is this to say that prediction of VIX movement has no value in terms of trading SPX options? if one were to have a profound prediction of VIX movement, what would be the best way to play it then?
Change in demand for options is a sufficient, but not a necessary condition for changes in the level of VIX. Most of the time, changes in VIX are simply due to the delta to S&P. Now, why does VIX have any delta, if it's measuring volatility? Well, VIX is nothing more then a weighted average of the OTM option prices across the strike space, where the price of each option is weighted by the inverse square of the strike. Both calls and puts have a delta to S&P 500, but since OTM puts have a lower strike, they are weighted more. Because of the higher weight, they have a higher part in the overall delta of VIX and because of that, VIX has a negative delta - S&P moves down, VIX moves up and vice versa. No, you instinct should tell you to be long or short VIX futures.
So even if I knew exactly where the VIX is going to close tomorrow, there's no way for me to efficiently play this advantage with options? my idea was to either be long $SPX Vega by buying puts and calls (or even make a long directional bet, although it's risky), or, if my prediction is a decline in the VIX, I could short both puts and calls and buy/sell synthetic contracts (delta=1) to keep my overall Delta at 0. If by doing this i can effectively have a zero (or close to zero) total exposure to the Delta and Gamma of the puts and calls I sold, then I've got Theta working for me and a declining Vega on my side as well (provided my initial assumption about the VIX is right) SLE- I want to hear your view about this strategy. As for futures - I try to avoid them at this point and focus on options. Thanks for sharing your knowledge
If you are truly able to predict the level of VIX or even changes in the level of VIX, your best bet is to trade something delta-one, either S&P or maybe a VIX ETN. It is going to be pretty hard to play changes in variance (which is what VIX is) in options, unless you are willing to trade a wide range of strikes.
interesting. I was thinking of VIX changes as changes in the implied volatility of all S&P500 options.. thought I could short or long straddles according to where I see VIX going in the ultra-near term (1 day for example). you're suggesting using a Delta=1 position (synthetic contract) to play a very directional bet (long call+short put if bullish volatility, and vice versa if bearish on vol).. If I do that, wouldn't you recommend at least some sort of hedging? if so, in what form? Thanks. Lioresh.
when the VIX drops, the market tend to raise (or the other way around). However, if I were to BUY $SPX calls based on a prediction of VIX going down, I think I may still lose as even though the SPX will indeed go somewhat up, the volatility will decline and so I may lose on the Vega more than I'm actually gaining on the positive change in the underlying index. is it possible? If it is, then when I predict the VIX is about to drop maybe I should actually SELL (WRITE) SPX calls and SPX puts of the same strike price, so that my total Delta is 0, and the declining Vega will work for me (together with Theta of course)?
Rules of Successful Traders (1) Keep it as simple as possible. (2) Execute with professional judgement and infrastructure.
That makes sense, but wouldn't it require me to also but a corresponding OTM call so that my 0 delta exposure is maintained?
Short ATM put makes you long delta. Buying OTM put makes you shorter delta but not enough to offset all your long delta. You are still long delta. Generally if you think an ATM put is overpriced, then you should think an OTM put is way overpriced.