There seem to be times when you can predict volatility. Because people are hesitant to hold positions over the weekend, Friday afternoons should be relatively calm. Conversely, as people attempt to process the information from the past weekend, Monday mornings should harbor more uncertainty, causing people to pay a greater premium for options.
I looked at about ten years worth of data for the VIX. Despite an overall decline in the VIX, the Monday close was consistently higher than the Friday open.
from 2005 to present
average price -- 12.71
average weekly gap up -- .31
for 2004
average price -- 15.69
average weekly gap up -- .42
for 2003
average price -- 22.28
average weekly gap up -- .62
from 1997-2002
average price -- 25.07
average weekly gap up -- .71
I also checked out prices for options for vix for the past three years.
vix bid index (VWB)
average price -- 119.69
average gap up -- 5.18
vix offer index (VWA)
average price -- 133.35
average gap up -- 9.34
What is the best way to buy volatility? I've looked at the CBOE website and searched previous posts on Elite Trader, but I'm still not sure how to buy VIX futures or options.
Could I use this as a guide for buying spreads for individual options? Also, what would some of the problems be with buying on Friday close and selling on Monday open (or vice versa)?
Even if you get the IV prediction right over the weekend, if you get the direction of the underlying wrong, you're probably not going to make any money.
Having said that, you could be very speculative any buy an outright put or call. With less risk but more commish and slippage, you could buy a calendar spread or debit vertical spread. Being a retail customer, I would think it would be hard for you to exploit this method however.
Vix typically goes down on friday, and up on monday.
Why?
Market makers look at the theta decay on options over the weekend, and lower their bids a bit on friday, which causes VIX to drop, on monday, their bids are back to normal, which causes VIX to go back up a bit.
Plus you can't outright buy or sell VIX, and the calls and puts price this factor in already.
Market makers look at the theta decay on options over the weekend, and lower their bids a bit on friday, which causes VIX to drop, on monday, their bids are back to normal, which causes VIX to go back up a bit.
Correct explanation.
Imagine the theta slope downwards to 0 at expiration: this curve is interupted by the weekends which would be a discontinuity. Discontinuities do not exist in nature so the gap has to be bridged. The effect is noticable on Thursday afternoon already.
Instead of using the expected volatility movement to trade volatility, trade outright price movement instead. In your own words, you believe you're observing an increase in volatility over the weekend. Increasing volatility generally means declining stock prices. Maybe you can grind out some money by buying into the adage of "Don't sell stocks on Monday". You're going to sell on Friday instead and ideally close out your short with a profit sometime during the following Monday.
