Option IV - Futures Relationships

Discussion in 'Options' started by jmsco, Jun 27, 2007.

  1. jmsco


    In looking at the ES there is a significant relationship between the ES return and the change in the VIX level (No noble prize in that statement). As ES moves up the Vix generally moves down and as the ES plunges downward the VIX spikes.

    My question is what is the relationship between the IV of options on other futures and the direction of the underlying. For example, if there was a VIX equivalent with GC, EC, TY, etc what would that relationship look like?

    Also, are there any option packages that provide a summary of the IV of the different futures contracts?

  2. Financial commodities, i.e. stocks, bonds and currencies, have an inverse relationship between price and volatility movement. Physical commodities: i.e. grains, metals, energies and softs, have a congruent relationship between price and volatility movement. It's rooted in fear. When stocks and bonds go down, people become afraid. When commodities rally, it's usually because of supply disruption.......and people become afraid of shortages.
  3. jmsco


    Thanks for the succinct reply, NazzDack. Today was a good day to be long deltas and short Vol in the ES.

    I'll have to go back and look at those IV relationships as well as the intermarket relationships.

    Do most option traders take into account the dependence relationship between price and IV when looking at option outcomes? i.e. If you're short delta and short vega in the ES then some or all of the gains made from a downward move could be lost to vega.

  4. wayneL


    Of course. Every option trade is a volatility bet to some extent.

    Hang on! Most probably don't and wonder how the market makers ripped them off again. LOL
  5. Prevail

    Prevail Guest

    ripped off today is right. vix down > 3 points.

    crude also appears to have its "fear skew" to the upside.

    interesting question.
  6. The profitability on the short delta hedge against short otm puts is a function of stat and strip vols, as well as the smile curvature. The price received by the seller of the downside otm/atm swap [insurance or stop // gamma] needs to compensate for the rise in strip volatility into the decline. The short deltas win within the atm straddle boundary, losing beyond. This assumes a dynamic hedge.

    Read Derman's sticky delta.
  7. jmsco


    Atticus, you know I don't speak spanish. English please. preferably slowly with small words and color illustrations.

    How stationary is the relationship between the IV surface and the underlying? If not very, then how does one estimate the parameters for the relationship? Obviously, over time the relationship for a particular set of options changes towards expiration.