Wednesday, November 18, 2009

Narrow Escape

Looks like VIX November settlement came in at $22.54. Remember you can view the settlement price via CBOE's Index Settlement Values page or via the ticker VRO. As far as I can tell the CBOE has yet to publish the data, but VRO is currently at $22.54. Looks like the opening price for the cash VIX this morning was $22.35, so the settlement price seems in line or perhaps a minor gift to those who held their short 22.50 puts into expiration. You don't cut it much closer than settling $.04 out-of-the-money.
[Source: EduTrader]

I received a question regarding selling call spreads, such as the 32.50-35, on the VIX via December options. Let me preface my answer by stating that I can't remember the last time I traded call spreads on the VIX, so my answer is coming from an objective bystander's point of view, not from a extensive experienced one. First off, since selling call spreads is a neutral to bearish bet, you'd obviously need to have that type of bias right now on VIX December futures before considering the trade. Here's how the volatility landscape stands right now:

21 day HV on SPX = 21%
Cash VIX = 22%
December VIX Futures = 24.8

So, the Dec futures are sitting around a 3 point premium to the cash. If you're of the opinion that the cash VIX is going to remain in the low 20's, and in turn Dec futures will continue to diminish over the next month, then a selling call spreads sounds feasible. The other two considerations are timing and potential profit.

Timing: Based on the nature of the VIX, particularly over the past few months, I think it's fair to say the ideal time to sell call spreads is immediately after the VIX spikes and forms a short term top, such as numbers 1-5 in the chart below (with a 10 day MA and bollinger bands). Under those circumstances you're likely to get some type of pop in the futures thereby increasing call premiums. Given that the VIX has already dropped significantly in the last 2 weeks, I'm not sure I'm in love with the timing. It would be nice to see some type of pop in the VIX before selling call spreads.
[Source: EduTrader]

Potential Profit: The other consideration is whether or not there is sufficient premium in the call spreads to make it worth your while. Currently I'm seeing the following:

Dec 32.50- 35 call spread @ $.20 credit
Dec 32.50 - 37.50 call spread @ $30 credit
Dec 30-35 call spread @ $45 credit

Based on current prices we're not dealing with a lot of potential credit. Consequently, Dec call spreads don't seem all that alluring to me at this point.

In reviewing my posts the last few weeks, it seems I've been fixated on the VIX and volatility. This is due primarily to my responses to the Volatility quiz as well as VIX expiration. For those of you that are tired of hearing volatility this and volatility that, I'll see if I can mix things up a bit going forward.


Anonymous said...

your views on call spread makes sense.
Any good ideas what to trade now?

Tyler Craig said...

Today's VIX spike is a prime example why I don't like to enter call spreads when the VIX is somewhat depressed.

No trade ideas off the top of my head for today.


Now thats great news as such.