Anyone here trading vix options. I've been making good trades (about the only good trades lately) and am curious what other people have been doing. People say you have to be aggressive and even crazy to trade the vix but to me it has been the easiest thing to trade. I've been writing calls for all the disaster hedgers. (well selling verts to be exact) If i ever get in hot water i roll to the next month, and actually get credit to do so. seems pretty easy with a mean reverting index. anyone using a similar strategy?
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vix trading
- Thread starter DennisR
- Start date
How much have you been making ?
From what I understand, the VIX options are priced off the futures, and since the options are European style, you're making a bet on the volatility at expiration time, not current volatility.
You mentioned that you'd roll out to the next month if you got into hot water, but what happens if you get into the following situation:
- you sell calls (or a vertical) for June
- some huge market drop happens right before June expiration
- now to buy back your calls you would take a 12x loss
- you can't reduce the loss by selling the calls for July, because those July calls have the mean reversion already priced in (e.g. market expects normal volatility at the time of July expiration)
http://www.ibankcoin.com/adamblog/index.php/2008/05/14/a-quick-trading-vix-primer/
You mentioned that you'd roll out to the next month if you got into hot water, but what happens if you get into the following situation:
- you sell calls (or a vertical) for June
- some huge market drop happens right before June expiration
- now to buy back your calls you would take a 12x loss
- you can't reduce the loss by selling the calls for July, because those July calls have the mean reversion already priced in (e.g. market expects normal volatility at the time of July expiration)
http://www.ibankcoin.com/adamblog/index.php/2008/05/14/a-quick-trading-vix-primer/
seems there is a mispricing here with the futures to the options, the futures being consistently cheaper. Can someone tell me if there is a reason for this? why couldnt you buy the futures and sell the puts considering the current june contracts at a 20 strike? Or even sell the calls for a profit up to a point on the downside.
seems there is a mispricing here with the futures to the options, the futures being consistently cheaper. Can someone tell me if there is a reason for this? why couldnt you buy the futures and sell the puts considering the current june contracts at a 20 strike? Or even sell the calls for a profit up to a point on the downside.
should have said 30 strike for the puts but I believe there are similar profits at all strikes with more/less risk because of the limited upside if the prices crosses the strike.
As far as VIX options are concerned, the answer to the simple question "where is the underlying trading?" is about as clear as mud.
I've read the CBOE's explanation, which only convinces me the confusion is not my imagination. To read the whole thing go to http://www.cboe.com/micro/vix/VIXoptionsFAQ.aspx#5
Apparently the futures price represents the best guess as to what that underlying should be. But it's far from a precise calculation.
I'll post some of it here for convenience, straight from the CBOE website:
5. Will VIX options always reflect current, real-time, VIX values?
Probably not, at least not until you get close to expiration. The underlying for VIX options is the expected, or forward, value of VIX at expiration, rather than the current, or "spot" VIX value. This forward value is estimated using the price quotations of SPX options that will be used to calculate the exercise settlement value for VIX on the expiration date, and not the options used to calculate spot VIX. For example, VIX options expiring in May 2006 will be based on SPX options expiring 30 days later - i.e.; June 2006 SPX series. In fact, June SPX options do not even enter into the spot VIX calculation until April 17, 2006.
Some VIX options investors look at the prices of the VIX futures to gain a better general idea of how the market is estimating the forward value of VIX.
VIX option prices should reflect the forward value of VIX, which is typically not as volatile as spot VIX. For instance, if spot VIX experienced a big up move, call option prices might not increase as much as one would expect. Depending on the value of forward VIX, call prices might not rise at all, or could even fall! As time passes, the options used to calculate spot VIX gradually converge with the options used to estimate forward VIX. Finally, at VIX options expiration, the SPX options used to calculate VIX are the same as the SPX options used to calculate the exercise settlement value for VIX options.
8. Why do VIX option prices appear different than other index option prices I'm used to seeing?
The price of any index option depends on the forward price of the index and the expected shape of the forward price distribution. In the case of stock indexes like the S&P 500, the theoretical forward price is determined in a fairly straightforward manner that considers the "cost-of-carry" (i.e., interest rates and dividend yields). Forward prices of option volatility exhibit a "term structure", meaning that the prices of options expiring on different dates may imply different, albeit related, volatility estimates. VIX option prices reflect the market's expectation of the VIX level at expiration, as measured by the VIX SOQ on that date. For example, prices for VIX options expiring in May 2006 reflect the expected volatility implied in June 2006 SPX options; VIX options expiring in August 2006 reflect the expected volatility implied in September 2006 SPX options, etc. The VIX volatility implied by June SPX options may be significantly greater or lower than VIX volatility implied by September SPX options.
Most readily available option pricing models assume that price changes in an underlying asset - IBM or S&P 500 Index (SPX), for example - have a lognormal distribution. The distribution of VIX prices is not lognormal. In a lognormal world, the price of IBM, for instance, could go to $0 per share, or rise to very high levels depending on market conditions and company fundamentals. A VIX value of zero, on the other hand, would imply a market expectation of virtually no daily change in the level of the S&P 500 Index! Extreme or persistently high VIX levels are just as unlikely because there would need to be a market expectation of very large daily SPX index changes over an extended period of time. Yet, since 1990 the largest 1-day move in SPX has been -6.9%, and price changes of at least ±5% have occurred only 8 times.
Option practitioners commonly refer to the unique behavior of VIX and other volatility measures as "mean-reverting," which is a statistical way of saying that at historically low VIX levels, there is a higher probability that the next big move will be up rather than down. Conversely, at historically high VIX levels, the next big move is more likely to be down rather than up.
Because of these differences between VIX and traditional stock indexes, calculating exact theoretical values for VIX options can be very complex. Assuming that VIX option prices reflect the "term structure" and "mean reversion" characteristics of VIX, VIX options could appear somewhat peculiar relative to other index and individual stock options.
I've read the CBOE's explanation, which only convinces me the confusion is not my imagination. To read the whole thing go to http://www.cboe.com/micro/vix/VIXoptionsFAQ.aspx#5
Apparently the futures price represents the best guess as to what that underlying should be. But it's far from a precise calculation.
I'll post some of it here for convenience, straight from the CBOE website:
5. Will VIX options always reflect current, real-time, VIX values?
Probably not, at least not until you get close to expiration. The underlying for VIX options is the expected, or forward, value of VIX at expiration, rather than the current, or "spot" VIX value. This forward value is estimated using the price quotations of SPX options that will be used to calculate the exercise settlement value for VIX on the expiration date, and not the options used to calculate spot VIX. For example, VIX options expiring in May 2006 will be based on SPX options expiring 30 days later - i.e.; June 2006 SPX series. In fact, June SPX options do not even enter into the spot VIX calculation until April 17, 2006.
Some VIX options investors look at the prices of the VIX futures to gain a better general idea of how the market is estimating the forward value of VIX.
VIX option prices should reflect the forward value of VIX, which is typically not as volatile as spot VIX. For instance, if spot VIX experienced a big up move, call option prices might not increase as much as one would expect. Depending on the value of forward VIX, call prices might not rise at all, or could even fall! As time passes, the options used to calculate spot VIX gradually converge with the options used to estimate forward VIX. Finally, at VIX options expiration, the SPX options used to calculate VIX are the same as the SPX options used to calculate the exercise settlement value for VIX options.
8. Why do VIX option prices appear different than other index option prices I'm used to seeing?
The price of any index option depends on the forward price of the index and the expected shape of the forward price distribution. In the case of stock indexes like the S&P 500, the theoretical forward price is determined in a fairly straightforward manner that considers the "cost-of-carry" (i.e., interest rates and dividend yields). Forward prices of option volatility exhibit a "term structure", meaning that the prices of options expiring on different dates may imply different, albeit related, volatility estimates. VIX option prices reflect the market's expectation of the VIX level at expiration, as measured by the VIX SOQ on that date. For example, prices for VIX options expiring in May 2006 reflect the expected volatility implied in June 2006 SPX options; VIX options expiring in August 2006 reflect the expected volatility implied in September 2006 SPX options, etc. The VIX volatility implied by June SPX options may be significantly greater or lower than VIX volatility implied by September SPX options.
Most readily available option pricing models assume that price changes in an underlying asset - IBM or S&P 500 Index (SPX), for example - have a lognormal distribution. The distribution of VIX prices is not lognormal. In a lognormal world, the price of IBM, for instance, could go to $0 per share, or rise to very high levels depending on market conditions and company fundamentals. A VIX value of zero, on the other hand, would imply a market expectation of virtually no daily change in the level of the S&P 500 Index! Extreme or persistently high VIX levels are just as unlikely because there would need to be a market expectation of very large daily SPX index changes over an extended period of time. Yet, since 1990 the largest 1-day move in SPX has been -6.9%, and price changes of at least ±5% have occurred only 8 times.
Option practitioners commonly refer to the unique behavior of VIX and other volatility measures as "mean-reverting," which is a statistical way of saying that at historically low VIX levels, there is a higher probability that the next big move will be up rather than down. Conversely, at historically high VIX levels, the next big move is more likely to be down rather than up.
Because of these differences between VIX and traditional stock indexes, calculating exact theoretical values for VIX options can be very complex. Assuming that VIX option prices reflect the "term structure" and "mean reversion" characteristics of VIX, VIX options could appear somewhat peculiar relative to other index and individual stock options.