty, or two months volty. It can't be generalized for every volty behaviours.
Tomorrow, assume there is a market collapse. Assume a 6% down move. A guy clever as you are can't really think that a 10 years option volatility on SPX would be hurt by something like that. I hope you don't. I bet you don't. I'm sure you don"t .

 

[dmo]

Quote from MasterAtWork:



About ALWAYS negative correlation between IV and SPX, please try to take a look at what is going on with S&P DEC10 and DEC11 implied volatility options. I'm sure your obstinacy won't last .

I've looked at those options and, predictably, they follow the same pattern as the front month options, with great precision. Every strike trades at an IV higher than the strike below, and lower than the strike above. As a result, it's certain that every time the underlying goes up, ATM IV goes down and vice-versa. This is harder to verify as there is no convenient VIX chart of back month options, but I don't see how it could be otherwise.

This isn't a testosterone thing MAW, where I'm attached to being right. I'd much rather be wrong - that would make it so much easier to make money! So if you can show me that in the back months there is no negative correlation between the S&P 500 and ATM IV, I would be very interested.

 

[MasterAtWork]

I'm sorry but I can't believe it.
I do trade long term options on several indexes, including on SPX. And for what I witness there is no such a thing as a finite and stable correlation between volatility and SPX.
Please show me the way Dmo, and I swear to God, I never come back here on ET claiming what I stated. I will be busy making a lot of money.
As you know, option vega is much more higher for long term options. If it was true, every volatility deals would be made on them. It's because the behaviour such options is hard to handle that products like volatility swaps and variance swaps is much more appropriate for pure volatility deals.

As short term volatility rise, long term doesn't behave so. It takes time to witness a reaction. There is a very light volatility of volatility for long term options. The market need to experience a real movement on short term volatility to see long term volatility moving. One more time a 5 years option needs something else than a 2% drop to provide volatility reaction.
Again, if short term volatility comes to a very low level, long term doesn't behave so. Every volatility traders knows that this level is far from historical long term volatility and implied volatility would keep higher level, near long term historical volatility. That is called mean reversion. And some times that is called memory.

Do you really think that a one day 8% move up will collapse a 5 years option volatility level ?
If movements made the same reaction one would witness the same level for long term and short term volatility. It doesn't work like that.

 

[dmo]

Quote from MasterAtWork:

I'm sorry but I can't believe it.
I do trade long term options on several indexes, including on SPX. And for what I witness there is no such a thing as a finite and stable correlation between volatility and SPX.
Please show me the way Dmo, and I swear to God, I never come back here on ET claiming what I stated. I will be busy making a lot of money.
As you know, option vega is much more higher for long term options. If it was true, every volatility deals would be made on them. It's because the behaviour such options is hard to handle that products like volatility swaps and variance swaps is much more appropriate for pure volatility deals.

As short term volatility rise, long term doesn't behave so. It takes time to witness a reaction. There is a very light volatility of volatility for long term options. The market need to experience a real movement on short term volatility to see long term volatility moving. One more time a 5 years option needs something else than a 2% drop to provide volatility reaction.
Again, if short term volatility comes to a very low level, long term doesn't behave so. Every volatility traders knows that this level is far from historical long term volatility and implied volatility would keep higher level, near long term historical volatility. That is called mean reversion. And some times that is called memory.

Do you really think that a one day 8% move up will collapse a 5 years option volatility level ?
If movements made the same reaction one would witness the same level for long term and short term volatility. It doesn't work like that.

I never said back-month IV moves AS MUCH as front month IV. Only that it follows the same pattern.

If you don't see it, then I guess you don't. I feel more than confident in my own observations in that regard, and in my understanding of the ironclad relationship between the buying of puts for portfolio insurance, the skew, and the underlying/IV inverse correlation. It was for many years a prominent daily feature of my trading life, something I relied on heavily, something I feel more than intimately familiar with.

Objectively of course, my conviction proves nothing. If you don't see it, you don't. It's well known that two eyewitnesses to the same event will often see something completely different - I guess we'll just have to chalk off our differing observations to that phenomenon.

 

[newguy05]

Quote from dmo:

Nitro - haven't we been through this before? Not once but many times?

The pattern seems to go like this: I say that every time the S&P 500 goes up, IV goes down, and every time the S&P 500 goes down, IV goes up. You come in and say that's not true. I post a chart of the last few days demonstrating that it was true for those days at least, and invite you to post a chart showing otherwise. So far you haven't taken me up on it.

Nitro can you please post a chart (any time frame) that will void dmo's claim. I am very curious to find out as well, just 1 line of "it's not true" means nothing.

dmo, do you know what happened to atticus? I miss deciphering his option posts.

 

[dmo]

Quote from newguy05:

Nitro can you please post a chart (any time frame) that will void dmo's claim. I am very curious to find out as well, just 1 line of "it's not true" means nothing.

dmo, do you know what happened to atticus? I miss deciphering his option posts.

You know, I was just wondering about atticus myself. It's been a long time since he posted. I hope he comes back - he definitely livens things up around here and, as you say, provides a good challenge to my cryptographic chops.

As for the charts showing the negative spx/vix correlation - I've looked at dozens if not hundreds of time frames and they're all the same. The only exception is when vix gets down to about 10% or so, that seems to form a "hard bottom." From there, even if the spx goes up the vix will not go down much past 10%, it will just "drag along" that hard bottom of 10%.

If you look at the skew, it too is always consistent in that every strike trades at an IV higher than the strike above and lower than the strike below. That's true of the front month and back months too. Given that skew, the negative correlation I mentioned above has to exist, or it would be absurdly easy to make money. I explained all this in detail in a thread a few months ago.

But by all means, if anyone can find a chart showing a time period where that did not hold true, I hope they will post it.