VIX Manipulation Costs Investors Billions, Whistle-Blower Says

Here I've changed the prices of the puts up until a value of 1.00... IV's lowered from green to yellow.. and the VIX went from 41.75 to 41.08.

It's not the right VIX when I compare with the actual settlement at that day... Don't know why. I used simple Black and Scholes to estimate the IV for the strikes and interpolated the strikes around the ATM and for the OTM calls.

But it shows that the adjustment in IV's due to small increase in price made a difference. If overall the VIX is lower... I could argue that the change in the VIX spot is easier to manipulate and bigger relatively.

3500 options traded in those strikes, average 10 cents difference = 35k in cost. But that's easily made into a profit by hitting bids in 1600-1700 strikes and just get it theta positive for a few days. Depending on your VIX futures and options position, I think it's easy to make money out of this. Not in the 100's of millions each month though... but definitely worth a lambo.

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I put up a graph of IV for targeted spreads over 6 expiries, and finally got around to putting up the VXST/VIX on the same graph -- just as a curiosity. Although I look as a step-1 overview of the market when I'm setting up, I *rarely* see anything by way of correspondence that would make me choose spreads/expiries over having the targeted IVs posted right there.

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If The Bad Guys manipulated the VIXies, I really wouldn't know/much care. What mattered to me (for the above) was that perceived vol was declining from the current, quickly at first, then easing down farther out in the future. (*Footnote: the δ cited by expiration here was ~|19|.)

(BTW, the IV impression from this chart is uncommonly smooth -- there are usually distinct bumps/troughs week-by-week, possibly in puts, possibly on calls -- traceable to specific economic data releases or known political events. To see this seeming 'decay curve' was notable, not common.)
 
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cdcaveman said:
I don't believe it... the cost to risk relationship of trying to manipulate such a large liquid market seems very improbable.. plus Maverick makes a clear point about the otm weights
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No, I think it's definitely doable... just look at my excel posts...
 
Some people got squeezed.... End of story... Even if that is true... And vol spiked because of some purchase of otm options...the vol curve was the lowest and flattest it's been in a really long time... People who were leveraged got squeezed... Liquidity hole it's called.. if you have the money to risk poking around for that my hats off to you.... It's confirmation bias...as many who would try that strategy might lose alot and you never hear about it.... Anytime the public takes a loss it's a conspiracy..
 
They call it Carpet bombing on the floor.

SPX “Carpet Bomb” Due to VIX Settlement


Optionshouse , Visit Options House
October 20, 2010 10:52am

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The monthly settlement of the CBOE Market Volatility Index (VIX)October options this morning resulted in more than 300,000 out-of-the-money puts trading in the S&P 500 Index (SPX). This program of put buying is referred to as a “Carpet Bomb,” as every strike that is traded is taken into the calculation of the cash settlement of the VIX.

The volume today ran from the 725 puts to the 1,400 calls. This volume is not necessarily indicative of a desire for put hedges, but rather is likely an attempt to push the VIX final settlement price higher. Yesterday the VIX index closed at $20.63, the settlement value this morning ramped higher to 21.41 causing the 21 puts, which yesterday were in-the-money, to finish worthless.
 
cdcaveman said:
Some people got squeezed.... End of story... Even if that is true... And vol spiked because of some purchase of otm options...the vol curve was the lowest and flattest it's been in a really long time... People who were leveraged got squeezed... Liquidity hole it's called.. if you have the money to risk poking around for that my hats off to you.... It's confirmation bias...as many who would try that strategy might lose alot and you never hear about it.... Anytime the public takes a loss it's a conspiracy..
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This manipulation has nothing to do with the crash last week and the significant increase in the VIX.

It has to do with moving the settlement price of VIX spot to get the derivatives to expiry higer (or lower)... like the 'carpet bombing' which @ajacobson mentions.
 
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