Vix

[clarodina]

Traditional TA does not seems to works in analyzing vix compared to others like futures stock etc. Some comment that forecasting vix is easy than forecast futures and stock. What should be the tools that is suitable for vix?

For buying and selling vix options, should the cash vix index be used to make decision or the futures vix? vix option uses the cash index for strike price.

 

[dmo]

Quote from clarodina:

Traditional TA does not seems to works in analyzing vix compared to others like futures stock etc. Some comment that forecasting vix is easy than forecast futures and stock. What should be the tools that is suitable for vix?

For buying and selling vix options, should the cash vix index be used to make decision or the futures vix? vix option uses the cash index for strike price.

VIX is fundamentally different from stocks and commodities in that there is a long-term tendency for stocks and commodities to rise in price. The DJIA for example rose more or less steadily from 41 in 1932 to some 14,000 in 2007. So you could say that these things are a long-term measure of economic growth.

The VIX is completely different. It is not a measure of economic growth. Rather, it is a measure of human emotion. At its lows it measures complacency, at its highs it measures panic.

So of course, the technical tools you might use for the VIX are not the same as for stocks and commodities. Or at the very least, you may need to adjust them.

The underlying you should use for VIX options is the VIX futures contract of the corresponding month, not the cash index. The cash index and the futures converge at expiration.

 

[rosy2]

imo, backspreads seem to be good for instruments that are "jumpy" like the vix

 

[rallymode]

If you insist on using TA, use it on the SP then solve for correlation and synthetic time.

 

[clarodina]

backspread like moving average spread? When vix has no volatility the macd does not work

 

[clarodina]

don't know why vix option should use futures vix cos the cash vix price determine whether the option is in at or out of money. If a out of money option is brought where the strike price is 32.5 and the cash vix rally to 35 while the futures vix rally to 32, the option is consider in the money (using vix cash). If using the futures vix pric, the option is out of money. So why uses futures vix to trade vix option? For implied volatility?

 

[dmo]

Quote from clarodina:

don't know why vix option should use futures vix cos the cash vix price determine whether the option is in at or out of money. If a out of money option is brought where the strike price is 32.5 and the cash vix rally to 35 while the futures vix rally to 32, the option is consider in the money (using vix cash). If using the futures vix pric, the option is out of money. So why uses futures vix to trade vix option? For implied volatility?

VIX options are exercisable only at expiration. And you cannot buy or sell the VIX cash index. So prior to expiration, the VIX cash index has no practical, usable, tradable, arbitrageable relationship to VIX options.

The VIX futures converge with the cash at expiration. Prior to expiration - unlike the cash VIX - you CAN buy and sell it. Unlike the cash VIX, it IS a tradable instrument that can be used in every way as the underlying for the same-month VIX options.

Imagine for example that the VIX June 30 puts are trading at 3, the VIX June 30 calls are trading at 3, and the VIX cash is trading at 25. If the VIX cash were the true underlying, there would be a way to lock in a 5-point profit. But in fact, there is no way to do so.

However, if the VIX June 30 puts are trading at 3, the VIX June 30 calls are trading at 3, and the VIX June futures contract is trading at 25, you can buy the futures at 25, buy the puts at 3, and sell the calls at 3 at a 1-to-1-to-1 ratio, and you have a locked-in profit of 5 points each (not taking into consideration cost of carry).

So you are making a very common but foolish mistake if you are in any way conceptualizing the VIX cash as the underlying for the options, rather than the futures.

 

[clarodina]

Thought is possible to sell off a call option previously brought if the direction is wrong before expiration? Isn't only that exercise is not allow in the option month?

Say the cash vix is at 29 and a out of money call 30 option is brought at the price of $3. Cash vix then rally to 31 and has become in the money with a price of $4. Cash vix furthur rally again to 33 and the call option become more in the money (since the cash vix is used to decide how much an option is in the money or very in the money)

Now the option buyer decide to sell off the call option profiting from the in the money profit. A call option very away (in the money) from the cash vix is often higher in value than a call option around the cash vix price. Thought all this are comparing cash vix price and call option strike price to decide the profit. The futures vix does not seems to be included in the process of buying and selling. Maybe just to calculate the fair price of all option?

 

[dmo]

Quote from clarodina:




Say the cash vix is at 29 and a out of money call 30 option is brought at the price of $3. Cash vix then rally to 31 and has become in the money with a price of $4. Cash vix furthur rally again to 33 and the call option become more in the money (since the cash vix is used to decide how much an option is in the money or very in the money)

No. As I explained above, the cash vix is NOT used to decide how much an option is in the money. The futures contract is.

If the cash vix rallies to 31, the 30 call DOES NOT automatically become in-the-money. The 30 call does not become in-the-money until the futures gets above 30. That's because - and I repeat - THE CASH VIX IS NOT THE UNDERLYING, THE FUTURES CONTRACT IS!

If you do not understand that then please re-read my previous answer above, and think about it until it makes sense to you. Pay particular attention to the example about locking in a profit. I don't think I can explain it more clearly than that.

Heech posted a link within the last month or two to a really excellent article that explains this beautifully. If you search some combination of vix and heech you'll probably find it.

 

[clarodina]

Than using cash vix price in options strike is really misleading. Below is a jpeg on vix from optionsexpress. The cash vix is 29.62 and the yellow strike are option "in the money" compared to cash vix.