Wednesday, January 20, 2010

VIX Options Laid to Rest While the Cash Springs to Life

With this morning's settlement coming in for January VIX futures and options, we now know which expiration play mentioned in last weeks Expiration Musings had the upper hand. Due probably in part to the IBM beat down after hours last night following its earnings announcement, the major indices all gapped down this morning. The VIX in turn jumped up roughly 5% out the gate opening the day at 18.51. Settlement came in a smidge higher at 18.87.

Though both trades mentioned came out winners, the long 21 Jan put purchased for $1.10 produced the larger gain ($1.13). The profit would have actually been much better were it not for today's gap. The January cycle was yet another example where the premium in VIX futures proved unwarranted and was therefore snuffed out as the futures inevitably dropped to the cash.

I also noticed with today's notable sell-off, 10 day historical volatility on the SPX rose to around 14.5%, a level not seen since the beginning of December.

[Source: EduTrader]

If realized volatility of the SPX starts to find a home in the 14-15% range, my bet is the VIX will be reticent to probe much lower than its current 52 week low of 17. Though I don't want to make a mountain out of a molehill by reading too much into today's sell off, if today's price action is a sign of things to come the VIX won't be near as heavy in the coming weeks as it has been over the past month.

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5 comments:

scilella said...

Tyler,

Do you have any thoughts re. closing the VIX put position on tuesday vs. waiting for cash settlement on wednesday? In hindsight it would have been more lucrative to trade out of the position but I wonder whether you have any general "rules" around this...

Thanks,
Sal

Tyler Craig said...

Good question Sal. If I'm short puts, I'll always buy them back before expiration/settlement if I've made my profit target. If I haven't hit my profit target or if I'm long puts, it just depends. I don't really have a set rule. It's always sort of a gamble holding into wed. settlement because you could get a gap that throws everything off.

Bottom line: if I'm satisfied with my profit before expiration I'll exit on Tuesday. If I don't mind risking an adverse settlement price then I'll opt to hold into Wed.

scilella said...

Great - thanks for the guidance. I ended up selling my long puts on tuesday, due in part to the difference between trade and settlement commissions and my hunch that the VIX wouldn't drop below $17. And of course, some luck may have been involved...

Tyler Craig said...

Well played. Keep up the good work-

scilella said...

Thanks. I've learned a lot from your writings - a great blend of strategy and pragmatism. Look forward to your future posts...