Does the VIX relate to calls and puts equally?

Discussion in 'Options' started by BenChi, Nov 7, 2007.

  1. BenChi

    BenChi

    VIX tends to go up when the market goes down (today for example) - does this mean that premiums increase on call options on a big down day?
     
  2. no. Pick up a option book...Natenberg has a good one.

    High VIX = perception of a high degree of risk.

    and when does that happen? When the market is crashing... not when it's sky rocketing. A compare the VIX between 2000 - to 2003 and 2003 to 01/2007.
     
  3. Premiums on calls will necessarily go down on a big down day, because they lose intrinsic value or get farther from the money.

    However, the IV of calls will follow the IV of puts. Ignoring carry cost, the call and put of the same strike expiring at the same time will have the same amount of time premium because of conversion arbitrage. So the value of the calls will inflate somewhat from the IV expansion, making them drop a bit less than you'd expect from the movement in the stock.
     
  4. BenChi

    BenChi

    that doesn't really answer the question.

    here is an example:

    ON DAY ONE

    VIX is at 20

    SPY is at $100 per share

    I have Call expiring at some theoretical date in the future at $120 strike

    and

    a Put expiring at some theoretical date in the future at $80 strike

    they have an equal premium and expiration for the sake of this example.

    ON DAY TWO

    VIX goes to 25

    Spy goes to 90 per share.

    now here is the question: does the increasing VIX have any effect on the CALL premium?
     
  5. BenChi

    BenChi

    hey commiebot,

    ignore that reply, i was composing it while you were answering my question. thanks for your help, that is exactly what i was wondering