VIX and the Greeks
- Thread starter metaphysician
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No the traditional greeks don't function in the same way. What the author of that article needs to realize is that VIX options aren't priced off of VIX spot. They are priced from VBI (VIX futures). That is the first mistake people make.
But for him to say that trading vix options is nuts is just showing his lack of experience with them. For the past year they have been the easiest money ever.
Thanks, as I suspected. Didn't know that about the VIX options - futures relationship.
I strongly disagree though about VIX options being "easy money." You may have some legitimate reason to sound so cocky, but I'd like to know how someone can reliably and rationally trade options in an environment where the Greeks don't apply. That sounds like flying blind, and I find "easiest money ever" a rather incredible claim to make.
I strongly disagree though about VIX options being "easy money." You may have some legitimate reason to sound so cocky, but I'd like to know how someone can reliably and rationally trade options in an environment where the Greeks don't apply. That sounds like flying blind, and I find "easiest money ever" a rather incredible claim to make.
cache i know you were being somewhat facetious in the easy money remark, right?
rally tried explaining to me some vix trading and i had to stop him from wasting his time! in order to trade these profitably you must have some criteria met imo; full understanding of complex greeks and what happens when atoms collide.
it will be a long time before i can grasp vix trading edge. til then, it will be for those who are beyond professional and focusing pretty much on that product.
ps: you can still try to explain how you traded vix easily, if you really meant it...i'll be listening.
The situation that made VIX easy money is gone now. VIX is unlike any other index besides other vol indices like VXN. Vol indices have a natural floor. There are no circumstances where volatility will go to zero.
Through 2005 & 2006 VIX found a floor at about 12. What ended up happening was that you could sell either naked puts or bull put verticals when it popped slightly below that natural floor. Generally I could get 0.45-0.50 on a 11/12 put vertical. What would happen is that as the market rose, VIX would drop very little because it was at a natural floor. So I didn't really have to worry about the vertical going ITM, and even when it did go further ITM, the credit wouldn't get any higher than what I sold it for because of forward pricing. Yet a relatively small SPX drop for one day would cause VIX to jump back up to 13-15ish. The 0.50 credit would drop to 0.25 in a hurry and I would buy it back there.
Then in late 2006 to early 2007 the conditions changed a bit. VIX found a new floor at 10ish. Everyone knew that vols wouldn't drop any lower so nobody would give me 0.50 on a 9/10 put spread, but I realized some patterns in front month call options where they acted similarly to the bull put spreads. I could buy calls at a point where they were selling far below what I determined to be their true value, and then waited for a 8-10point down day in SPX. The calls would gain about 40-100% in value and I would take profits really quick.
The only problem with VIX has been that in the beginning when doing those put spreads, my orders of 400+ were too big for the light VIX volume. Now they are much more heavily traded, but the conditions aren't as good.
Through 2005 & 2006 VIX found a floor at about 12. What ended up happening was that you could sell either naked puts or bull put verticals when it popped slightly below that natural floor. Generally I could get 0.45-0.50 on a 11/12 put vertical. What would happen is that as the market rose, VIX would drop very little because it was at a natural floor. So I didn't really have to worry about the vertical going ITM, and even when it did go further ITM, the credit wouldn't get any higher than what I sold it for because of forward pricing. Yet a relatively small SPX drop for one day would cause VIX to jump back up to 13-15ish. The 0.50 credit would drop to 0.25 in a hurry and I would buy it back there.
Then in late 2006 to early 2007 the conditions changed a bit. VIX found a new floor at 10ish. Everyone knew that vols wouldn't drop any lower so nobody would give me 0.50 on a 9/10 put spread, but I realized some patterns in front month call options where they acted similarly to the bull put spreads. I could buy calls at a point where they were selling far below what I determined to be their true value, and then waited for a 8-10point down day in SPX. The calls would gain about 40-100% in value and I would take profits really quick.
The only problem with VIX has been that in the beginning when doing those put spreads, my orders of 400+ were too big for the light VIX volume. Now they are much more heavily traded, but the conditions aren't as good.
Rally is getting good at trading VIX, and doing quite well at it. He'll do even better when the instrument becomes about 10X more liquid IMO.
It is very complicated and you have to develope your own models like Rally and I. But you are right. It really is better left to those who want to really focus in on it. beginners will lose money very fast without knowing why.
I tried to explain VIX to someone a while ago and I could see their eyes glassing over in a hurry.
Clearly the guy hasnt a clue what he is talking about which is in line with most of the bloggers out there who talk about vix derivs. I especially liked the quote where he says market makers dont have a clue what models to apply. LOL Yes! They are blindly making markets, throwing money into the wind.
VIX ops do have greeks as long as you consider the underlying future contract as spot and not the cash index. They work differently however and are more sensitive to vvol than anything else while the conversion/reversal arb keeps the markets in line. Having said that, none of the retail firms have software which will model the risk for you as they do with regular ops which provides a certain edge for those that do.
As with everything else, dont trade what you dont understand if you want to avoid this:
http://www.elitetrader.com/vb/showthread.php?threadid=101274
VIX ops do have greeks as long as you consider the underlying future contract as spot and not the cash index. They work differently however and are more sensitive to vvol than anything else while the conversion/reversal arb keeps the markets in line. Having said that, none of the retail firms have software which will model the risk for you as they do with regular ops which provides a certain edge for those that do.
As with everything else, dont trade what you dont understand if you want to avoid this:
http://www.elitetrader.com/vb/showthread.php?threadid=101274
So Rally, Cache, the post I was asking about made two claims:
1. The Greeks don't apply to VIX options in a normal fashion.
2. Retail people probably shouldn't be trading VIX options.
Now, amidst all the blogger-bashing and chest-pounding about how experienced and smart you are, here's what I hear you saying:
1. The Greeks don't apply to VIX options in a normal fashion.
2. Retail people probably shouldn't be trading VIX options. (b/c there's no retail software that accurately models them, among other reasons)
So if you agree with the points I was asking about, why bother being so sniping and arrogant? I just don't get the dynamics of this forum sometimes, it's like a bunch of grown adults acting like small children.
1. The Greeks don't apply to VIX options in a normal fashion.
2. Retail people probably shouldn't be trading VIX options.
Now, amidst all the blogger-bashing and chest-pounding about how experienced and smart you are, here's what I hear you saying:
1. The Greeks don't apply to VIX options in a normal fashion.
2. Retail people probably shouldn't be trading VIX options. (b/c there's no retail software that accurately models them, among other reasons)
So if you agree with the points I was asking about, why bother being so sniping and arrogant? I just don't get the dynamics of this forum sometimes, it's like a bunch of grown adults acting like small children.
Meta, I'll answer any questions you have concerning the VIX without the arrogance. I've have traded them extensively and know someone that developed a robust pricing model for them.