Questions for Mark about Insurance

Discussion in 'Options' started by drcha, Jan 15, 2009.

  1. drcha

    drcha

    Mark,

    Truly enjoying your new book. I have two questions about insurance and neutral trading. If others wish to chime in I would welcome comments from anyone.

    1. In this atmosphere, I have been trading (wide) butterflies. I have much more experience with them than with condors, so I feel more comfortable with them. I do sometimes trade them with insurance, either at the longs or inside the longs. In your opinion, do flies lend themselves to insurance strategies less readily than condors, or what do you think are the pros and cons of each?

    2. Recently, I have also been paper trading VIX call options. I have no experience at all trading them with real money so at the moment I am trying to observe how they actually behave. As I was combing through my paper trades this morning, and also unhappily bailing out of one of my NDX Feb flies, I was thinking it would have been a good time to have a real VIX call :) Do you have any thoughts about using these in conjunction with puts/calls on the underlying as insurance?

    Thanks
    Mary
     
  2. dmo

    dmo

    Careful Mary - options on VIX are very poorly understood by most.

    For example, answer this question: Today the VIX closed at 51. If you had bought an April 50 put on the close, would that put have been in the money or out of the money?

    If you answered "OTM," then BZZZZ - better keep your money in a safe place for now. That's because the underlying for the April VIX is NOT the VIX index. It is the April VIX futures contract, which closed at 43.37.

    Strangely enough, there is absolutely nothing that ties the VIX futures to the VIX index, except at expiration. Last October the spread between the VIX index and the front-month VIX futures was over 30 points at one point - and more than that between the VIX and the back month futures. If you owned a 70 call when the VIX hit nearly 90, that call never went in the money, believe it or not. Lotsa people got screwed on that one.

    There are lots of quirks and strangenesses to the VIX options and futures. Please be sure you understand them thoroughly before putting real money in them.
     
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  4. spindr0

    spindr0

    I think that puts and calls for insurance should be implemented by those who are more risk averse and are looking to shift the risk/reward ratio in their option strategies. It's not for everyone or for every situation.
     
  5. MTE

    MTE

    I agree, if your positions carry the level of risk, that you feel you need to hedge then why put them on in that size in the first place!?
     
  6. Mary,

    This blogger (Bill Luby) has written about VIX options before, but today's post relates to your issue. I have no idea if his idea will help or not, but it is educational.

    http://vixandmore.blogspot.com/2009/01/vix-january-options-as-short-term.htm


    Sometimes insurance is worthwhile, even when risk is not substantial. It's a comfort zone decision.

    Mark