Thursday, November 12, 2009

Volatility Landscape and VIX Option Play

Per my comments on monday's VIX Sonar post, I've been stalking potential short put plays with the November VIX options. I went ahead and pulled the trigger yesterday on the NOV 22.50's, selling them at $.60 credit. Those of you who follow me on twitter are probably already aware of the trade (I tweeted it yesterday), so let me use today's post to elaborate on the rationale, starting with a recap of the current volatility landscape on the S&P 500 as of yesterday.

21 day HV = 21
Cash VIX = 23
Nov VIX Futures = 23.7

As the 21day historical volatility states, the S&P has been realizing around 21% volatility for the past few weeks. With last weeks rally, the VIX has taken it on the chin dropping to sub 23 intraday yesterday, which puts it pretty much in line with 21 HV. Remember, the VIX generally trades at a premium to realized vol, especially in 2009. Tack on the fact that the VIX was oversold by most measures, and I think we had a pretty solid thesis for selling puts.

As the chart below shows, the VIX was roughly 11% below it's 10 day simple moving average, as well as oversold based on the modified stochastic displayed (click image to enlarge).

[Source: EduTrader]

The following graphic displays the risk graph of the short NOV 22.50 put with it's corresponding profit/loss zones:


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4 comments:

Tasya Zigy said...

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Tyler Craig said...

Thanks for stopping by Tasya-

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