VIX Calls

Discussion in 'Options' started by bigbear1970, Apr 21, 2009.

  1. Anyone think the VIX will get back to the 42-45 range. Looking at getting some calls today with 2-3 month timeframe.
  2. dmo


    Just please understand what you are buying. For all practical purposes a vix call is a call on that month's futures contract, NOT on the cash vix. At expiration the cash and the futures contract converge, but before that (and especially 2 or 3 months before that) they can be two completely different animals.

    A few months ago, when the cash vix spiked up close to 90, some of the futures contracts lagged 30 or more points behind. I believe many of them never got above 60 - I'm sure Rallymode has all the details. Many call buyers couldn't understand why the vix was soaring and they were making no money.
  3. dr_sean


    If I was playing for a spot VIX back up to 42-45 in the next 2 months, I would look to be a seller as 2 months is some time and you'll need decay to make $$$.

    Buy the June 35 / 45 call's currently marking around 3.5 that's 3.5 at risk to win 6.5, caps w/ VIX printing 45 at June expo. Or you could sell the June 35 / 45 put spread which is the same play if you can sell it for 6.5.
  4. Daal


    VIX is headed higher, secular develering and a severe recession demands higher option premiums in a permanent basis simply because the uncertainty are so high, political risk(low tarp running out of money threatening LEH type failures) or 'change of the rules' also boost premiums. Ignore the occasional periods where the market get complacent, the market will quickly wake up when it gets hit with news surprises then put a massive move like yesterday
  5. Buying 2-3 month vol here[via vix derivs] given the current term structure is a poor trade. Sell SP deltas instead.
  6. dmo, just to summarize:

    1)vix options is based off futures as the underlying.
    2) futures will vary from cash quite a bit but always converges at expiration.

    based on this, wouldnt it be a very good trade to short the furthest month atm calls during those times when vix spiked above 60+ (yes i know futures wont spike as much, but it will still be at a very high level, it is related to vix after all)

    The reasoning been vix will likely go back down and as long as they converge by expiration, who cares what the middle looks like (if you dont get margin called).

    The risk been there is a spike when the call expires, but all things considered wouldnt that be a good risk/reward trade to make - when vix spikes short the furthest month atm calls (with enough cash to cover to avoid margin calls).
  7. dmo


    Right. To add a little detail: vix options are European-style, exercisable only at expiration. Between now and then, the only underlying instrument available for delta hedging, gamma scalping, locking in profits etc. is that month's futures contract, which will settle at the same price as the options.

    So for all practical purposes, the futures contract is the underlying for the options. The market recognizes that, and prices the options based on put-call parity with respect to the futures, not the cash.

    As a result, the IV of vix options should be calculated using the futures contract as the underlying. Unfortunately, TOS, IB and probably other data providers calculate IV using the cash index as the underlying, which yields useless IV information. Another reason I do my options analytics with Excel add-in functions such as Hoadley; that way I can set things up correctly.

    But while the market recognizes the futures as the underlying for the vix options, the regulatory authorities do not. That's mainly due to the split between the SEC and CFTC. Vix options are considered equity products and are regulated by the SEC; vix futures are regulated by the CFTC. This gives rise to the very annoying situation that there is no cross-margining between vix options and futures. You will pay the same margin on a losing futures position whether you have an offsetting options position or not.

    There is something to what you say. The vix is different from, say, the SPX in that it is essentially mean-reverting. That mean may change, but it's pretty certain that the vix will not behave like a stock or stock average. The DJIA rose steadily from 41 in 1932 to some 14,000 over a period of years. You won't see anything similar happen with the vix, which represents emotion, which cycles up and down. So if you short the vix above 60, it's pretty certain the pendulum will eventually swing the other way.

    That said, the devil's in the details. In the '87 crash - if there was a vix - it would have risen to about 150. Until the recent introduction of vix mini futures, the vix futures were $1000 per point. So if you shorted the futures at, say, 40 and they rose to 120, you would be looking at upwards of $80,000 per contract just to hang on. And there's no guarantee that those futures would drop back down to your buy point by expiration.

    The fact that the futures lagged so far behind cash when the vix spiked to 90 or so represents the fact that a lot of people were thinking like you - that shorting the vix was easy money. That of course made it less easy.
  8. dmo


    Rallymode, you seem to be saying that based on the current term structure, if you're bullish on the S&P, shorting the vix is a good bet, but if you're bearish, going long the vix is a poor bet.

    What is it about the current term structure that makes you say that?
  9. Right, 60-90 day futures are priced on the expensive side at the moment. You can certainly get long vol via vix derivs but dont expect much gearing before the SP sheds a decent amount of points first. Hence my rec to sell index deltas instead. Better yet, sell SP deltas 30-60 days out and short vol in vix 60-90 days out. It's a play on steepening of the curve.
  10. dmo


    Okay thanks. Yeah, I don't know what's holding the vix up here. Habit I guess. After being in a range this long I'm surprised it's not a lot lower.
    #10     Apr 22, 2009