hi FSU, in http://www.cboermc.com/media/52743 on pp. 22-23, it was mentioned that there is a way to play the HOSS by being liquidity providers. do you know how it works? i cant seem to figure it out. my impression is that on vix settlement day, due to spx options hedge demand (via variance strip http://www.cboe.com/data/variancestrips/intro.aspx) against short vix futures, there will be a vol bid and supply demand mismatch. thanks a lot, lcs
On the morning the VIX settles, the CBOE will post in real time the current expected opening price of the SPX options that will make up the VIX settlement (usually starting at about 8am ct.) http://cfe.cboe.com/data/EOSpage.aspx If you mark your order OPG (opening only) you will be able to participate in this process. The advantage you have here is you will actually be able to sell on the offer and buy on the bid. If you offer an option at the same price that it ends up opening at, you will be filled on a pro-rata basis with the other orders. If you offer an option at a lower price than it opens, you will get your entire order filled at the higher opening price. Sometimes there are many thousands of each strike offered or bid, which can create some real opportunities.
Given how the strip pricing is translated to the VIX print, it's fairly easy to manipulate the print up "in the course of bona fide market making activity". Been there, got a T-shirt.
saw this in the past http://onlyvix.blogspot.sg/2011/10/how-to-manipulate-vix-settlement-price.html but he retracted later http://onlyvix.blogspot.sg/2013/12/retraction-how-to-manipulate-vix.html the price weights are largest near atm and prob tough to affect you can prob extend the tails by putting in 0.05 bids all the way but its not going to change much? know that you have done it before but i just cant see how much you can move it
how about you write a spreadsheet and see how the weights work ? This said, new settlement process gives the exchange discretion to exclude trades at really low strikes so now it's harder (you actually have to be a proper player, we are not talking spending 20k but rather 200k). meanwhile, 14.70 preliminary print
http://www.stanford.edu/~iwrm/simple variance swaps latest.pdf http://onlyvix.blogspot.sg/2011/09/intuitive-understanding-of-vix-formula.html ahhah ok got it. the above images keeps getting stuck in my mind and keep thinking that having bids on the put tail is not going to affect much but i still cant figure out how providing liquidity during HOSS works even after FSU's reply...will continue digging.
The prices that print in the HOSS opening can be vastly disconnected from the first quotes streamed in the day session. For example, there was a slight imbalance to sell today, so you might have had an option that was quoted 10/11 on the open that was sold down to 9.5 in the OPG. In that case, if you had put out a 9.5 bid in the option, you could immediately hit the 10 bid once the options were open and scalp .50. The risk with this strategy is that there is a massive market-moving imbalance, such as the one that happened in February. In that case, there were orders to buy 285,000 options (compared to 100k in March and April), meaning many market-makers were left short and scrambling to cover. In that case, you would have been lucky to scratch your trade. You can get data for past option prints here: http://cfe.cboe.com/products/vixsettleseries.aspx
arh got it from liquidity provider's point of view. thks trickyname! thinking abt it from mm perspective. please correct me if I am wrong. if mm wanted to buy options to hedge expiring vix future, after HOSS, there is no need to buy those options already. After HOSS, their book would be managed as per normal just without VIX futures & options and most likely have some 30D SPX options . Wrong?
Depends on how you're running your book. If you had a naked VIX future position on as part of a vol bet, the future would roll off and your trade would be closed. If you bought a VIX future and sold options against it, and you do not buy the options back on the HOSS print, your book would be left net short the 30 day options. MMs do not typically aim to run their books unhedged unless they see a compelling trade opportunity involved, so they would probably have a hedge left on that would need to be unwound.
ok thks, trickyname. and it should be "Depends on how 'they' run 'their' books." ahha do mm usually flatten risk going expiry maybe using vix futures/options subject to liquidity? or is it usually via spx options? or its just a bit of both. if retailers/investors are not heavily involved in HOSS and its mostly mm trading in HOSS, it is interesting to know that mm are net short vix feb14 future. i always thought the street is usually long since real/fast money is short vix. hmm seems like demand for vix protection is higher despite the negative drift.