Wednesday, January 13, 2010

Expiration Musings

Apologies for the sparse posting since the new year rolled in. I've been swamped with other business and have found it difficult to find adequate time for my blogging. A few months ago I wouldn't have thought twice about only posting a few times a week instead of every trading day. Now I seem to feel a bit guilty anytime the blog gets neglected for a day or two.

If you're just tuning into the options arena, we've got expiration for January options rapidly approaching. Tomorrow marks the final trading day for index options such as the SPX and RUT, while Friday marks the final trading day for equity options. So if you've got any short Jan option positions remaining on your books, make sure to take care of those so as to avoid any unwanted assignment issues. Looking ahead to next week we've got VIX January options expiration on Wednesday. As is customary, let's take a look and see if we can find any short term expiration plays on the VIX. First off, let's recap current prices-

SPX 10 day HV = 12
VIX cash = 17.85
Jan VIX Futures = 19.50

Despite only having about 4 trading days before expiration, VIX futures are still trading at almost a 2 pt. premium to cash. As mentioned previously both will converge by expiration so that 2 pt. premium will diminish by next Wed - either cash rising to future or future falling to cash (or both). If memory serves correctly, VIX futures have had it wrong for quite a few months as the anticipated rise in the cash has yet to materialize. But hey who knows- maybe the blind squirrel futures traders are about to find their proverbial nut.
[Source: EduTrader]

From a bullish perspective one could make the case that the VIX probe below the bollinger bands on Monday may be signaling it's high time for the VIX to rally. Though I'd say that argument is on shaky ground given today's snap back rally in the SPX and subsequent resumption in VIX decline. If I were to consider a bullish play I'd probably look to sell January naked puts. The 19 strike put, currently trading at $.55, is really the only one worth considering. Here's the risk graph:
From a bearish perspective, one could certainly use Wednesday's sharp snap back rally as a sign that the resilient bulls are still coming out in force each time the market experiences any type of shallow pull back. If you think the market rally continues, it stands to reason the VIX will remain heavy into Jan expiration and a put purchase may just be your best bet. Instead of simply purchasing the 19 strike put, I'd opt for buying something ITM to raise your break even point. Let's use the Jan 21 put, currently trading around $1.10, as an example:

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