well i’ll be gosh darned, these volatility expectations just refuse to die. anyone here an options trader? i could use some advice on a trade i’ve put on, but just isn’t working as expected. is the VIX futures chain usually in backwardation or contango? its in pretty severe backwardation right now, and the roll yield is killing me.
It’s pretty new (2003 or 2004, I guess) but vol is mean-reverting and there is no hedge that is not a VIX derivative or a complicated option hedge so the price of the thing is pretty much the market’s expectation for vol. I would say backwardation when vol is high and contango when it is low. I have data but I’m too lazy to look.
although vol is mean reverting, it’s probably best modeled using NGARCH. I don’t know a lot about the vix options (have traded them small size in PA) but do think VIX CAN (although not easily) be manipulated, b/c last I heard a very large HF in Chicago (hint hint) makes up some 30-50% of option trading…
i sold nov and dec VIX futures at 43 and 35, and am ‘dollar cost averaging up’ [chuckles nervously, wipes sweat off brow] but in hindsight, given how persistent the volatility expectations are, i should have probably sold the april, may contracts, by when the dust will likely have settled, and the chain likely would be back in contango. go out and buy stocks people, lol. please
rohufish Wrote: ------------------------------------------------------- > i sold nov and dec VIX futures at 43 and 35, and > am ‘dollar cost averaging up’ > > Your risk manager is letting you do that?
you’re talking to my risk manager, lol this is the tuition you pay to make money on the trade next time my own money, joey, no one other than me and my wife will cry
Futures chain has been in contango since inception, except for a few times likes these. Never played the futures, buy have played put spreads on the VIX options - buy slightly OTM puts, sell more OTM puts. Right now I’m long Dec 40 puts and short Dec 35 puts in about 2:1 ratio. You can’t take an outright directional position because the vol in these options is so high. I suppose a large fund could potentially manipulate the VIX, but why bother? Any money you might be able to make manipulating VIX options would be dwarfed by the risk you’re taking manipulating a large volume of SPX options.
Any money you > might be able to make manipulating VIX options > would be dwarfed by the risk you’re taking > manipulating a large volume of SPX options. How would you manipulate the vix? Are you talking about getting long futures on the vix and buying up SPX options until the futures contracts are in the money? How about this one: Take out a huge short position in a technology company where, let’s say, 80% of their expenses is employee compensation, particularly stock options. Then you manipulate the options market – not sure how or if even possible – to increase the implied vol on the options so that the stock options have to be booked as a bigger expense, thus, leading to lower NI, lower stock price. Totally impossible? Not sure, probably, especially if the vol numbers used to price the stock options is an average number derived over an extended period.
Well the VIX is calculated from near month ATM SPX options, so you’d have to manipulate that entire series, perhaps buying up calls and puts to increase vol, and hedging any remaining delta. Like I said, seems unlikely, and more importantly, pointless.
And even worse, an arbitrage for everyone else. If imlpied vol is demonstrably higher than any reasonable expectation of realized vol, you can arb it pretty easily.
NakedPuts Wrote: ------------------------------------------------------- > Well the VIX is calculated from near month ATM SPX > options, so you’d have to manipulate that entire > series, perhaps buying up calls and puts to > increase vol, and hedging any remaining delta. > Like I said, seems unlikely, and more importantly, > pointless. Pointless??? What if you were long a huge number of VIX Oct Futures, you could buy a bunch of OTM calls/puts on the Nov/Dec SPX series to increase the settlement which is the opening day each Wednesday following the Option Expirations. guess what today is? VIX settlement (VRO Index is the actual settlement PX). Large number of SPX options traded this AM. Vix spiked all the way up to 80+, but the buyer was only able to get the settlement of 63, 10 pts higher then yesteday close… I would bet this is pure manipulation.
I’ll admit that today’s action looks suspicious, especially given that the RVX and VXN opened roughly in line with yesterday’s close. Settlement is based upon actual traded prices, not b/a midpoints from which the cash VIX is calculated. This is why you often see crazy VIX spikes on the open, when options spreads are ridiculously wide. VRO difference from the prior day’s close as a percentage of the prior day’s close is usually 1-4%, although it has spiked to 7-9% several times. Today’s 18% is obviously a record. However, the current VIX would be based almost solely on NOV options, since it’s almost exactly 30 days until expiration, and I don’t see a ton of suspicious activity in those options. Furthermore, VIX is weighted towards ATM options, so manipulating OTM options wouldn’t have a large effect.
yes, all Nov Options used for settlement. I see there were some big buyers of puts on the HOSS, http://cfe.cboe.com/data/EOSpage.aspx
NakedPuts Wrote: ------------------------------------------------------- > Futures chain has been in contango since > inception, except for a few times likes these. thats what i thought - in normal conditions, vol is low, and buyers of the futures are essentially SPY hedgers, hence the contango. this is truly historic reversal - the sheer persistence of the vol expectations is amazing. we’ve been above 50 for a month almost, it just won’t come down. week after week after week. in the past, there’d be a big leg down, and things would get washed out, but this is just inexorable.
http://adamsoptions.blogspot.com/2008/10/upon-further-vix-review.html Interesting, he’s also got another post below this one on yesterday’s action.