Ivol posted first IV numbers based on yesterday's trades , and just like I predicted the IV is around 90. http://www.ivolatility.com/options.j?ticker=vix&R=0&top_lookup__is__sent=1
Thanks KTM on your explanation of SPAN. You comments above make me question why futures contracts follow the underlying so often. An obvious reason would be because they reflect the market's sum view of the forward price at expiration, which happens to be the current spot price. Therefore, both will move together. One problem with this is that the spot price is NOT the market's sum view of the forward price at expiration, but the sum view of the forward price for ALL expiration dates. Although this thought could still hold water in that all futures contracts for any date follow the spot market. The other reason why futures contracts follow the spot is because of arbitrage. When prices get out of line, arbers come in and move it back to where it should be. With the VIX, this is not possible â or very difficult to do. So perhaps the VIX futures contracts represent what futures and forwards would do if arbing was not possible. What if you could not arb the ES in any way? I often speak out loud when I think through ideas. This post is in that same vein. Granville
Another random thought.... Whereas forward contracts are often arb'ed, options are not (they are rather 'priced'). Therefore we could see the options moving just like any other option. Now I'm diluting my content rich posts with random thoughts
granville/ktm - you are making valid points - i have pulled down the Feb VIX future daily data from cfe's website - using daily closing prices from end of last year to Feb 14 (last trading day), the correlation of log-returns between VIX index and VIX future is 0.65, which makes sense, i.e. they have to be correlated (despite my sample being small) - what is different is the volatility of log-returns - the VIX index volatility is 86% annualized for the same period, which is by the way close to the implied VIX option volatility which IV_trader posted above - the Vix futures volatility is only 29% - my guess is the (only) reason for this is the lack of ability to arb - e.g. if VIX index moves by 1, if one could arb perfectly, the future would move by 1 (disregarding fair value adjustments for the sake of example), otherwise, the lack of arbing ability results in only a "partial correction", i.e. to fully correct by 1 point would be too expensive/cost prohibitive/risky etc. - hence the lower volatility in the futures - i think the only "arb" in the VIX futures may possibly be a convergence play a few days before the expiry - the options on VIX are a completely different animal as you can see above, they track the actual/historical volatility pretty close, same as options on any other instrument since VIX's long-term HV's is available and can be modelled etc. - i am looking forward to seeing how the options will trade when the volatility picks up, but great to see that already they are attracting liquidity at a much greater pace than the futures - all the best.
Yes, they certainly - which has me dusting off old textbooks looking up option pricing formulas. Enjoy the rest of your weekend, Granville
one point I"d like to make after reading several posts here. The underlying is not the spot vix but rather a theoretical forward contract on the vix maturing on the same date as the option. One question I am asking myself here and maybe someone here might help me find the solution is : Can the vix futures (VBI) prices divided by 10 can by seen as a proxy of the theoretical forward contracts used as underlying for the vix options. More precisely and as an example, the Vix May futures price divided by 10 would then be used as the underlying price for the May vix options. Any comment or input appreciated.
This actually has me on the sidelines for the moment. What will the VIX options reflect? - The forward or the spot? Again, from the CBOE website: ************************************************************** CBOE VOLATILITY INDEX® (VIX®) OPTIONS Underlying: The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. AND: Will VIX options always reflect current, real-time, VIX values? Probably not, at least not until you get close to expiration. The underlying for VIX options is the expected, or forward, value of VIX at expiration, rather than the current, or "spot" VIX value. ************************************************************** So I am honestly a bit confused. It seems to me that the CBOE website is speaking from both sides of their mouth. Contract specifications indicate that the underlying is the spot VIX, the FAQ section refers to the forward value. Maybe they are trying to hedge expectations? I'm sure some hedge fund has been working on this for months...
Another thought: The VIX futures price does not reflect the "expected future" spot price of the VIX alone. Rather, just like any other futures contract, it reflects the expected future price PLUS the cost of carry. Therefore: VIX Futures = VIX Spot + Cost of Carry I do not see a cost of carry component in any options pricing model. Therefore if the VIX options do not reflect the spot VIX index I will be both surprised and corrected as this would indicate a directional bias not found in the options market that make up the index. Also note: Iâm trying to understand this like the rest of you. If you can think of some hole in my arguments then please post! Granville
Options on the VIX are really options on options, a.k.a 'Compound Options'. This is really cool because up to now, compound options have only been traded over the counter (OTC) and not on any exchange that I know of. My assumption is that the VIX options will be priced similiar to other compound options and will probably not reflect the futures price.