Wednesday, October 14, 2009

Surveying the Volatility Landscape

Though VIX options usually expire the Wed prior to equity options expiration, the October cycle finds VIX expiration falling on the Wednesday(21st) after it. As mentioned in last months Lessons Learned from a Put Matrix, I like to keep an eye on VIX options each expiration cycle, particularly as the expiration date approaches in an effort to discover trade opportunities.

A quick survey of the current volatility landscape yields the following:

SPX 21 day HV = 17%
VIX = 22.86
Oct VIX futures = 23.50
Nov VIX futures = 25.30

Though the Oct futures are trading at about a 1 pt. premium to the cash VIX, that discrepancy will diminish as expiration approaches (either cash rising to futures or futures falling to cash). Given the shlacking that the VIX has taken over the last 8 trading sessions, it's quickly coming in line with the realized volatility we're seeing materialize in the SPX day to day. Tack on the fact that the VIX is oversold by just about every measure out there (% below 10 SMA, RSI, Stoch, et. al.) and you've got a pretty decent argument that the VIX is close to a short term bottom (click image to enlarge).
[Source: EduTrader]

One other quick observation regarding today's price action. I find it somewhat interesting that despite the SPX's explosion higher, the VIX was still able to close near the high of day. I don't mean to fall into the trap of hyper analyzing every tick in the VIX, but.... just sayin.

As mentioned in prior posts, my play du jour on the VIX tends to be selling naked puts. So what's in play between now and next Wed? Of the Oct strikes available, the 22.50 put is the only one I see worth considering. The Oct 20's have no bid and the Oct 25's are a too far in-the-money IMO. Selling the Oct. 22.50 puts for around $.50 gives the following risk graph (click image to enlarge):

[Source: EduTrader]

For related posts, check out:


Luis023 said...

After friday's movement and the VIX going down and down, do you still believe that on wednesday vix will be above 22.5? The fact that the future was 1 point ahead the index with only 8 days to maturity should have not been telling us that the future had to fall down to achieve parity on wednesday?

I just discover your blog, and you have great posts. keep doing it as good as usual.

Thank you

Tyler Craig said...


Thanks for stopping by. Glad you're enjoying the posts. In hindsight, it certainly would have been worth it to wait until Friday before selling the puts. Currently the Oct. 22.50 put is around $.80. I'm not sure if we get a settlement price above 22.50 (my crystal ball is a bit fuzzy), but I still personally like the risk-reward tradeoff (especially now that they're at $.80).

At VIX option expiration, the front month futures and spot VIX converge. The futures didn't "have to" fall to the spot price. The spot price could have risen to the futures. Or they could have met in the middle. There's no set rule for which one rises or falls. Though for the last few months, it certainly seems like the futures have been falling as opposed to spot rising.