VIX SOQ (VRO) Thread

There is no correct answer as to how MM books are run, as it all depends on how their VIX future position fits into their portfolio. There are numerous ways they could be hedging their futures, so it all depends on how they want to close the trade.

In the case of the Feb expiry, the high print doesn't necessarily mean the street was short the future; in fact, it could easily mean the exact opposite. If they were long the future and hedged it by selling options, they would have to buy those options back en masse on the open, driving up the price.

To be honest, though, I've never understood people who hold large future positions into the print without participating in the HOSS opening. Leaving yourself open to the risk of something you have no control over and can easily become disconnected from the true state of the market seems like a losing proposition to me, unless you're consciously making a bet on where you think the print will be in the morning.
 
FSU said:
On the morning of VIX expiration, everyone (customers, marketmakers, firms) can participate equally in the following months SPX option opening. The opening prices of these options are used to "set" the VIX settlement price. Indications are listed at the previous page I posted. There are usually very large orders in the SPX that are used to "massage" the VIX print. Not sure if it is large customers simply rolling postions or not. For example today there were large sell orders in the options, thus a lower VIX print.

The opportunity is to essentially be able to buy or sell an option with edge. For example today you could see that there were large amounts of puts and calls offered. One play with the least risk is to buy the out of the money puts for .05 for knowing that yesterday the strike 100 points lower were .05 bid, then sell the options just after the opening for .10 or .15. Other more aggresive plays could be done with meatier options.
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hi FSU, i owe u an apology... just saw this and you have already answered this qn before... cheers!
 
trickyname said:
There is no correct answer as to how MM books are run, as it all depends on how their VIX future position fits into their portfolio. There are numerous ways they could be hedging their futures, so it all depends on how they want to close the trade.
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Yup. A few possibilities that produce a very expiration risk profile. The two main buckets are - I might have VIX futures vs variance, in this case I'd want to collapse it into the strip vs variance; conversly, I might be carrying long or short ATMish options against the strip and play the BE game in which case I'd expire cash on all. In the first case I'll participate actively in the settlement process, while in second case I'd "watch it with interest" and only get involved if I feel like providing liquidity on a large imbalance (usually hedging myself with front month var later during the day).
 
sorry just 1 more question:

a) in order to determine the weights of each spx option strikes, how is the sqrt sign typically taken care of? or is it typically ignored assuming small changes in vol? more generally how to size spx options vs vix futures? vega flat i presume? any other creative sizing techniques?




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b) more philosophical qn and I am leaning towards (ii)
i) is vix a portfolio of spx options? the strip has its own delta, gamma and theta even if the vega is used to net off the VIX future in some way after taking sqrt. does this mean that vix futures also has delta, gamma and theta? there is beta to spx from linear regression but is this beta in any way related to the strip's delta or just vol skew and 1/K^2?

ii) or is vix just a calculation using spx option prices and not really a portfolio? and since its calculation based on spx options, you can hedge the movement in vix using spx options. hedging vega risks but taking on gamma, theta and delta risks.
Alan's reply in http://www.wilmott.com/messageview.cfm?catid=4&threadid=94065
does anyone know what is that well known theory?
 
FSU said:
Last months could have had a Ronin effect. Extremely large size on the put wings, over 40,000 of each strike to sell.
Follow along tomorrow morning here https://markets.cboe.com/us/futures/market_statistics/volatility_settlement_eoi/
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The strip premium is pretty low this time, so I don't expect too many people carrying big size into the print. Also, no huge outstanding VIX options positions for tomorrow, so no expiration gamma to speak of. Expect calm weather.
 
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