VIX options

Discussion in 'Options' started by qazmax, Jan 30, 2006.

  1. qazmax


    VIX options are coming on Feb 24. Anyone care to comment on the application of the Greeks to these options? Seems like launching a product that needs is priced on volatility which is also a measure of volatility might cause some kind of cosmic rift or something.

    How did anyone find a model to price these things?

    Will there be any risk management issues that are unusual for this product that do not apply to normal option?

  2. Good questions. But since the VIX futures move like mud compared to the VIX, it should be interesting to see how the options reflect the underlying.
  3. I imagine trying to get your hands around the IV/vega of an option based on volatility will send you to a parallell universe or cause a split in the ribbons of time and space....
  4. qazmax


    Vega risk of ATM VIX options?

    If you want to own volatility I guess you should buy Deep ITM VIX options. But what is the derivative of Vega if you are exposed to if you buy ATM VIX options?

    SPX index moves cause SPX options vols to change
    When SPX option vols change the VIX changes
    When the VIX changes the VIX option vol changes

    I need more coffee for this stuff...

  5. qazmax


    The CBOE says the VIX volatility in 2005 was 84%

    But the forward VIX was only 45.8%

  6. qazmax


    One notable difference:

    Shorter dated implieds are expected to be more volatile than longer dated implieds; the vol of vol is higher for shorter dated options.

  7. On what basis will the VIX options be settled ? From memory isn't the VIX an average of the IV on just 6 ATM options ? If so, and depending just how the VIX options are settled, aren't they (VIX options) wide open to manipulation ?

    Just a thought...
  8. Another thought (must stop it now), what is the VIX forward based on ?
  9. The VIX futures settlement is based on the final value of the VIX at the specified date.

    The reason why they do not track the VIX is because it is VERY hard to contrust the VIX and arb trade it against the futures. The cost of carry (holding options) is too expensive with the time decay.

    They do rapidly approach the VIX near the contract date, but before then they are alseep.
    #10     Jan 31, 2006