Friday, August 21, 2009

Back in the Saddle

Hey all. I'm back in the saddle from my hiatus with the good ole relatives from the Crossroads of America. While it was good to have some down time from the market, I must admit it's good to be back.

As I caught back up with my reading I found a few gems in the blogosphere worth a look if you missed em:

Bill Luby at VIXand MORE did a superb job in summing up the perpetual overpricing we've seen in the VIX vs. realized volatility over the past 6 months. Take a look at his post: The Gap Between the VIX and Realized Volatility.

For those seeking to get long volatility via the VIX or SPX, thus far it seems as if shorting puts on the VIX has worked better than most alternatives - long VIX calls or call spreads, long VXX, long VIX futures, long straddles/strangles on SPX, etc...

With August VIX options settling at 28.76, shorting the Aug 25 puts worked like a charm this go around. For an insightful take on VIX settlement take a look at Adam Warner's VIX Settlement Shenaigans over at DailyOptionsReport

Current 30 day HV on SPX is sitting at 17%, the spot VIX is around 25%, and Sept. VIX Futures at 27.35. The uptick in realized volatility as predicted by VIX and VIX futures has yet to materialize. Will we finally see it in the September cycle?

If I had to play VIX options for September I'd probably look at selling Sept. 25 puts sometime in the next week or so. With the way the VIX is priced right now, put sellers don't really have much choice in terms of strike prices. 25 is about the only one with enough juice to consider playing.

On a side note I like the higher probability inherent with selling the OTM put (particularly on a mean reverting underlying such as the VIX) vs. making a speculative play by buying OTM calls.


James said...

Great series of blogs. I found the Greeks tutorial quite useful. I have a question on the implied volatility of the VIX options. Why is the IV for call options so much more higher (100+) than the IV for put options? Is it because investors use the call options to hedge against a pull back? and are willing to pay a premium for it?

Tyler Craig said...


The underlying for VIX options is actually the VIX futures rather than the cash of spot VIX. Most brokers erroneously use the spot VIX in calculating IV for VIX options rather than using VIX futures- hence the discrepancies in call IV vs. puts. Dean Mouscher expounds on this in his video "The VIX- What You Need to Know". You can check it out at