VIX Volume

I have been living trading credit spreads for a number of months on SPX and have started paper trading long puts and calls on the VIX. I just jumped into my first live VIX trade by going long the Mar 20 call @ 5.05. I noticed that volume is pretty low at 176 for the Mar contracts and as I would expect, Feb is significantly higher. I assume once January expiration comes around that volume will pick up. Since Volume really hasn’t been much of an issue with SPX I was wondering what kind of volume do most look for before trading?

Thanks

 

Question: Do you know what you are trading?

These are NOT options on the VIX index.

These are options on VIX futures.

They are also European style options and it's possible for the calls to trade under parity.

This is not your typical option.

As long as the markets are liquid, volume is not an issue.

Mark

 

I am aware of what I am trading. I make it a point to do as much research on the front end as to lessen the financial cost of ignorance.

One question I do have is how are markets liquid without volume . . . If the VIX rises by one point and the delta is .60 (ignoring the other Greeks for these purposes) how am I suppose to take advantage of it if no one is willing to buy my position at +.60. I would think you need a minimum amount of volume in order to make the markets liquid.

Am I taking crazy pills?

 

There are market makers, who will quote the options accordingly.

 

But without volume the MM's spreads will be wide thus making it difficult to turn a profit without a large move.

 

Correct, uptickk, you're going to need a big move to get out profitably. Does anyone here trade the futures actively?

 

If the VIX rises by one point it does not matter what the delta of oyur VIX options are because they are not tracking the spot VIX but the VIX futures. Therefore, you need to understand not what happens to your option if VIX goes up 1 point but what happens if the relevant VIX futures goes up by one point.

 

I traded some VIX options last week and this week. Late last week there was some action, but this week with the nearby VIX futures being range bound within a 1 or 2 point band and the ATM options having a bid-ask spread of .25 to .35, it's been like watching paint dry. Paint with a time decay. Do y'all typically short these?

I have better results trading the VIX futures directly, but with tight stops if I'm short because the price can zoom upwards at any time.

 

I understand in theory that European style options can trade under parity, but how does it work in practice? It just seems like there is an arbitrage opportunity there for a riskless profit if it were to happen..

 

dagnyt... is correct he just chose a poor way to express it. European options don’t trade under parity. They appear to trade under parity given that you’re applying the definition of parity which applies to American style options. The definition of parity on Euro style options is different and trust me they don’t trade under the correct price and there is no easy arbitrage.