VIX options

VIX options are settled 30 days pior to normal expiration. pricing is based on the SPX options opening price. This may allow for some large institutions to try and fire through some manipulating orders on that Wednesday morning in the SPX.

The price of the VXN is based on... 8 option contracts... 4 front month and 4 back months all surrrounding the strike (ATM).

The VIX now uses some weighted average of all the front-month vols.

Reverse skew will inflate the VIX OTM call options when the VIX is low. Since the VIX will spike with a sharp correction in SPX.

:)
 
Quote from granville:

The cost of carry (holding options) is too expensive with the time decay.
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i was thinking that the main problem with replicating the vix is not only time decay (especially in the event you go short i.e. sell the underlying options), but the need to delta-hedge as the ATM price changes - am i right in assuming that there is no "clean" arbitrage based pricing model for the vix futures / options, i.e. impossible to replicate the underlying instrument (since the "underlying" changes with the atm strike) unlike the other futures / options where the underlying is "static"?
 
Quote from fader:

i was thinking that the main problem with replicating the vix is not only time decay (especially in the event you go short i.e. sell the underlying options), but the need to delta-hedge as the ATM price changes - am i right in assuming that there is no "clean" arbitrage based pricing model for the vix futures / options, i.e. impossible to replicate the underlying instrument (since the "underlying" changes with the atm strike) unlike the other futures / options where the underlying is "static"?
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A big problem is the VIX is priced on the MID volatility and you will be trading on the bid and ask.

This with management fee, commissions etc... the cleanest arbitrade may be an OTC volatility swap?

:)
 
Well, this subject is out of my normal playground as I use VIX as only an overall guide in trading equities, but wouldn't there be an opportunity at times of strong market movement to spread the VIX and the S&P?

For example, on a strong market pullback, go long the S&P and short the VIX.

Overlay a daily or weekly chart of the two and it seems a no brainer, unless I'm missing something.
 
If I'm reading this correctly, it appears that the new VIX options will be based on the VIX itself, NOT VIX futures. I think this is a significant difference if it is true. Are you guys reading this the same way?
 
Quote from ktm:

If I'm reading this correctly, it appears that the new VIX options will be based on the VIX itself, NOT VIX futures. I think this is a significant difference if it is true. Are you guys reading this the same way?
More...

Yes, VIX options are based on spot VIX not VIX futures. And to add to that, options that are not front-month will be based on forward VIX value rather than spot. So there will be a difference between the spot VIX and the underlying VIX for particular options up until close to expiry.
 
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