Current value of the VIX (SP 500) index seems to be low compared to the past. Apparently this indicates that implied vol of the price model for options in general is also low. What are you expectations to the VIX levels for the next 3 months?
I'm hoping it will touch 25 before Mar expiry. Betting on higher VIX during Q1 2010 is not a bad idea, methinks.
Maybe it is time to look at a Vega game. We are on the same page; beside the higher VIX level I also think that the current stock levels will be traded lower during Q1 2010. SP 500 around the 1000 mark at marts would be perfect for my current positions.
To play devil's advocate, I will take the other side. VIX is now at the historical norm. It is be flat or lower until the end of the first quarter. Good results and guidance will keep it there. Then, when second quarter results come out, there will be disappointment (because of higher expectations). So, I would be looking at bullish to neutral short strategies until the middle of March. Then look to strategies that take advantage of increasing vega (VIX) and bearish strategies. Not that I am one to forecast--just taking the other side.
If there is anything we should expect from volatility is that it generally travels in regimes for a long while. I.e. just because it is low, don't expect it to spike anytime soon. A lot of shorts got killed waiting for the spike in early 2004 to late 2007. It came when everyone on the board was ridiculed for even thinking of shorting (i.e. like a thief in the night). A time when stocktr3der was simultaneously annihilating and infuriating those on the short side.
I guess in it is nature implied vol can never hit zero and never be high for a long time and that it seems to be completely unpredictable, anyway we have to make some bets. I think that expectations to company earnings already are too high priced in. Iâll make the bet that there is room for a Vega game here in Q1. In my view delta will always be more important than Vega so Iâm considering trading delta neutral.
does anybody use Connors CVRs to predict VIX extremes or to trade VIX futures? CVRs are basically various overbought/oversold conditions pointing to pending VIX (and SPY) reversals.
dtrader98, jwcapital, point taken about vol regimes + case for it to stay low. dtrader98, have you done any work on the nature of regimes/regime changes in vol? Asking because I've seen some educated/quantitative posts by you in the past.
So what strategy are you looking at? How about long straddles? Delta neutral taking advantage of a volatility increase and a huge move in either direction. Even if the underlying hardly moves, but volatility goes up, you win. You can also win if volatility is flat or lower, but get a huge move anyway. But all of this has to occur quickly if using front-month options (fighting theta decay).
Yes long straddles or long strangles. Strangles seems to have lower delta's and lower Vegaâs. Straddles seemes to have higher gamma and higher theta and higher Vega. It seems that strangle is cheaper but Iâll go for the long straddle it is easier to have the same strike.