VIX = SPX options' Vega?

L

lioresh

Hi all,

(NOTE - when I say $VIX, I mean the CBOE S&P500 Volatility Index. When I say $SPX I mean the S&P 500 index itself. I am NOT talking about any ETFs or ETNs)

On the surface, $VIX is the volatility of $SPX, right?

BUT, is this to say that a rise/fall in the $VIX would automatically mean a similar increase/decrease in the Vega of all $SPX options?

I hope I made the question clear enough, I need a solid answer from someone with deep understanding of the subject.

thanks in advance!
 
Quote from lioresh:

Hi all,

(NOTE - when I say $VIX, I mean the CBOE S&P500 Volatility Index. When I say $SPX I mean the S&P 500 index itself. I am NOT talking about any ETFs or ETNs)

On the surface, $VIX is the volatility of $SPX, right?

BUT, is this to say that a rise/fall in the $VIX would automatically mean a similar increase/decrease in the Vega of all $SPX options?

I hope I made the question clear enough, I need a solid answer from someone with deep understanding of the subject.

thanks in advance!
More...

Well, I have heard that many investors dropped their ETN/ETF VIX positions over the past few months. That must have made the VIX futures drop down as well; since market makers are hedging them with $SPX options, VIX spot must have droppeddown as well and the SPX index is behaving accordingly. Just my 2 cents.
 
Quote from lioresh:

Hi all,

(NOTE - when I say $VIX, I mean the CBOE S&P500 Volatility Index. When I say $SPX I mean the S&P 500 index itself. I am NOT talking about any ETFs or ETNs)

On the surface, $VIX is the volatility of $SPX, right?

BUT, is this to say that a rise/fall in the $VIX would automatically mean a similar increase/decrease in the Vega of all $SPX options?

I hope I made the question clear enough, I need a solid answer from someone with deep understanding of the subject.

thanks in advance!
More...

Actually, it's not a bad question. VIX is the "expected" volatility of S&P 500 as formalized by the fair variance strike. Whatever the replication argument (too much to get into here), this means that it takes into account implied volatilities of options across all strikes. Thus, majority of changes in the level of VIX do no require changes in implied volatility for fixed S&P strikes - all that is happening is that VIX formula now takes into account more or less strikes with higher volatility (S&P moves down a few ticks, VIX moves up - it's not like vol got bid over these few seconds).

So, if you are asking "does the change in VIX necessarily mean that there is more demand for S&P options?" then the answer is certainly "no".
 
Quote from sle:



So, if you are asking "does the change in VIX necessarily mean that there is more demand for S&P options?" then the answer is certainly "no". [/B]
More...

If there is a rise in the VIX, I always thought this meant that if the VIX is a measure of put buying activity, this would mean that there is an increase (more demand) for options?? Can you please explain how this may be not accurate? Thanks.
 
Quote from sle:

Actually, it's not a bad question. VIX is the "expected" volatility of S&P 500 as formalized by the fair variance strike.
....
....

So, if you are asking "does the change in VIX necessarily mean that there is more demand for S&P options?" then the answer is certainly "no".
More...

Sle, thanks for your answer. Allow me to be more accurate in my question:
Let's make the hypothetical assumption that one can predict the change in the VIX over the next trading day. What would be the single most best way for him to play that prediction (with options)? My instincts tell me to be long/short vega on $SPX options?

Lioresh
 
Quote from sle:

Actually, it's not a bad question. VIX is the "expected" volatility of S&P 500 as formalized by the fair variance strike. Whatever the replication argument (too much to get into here), this means that it takes into account implied volatilities of options across all strikes. Thus, majority of changes in the level of VIX do no require changes in implied volatility for fixed S&P strikes - all that is happening is that VIX formula now takes into account more or less strikes with higher volatility (S&P moves down a few ticks, VIX moves up - it's not like vol got bid over these few seconds).

So, if you are asking "does the change in VIX necessarily mean that there is more demand for S&P options?" then the answer is certainly "no".
More...

Thanks Sle,

let me be more precise:

let's make the hypothetical assumption one had the ability to predict short changes in the VIX (say, over the next day or so); what would be the best way for him to play that prediction (with options). would being long/short Vega with $SPX options work well?
 
Thanks Sle,

let me be more precise:

let's make the hypothetical assumption one had the ability to predict short changes in the VIX (say, over the next day or so); what would be the best way for him to play that prediction (with options). would being long/short Vega with $SPX options work well?
 
Quote from hedgeman:

If there is a rise in the VIX, I always thought this meant that if the VIX is a measure of put buying activity, this would mean that there is an increase (more demand) for options?? Can you please explain how this may be not accurate? Thanks.
More...

SLE was pointing out that the SPX index dropping will make the vix rise WITHOUT any extra demand for options simply due to the way the vix is calculated.

Rising demand for SPX options will also increase the vix, of course.

While both will make the vix rise, these are not the same thing.
 
Quote from lioresh:

Thanks Sle,

let me be more precise:

let's make the hypothetical assumption one had the ability to predict short changes in the VIX (say, over the next day or so); what would be the best way for him to play that prediction (with options). would being long/short Vega with $SPX options work well?
More...

Complicated question...

SPX options will have gamma and theta aspects that arent represented in the vix index. Also, as already pointed out, the SPX options' volatility may not rise, but vix would still go higher if the SP500 goes down, while vix would drop if sp500 goes higher.

The vix, by itself, will not track the profitability of SPX options.
 
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