The low vix is causing us credit spread/premium writers heart ache lately. Real intraday volatility is rather high (SPX) with up to around 1% daily up/down changes starting in the Oct period. This is my problem with VIX. It appears to be a high frequency filter based too much on option put/call ratio trading which is a much lower frequency than the daily trading volume and intraday equity motion of the underlying (again SPX). So the downside to premium option writers is that we get substantially lower premium and oftentimes much higher real intraday volatility/risk. Given the trending down in VIX that generally is counter to a rising bull market environment it may make more sense for premium options traders to swap out tactics and go with long lower cost straddles/strangles. This way we can leverage the intraday uncompensated volatility and get in and out on the swings. It seems to be better than holding low premium (e.g. cheap gamma) credit spreads open through expiration and being exposed too long to the daily spikes in an upwardly trending market. Thoughts? TS
The vix goes in the nines, it's time to buy the VIX 10 and 11 calls. The VIX can only go so low before it rebounds. I usually don't pay much attention to the value VIX. It's more important to me the direction in which it is traveling. Climbing sell, dropping buy. But it can only drop so far and it's running out of room. Other indicators for an upcoming major correction is the Bullishness of almost everyone. It's almost like hunting season on bears. Look out once the futures money starts going back into futures. All this market needs is a little push and it's back to the (S&P) 1200's and the vix in the teens or possibly the twenties.
i'd be careful of vix options they're deadly. back in july i learned my lesson. the vix ran to 21 ish then dropped back to 14 i bought some 12.5 nov's. i paid like $4 for them. the vix ran back to almost 19 i think and i barely broke even. i was so angry. the vix going forward is based on expectations not the current price. so if people expect the vix to go higher in 2007 they might keep zero premium in them. also the worst part these are european options and you can't exercise them so you're screwed if your $7 in the money and there only worth $4.
Sounds like you got bit on an implied volatility contraction. The way to neutralize this is to short a position at a further out strike (AKA Bull Call Spread). It limits your total net potential but at least it balances the deck with offsetting IV and you get a shot at a fair return. It's lower risk than strictly buying call options, but limited profit potential. Also reduces the cost of getting in with the offsetting premium. The break-even is at a lower strike price plus net debit. Maximum profit potential occurs if VIX rises above the out-of-the-money (higher) call option strike price and is defined. TS
that was different. 1994 the market was near 4k and was not much higher than 1990. this market has been skying for 50 months or 5k pts and earnings have been skying for 4 straight years and are at massive all time peaks . the most important thing is the economy is slowing and earnings will fall off peak levels.