VIX options

neveragain · Sep 17, 2008

just a tip on VIX

the impl. vol on oct calls is an average around 50%
and the impl.vol on oct puts is an average around 210%
so becarefull..............

dmo · Sep 17, 2008

Quote from MasterAtWork:

I was thinking about a replication of VIX, that could be built on the same framework it's done. 'sure it could be little bit more complex.
I don't trade VIX, so it was a question, not an answer.

Nothing wrong with kicking it around - it's an interesting subject. But to replicate the VIX would be complex, as it takes into account every option with a bid greater than 0. You could do essentially the same thing by just shorting straddles or strangles. But however you do it, you would be selling naked premium, so you would have gamma risk to manage as well as vega.

In any case, the difficulty or risk of doing it that way is effectively summed up by the fact that the futures are selling at a 10-point discount.

dmo · Sep 17, 2008

Quote from neveragain:

just a tip on VIX

the impl. vol on oct calls is an average around 50%
and the impl.vol on oct puts is an average around 210%
so becarefull..............

Well, not really. That's a calculation error based on using the VIX as the underlying rather than the futures. Unfortunately TOS makes that rather fundamental error, as do many others.

Based on that calculation, the Oct. 37.5 puts are trading at 245% IV, and the 37.5 calls at 25% IV. Now wouldn't THAT be a juicy reversal!

I know of no contract as widely misunderstood as the VIX. As you say, be careful!

newguy05 · Sep 17, 2008

It be interesting to do some more historical analysis on the vix futures vs vix underlying. To see what the correlation is. I am looking at the historical daily going back 1 year between the 2, they dont seem to move together at all, although this week they both moved higher.

The reason the future doesnt follow the vix closely isbecause the numbers are driven by supply/demand, and it's just too easy to predict the vix at current level. NOONE is willing to buy vix when it's at 36 like today. Everyone knows it will fall back and have very limited upside. The most the buyer is willing to pay for a 36 vix is 26.

What's the point of this product then? maybe some vix futures traders can chime in, do they exist?

rallymode · Sep 17, 2008

Quote from newguy05:

What's the point of this product then? maybe some vix futures traders can chime in, do they exist?

Yes they exist. I'd be starving if it werent for vix futures.

dmo is on point that its the most widely misunderstood product not that the average ETer has a basic understanding of much.

neveragain · Sep 17, 2008

Quote from dmo:

Well, not really. That's a calculation error based on using the VIX as the underlying rather than the futures. Unfortunately TOS makes that rather fundamental error, as do many others.

Based on that calculation, the Oct. 37.5 puts are trading at 245% IV, and the 37.5 calls at 25% IV. Now wouldn't THAT be a juicy reversal!

I know of no contract as widely misunderstood as the VIX. As you say, be careful!

my point was only the difference on impl. vol that in the VIX options is different from ex citibank options where puts and calls have almost the same impl. vol 130% for calls and puts

dmo · Sep 17, 2008

Quote from neveragain:

my point was only the difference on impl. vol that in the VIX options is different from ex citibank options where puts and calls have almost the same impl. vol 130% for calls and puts

If you use the correct underlying for the October VIX options - namely the October VIX futures - you will find that puts and calls at the same strike also trade at the same implied volatility.

neveragain · Sep 17, 2008

Quote from dmo:

If you use the correct underlying for the October VIX options - namely the October VIX futures - you will find that puts and calls at the same strike also trade at the same implied volatility.

i use I.B and on my option trader shows all impl. vol different???

dmo · Sep 17, 2008

Quote from neveragain:

i use I.B and on my option trader shows all impl. vol different???

They must be making the same mistake - using the VIX index as the underlying, rather than the October VIX futures.

Garbage in, garbage out.

SPYoptiontrader · Sep 17, 2008

Quote from l2tradr:

Thinking of buying the OCT 32.5 Puts on the VIX and selling the OCT 25 Puts...

Comments welcome

You can buy puts and sell bear call spreads above it. Just in case the VIX doesn't drop as fast as you like. As least you can capture off of come time decay with the credit spreads.