VIX and More

Today was the first full day of the CBOE Risk Management Conference and between the presentations, sidebar conversations and opportunities to meet and greet, I have to say that things hit full stride very quickly.

Today CBOE CEO Ed Tilly announced that the CBOE will roll out nearly 24 hours of trading, five days per week in VIX futures beginning on Sunday, June 22. This announcement follows another important announcement last week that options on VXST (the CBOE Short-Term Volatility Index) will commence on April 10. Clearly, things continue to move forward on the volatility product front and at the end of the year, I suspect we will lock back on these two developments as critical milestones in the volatility space.

Today I had the opportunity to listen to Marvin Zonis give a keynote address on “New Insights into Geopolitical Risk: Examining Geopolitical Risk Hot Spots and the Implications for Trading Strategies and Risk Management.” For anyone wondering about what it might take to drive the VIX higher over the course of the next few years, Zonis had a laundry list of grave concerns (Ukraine, Japan/China, Korean Peninsula, Pakistan, Iran/Israel/nuclear weapons, Egypt/Syria/Turkey, China, political stagnation, etc.) and summarized the situation by saying, “We are in the age of major, major political risk.”

Another featured speaker was Maneesh Deshpande, who talked extensively about the evolution of the demand for volatility products as well as the evolution of the supply for volatility products. Maneesh had a number of interesting observations about new players and new strategies in the volatility space. He also expressed concern about the crowded VIX short trade and the potential for the next crisis that does not mean-revert quickly to lead to a sharp second VIX spike as shorts scramble to cover their positions.

Also of interest was a two-part presentation with Dominic Salvino discussing VXST and other volatility index products (he expects interest in VXST futures will pick up dramatically after the options are launched in less than a month) as well as a detailed description of the VIX settlement process (VIX SOQ) by Bill Speth of the CBOE

Other sessions I attended today included:

• a panel on volatility as an asset class that produced considerable debate on the proper answer to that question as well as a good deal of criticism of tail risk strategies
• two speakers on trading volatility across asset classes that shared details on the methodology they use to generate trade ideas as well as quite a few cross-asset class pairs trades

Last but not least, I had the opportunity to meet quite a few people who have been regular readers of VIX and More over the years, many of whom nudged me to ramp up my posting frequency – which I certainly intend to do in 2014, starting this week.

Related posts:

• Be Greedy When Others Are Fearful (Barron’s)
• Charting the Recent Decline of the BRIC Components
• Using DXJ to Monitor Developments in Japanese Equities, Currency and Risk
• VXEEM as a Measure of Emerging Markets Volatility and Risk
• Chart of the Week: EGPT and Collateral Damage
• VIX March Futures and Options Expiration on Monday, Not Tuesday
• The New VXST and VXST:VIX Ratio

Disclosure(s): CBOE is an advertiser on VIX and More

Just a quick reminder for those who may not be aware of it that the VIX futures and options expiration for March falls on next Tuesday, March 18^th, not the typical Wednesday. This means that the VIX special opening quotation (SOQ) used to determine the March settlement price will be at the open on Tuesday and also the last trading day for the VIX March futures and options will be on Monday. With the speed at which things are developing in Ukraine and elsewhere, these 24 hours could turn out to be significant.

For those who are interested in a link to the VIX options expiration calendar, the CBOE maintains a 2014 options expiration calendar here, with the VIX expiration highlighted in a solid dark orange box. Note that I have a link to the CBOE options expiration calendar on the blog at the bottom of my VIX, Sentiment & Options section.

To review how the VIX expiration dates are determined, the VIX futures and options expire 30 days before the SPX monthly options expiration in the following month. These SPX options expirations are almost always on a Friday, therefore the VIX expiration is almost always on the Wednesday four weeks and two days prior to the SPX expiration. The complication factor for the VIX March 2014 expiration cycle is that on Friday, April 18, the CBOE is closed due to the Good Friday holiday, which pushes up the April SPX expiration to Thursday, April 17, with the result that the VIX March expiration is pushed up one day as well.

Last but not least, the VIX SOQ probably deserves a separate post in order to explain some of its unique characteristics, but it is worth noting that the VIX SOQ is not the price at which the VIX opens, but rather another separate calculation that takes place at the open.

Related posts:

• The Convergence of VIX and VIX Futures at Expiration
• VIX January Options as Short-Term Portfolio Protection
• Pricing of VIX August and September Calls
• Another Record Day in VIX Call Volume
• Selling VIX Puts Pre-Expiration
• A VIX Butterfly Play
• Follow-Up to “A VIX Butterfly Play”
• Lots of Premium Left on Last Day of Trading in VIX November Options
• SPX Options Carpet Bomb Pushes VIX SOQ to 63.04 (!)

Disclosure(s): CBOE is an advertiser on VIX and More

The monthly VIX futures and options expiration is a fascinating time from an options strategy perspective, as it marks the point in time in which VIX futures prices collide with the cash/spot VIX. Thanks to the VIX Special Opening Quotation (SOQ), that price collision is an inexact one, but for all practical purposes, the VIX front month futures and cash/spot index converge once every month, just after the open on a Wednesday thirty days before the standard monthly option in the S&P 500 Index options the following month.

To make things more interesting, the last day of trading for the front month VIX futures and options is the Tuesday session just prior to expiration.

All these product attributes make it difficult to navigate the complex waters of the VIX product platform just prior to expiration, but because the VIX is capable of such sudden sharp moves [see VIX All-Time Spike #11 (and a treasure trove of VIX spike data) for some details,] options prices have to include the possibility of a sudden VIX spike right up until the moment of expiration.

For these reasons, it is sometimes possible to sell VIX options for a surprisingly high premium right before expiration. In the graphic below, I have captured some data from the TD Ameritrade/thinkorswim platform that shows the prices of various VIX calls as of about 2:00 p.m. ET that expire tomorrow, with just more than two hours of trading left in these products. For comparison purposes, I have also included the September options for the same strikes, which will expire on September 18^th.  For the record, at the time of this snapshot, the VIX was at 14.48 and the August VX futures (now available on the TD Ameritrade/thinkorswim platform as ticker /VXQ3) were at 14.43.

Note that the TD Ameritrade/thinkorswim platform includes information on the implied volatility calculated for these VIX calls as well as the estimated probability that these will expire out-of-the-money on September 18^th. Theoretically at least, the VIX August 25 calls have a more than 1% of expiring in-the-money at tomorrow’s open, while there is more than a 5% chance that the VIX September 25 calls will expire in-the-money. With an implied volatility of 139%, the VIX September 25 calls are currently bid-ask at 0.25 – 0.30.

I am not recommending selling VIX calls just prior to expiration and I certainly would want anyone who is interested in these type of trades to start out with defined risk trades (e.g., bear call spreads) before considering trades with unlimited risk...but the possible trading opportunities are fascinating, to me at least.

[source(s): TD Ameritrade/thinkorswim]

For those interested in additional background on the VIX expiration and some potential trade ideas, the posts below should provide a good jumping off point.

Related posts:

• VIX All-Time Spike #11 (and a treasure trove of VIX spike data)
• Selling VIX Puts Pre-Expiration
• VIX Expiration Straddles
• VIX Expiration Condors
• A VIX Butterfly Play
• Follow Up to “A VIX Butterfly Play”
• The Convergence of VIX and VIX Futures at Expiration
• SPX Options Carpet Bomb Pushes VIX SOQ to 63.04 (!)
• Another Winner from Jeff Augen

Disclosure(s): neutral position in VIX via options at time of writing

Exactly three weeks ago today, I thought I would break some news on an intraday basis with a post that I titled, Record VIX Options Volume and Large Purchases of VIX Calls. As it turns out, by the time the day’s total volume was tallied, February 26^th turned out to be an all-time record for VIX options volume in general and VIX calls in particular.

The events of three weeks ago now look a little less impressive in light of today’s new record in VIX call volume. Truth be told, VIX options seem to be attracting the attention of a new group of investors. In fact, during the CBOE Risk Management Conference earlier this month, there was a great deal of speculation surrounding who some of the new players in the VIX space might be that are responsible for the new growth in VIX futures and VIX options that appears to be independent of the volume driven by VIX ETPs.  [Hedge funds, proprietary trading firms, commodity trading pools/advisors, insurance companies, bond traders, FX traders and others were among the names that were bandied about…]

As is typically the case with the VIX, call volume outpaced put volume by a substantial margin. Today the call to put ratio was about 2.2 to 1, slightly higher than the average of 1.9 to 1. That being said, put buyers appeared to be a little more aggressive than call buyers, with 42% of all puts bought on the ask, as opposed to 30% of the calls, according to data provided by LivevolPro.

Investors are always looking for an interpretive overlay for these VIX options transactions. Frankly, on the day before the March VIX expiration, a great deal of the options activity is the result of large investors closing out March positions or attempting to game the special opening quotation (VIX SOQ) from tomorrow’s open that establishes the settlement price for VIX options and futures.  As a result of that low signal to noise ratio, the day prior to expiration is generally not a productive time for reading options entrails, though there will no doubt be some who are hell-bent on some sort of options divination regardless of where we are in the VIX expiration cycle.  For today at least, I would suggest that the links below might bear more fruit. 

Related posts:

• Record VIX Options Volume and Large Purchases of VIX Calls
• A VIX Risk Reversal
• VIX Puts Looking Attractive
• Selling VIX Puts Pre-Expiration
• A VIX Butterfly Play
• Follow-Up To “A VIX Butterfly Play”
• SPX Options Carpet Bomb Takes VIX SOQ to 63.04(!)
• Taking Profits in VIX Options (and ETPs)
• VIX Implied Volatility Exceeds 2008 Crisis Levels

[source(s): LivevolPro.com]

Disclosure(s): Livevol and the CBOE are advertisers on VIX and More

As action in the TVIX heats up again today (up 15% on 21 million shares traded), I gave some thought to who might be trading what I called in this space over a year ago “day trading rocket fuel.”

Fortunately, we have the optionsXpress Trading Patterns feature to help answer this question.

In the graphic below, it appears that TVIX is part of the arsenal of those who favor the high volatility products that are ideally suited to short-term trades. These include the 3x leveraged ETPs (TNA and TZA), the 2x leveraged ETP for silver (AGQ) and a handful of futures products based on the S&P 500, Dow Jones Industrial Average and crude oil. Two high flying stocks are also on the list, Renren (RENN) and BroadVision (BVSN) – the latter of which just happens to be the first or second internet stock I ever purchased, some 16 years ago.

It turns out I cannot type fast enough to keep up with market events. As I was typing this, there appeared to be another short squeeze in TVIX (see VXX Options Calm After Second Highest Volume Day Ever for details on the last one), though the markets seem to be settling back down once again.

Finally, a quick reminder that today is the last trading day for VIX February options. VIX February futures can be traded through tomorrow’s pre-market session, which runs from 8:00 – 9:15 a.m. ET. Both products settle with a special opening quotation (VIX SOQ) at the beginning of tomorrow’s regular trading session.

Related posts:

• Volatility Becomes Unhinged on Friday
• VXX Options Calm After Second Highest Volume Day Ever
• TVIX Finally Getting Its Due As Day Trading Rocket Fuel
• Who Trades the VIX and VXX?
• Optionsxpress Trading Patterns and the VIX

[source(s): optionsXpress.com]

Disclosure(s): short VXX and TVIX at time of writing

Selling naked puts on the VIX just prior to expiration can be a surprisingly low risk volatility play.

Normally, selling naked puts is a dangerous strategy because of the risk that negative news can overwhelm the underlying, causing it to gap down and create a large loss. With the VIX, however, spikes are almost always upward, because while threats to equities are relatively easy to identify, it is much more difficult to discern when these threats are suddenly extinguished.

For this reason – and because the VIX has lately shown some reluctance to drop below the recent floor of 27 – selling a naked put on the VIX is a lot less risky than selling naked puts on other securities. Risk to the down side is definitely limited, yet the limitations are not perfectly mathematically quantifiable.

A sale of the June 30 put illustrates one potential naked put sale opportunity. The profit and loss chart below outlines what the trade looks like. With yesterday’s closing price of 30.81, the trade is profitable if the VIX rises, drifts sideways or loses up to 1.61 prior to tomorrow's special opening quotation. The gain is $80 per contract. The profit and loss chart shows that a loss of $170 per contract occurs at 27.50. Assuming 27.00 is a floor in the VIX, then the maximum loss is likely to be capped at $220. While a 12.3% drop in the VIX in one day cannot be ruled out, it is obviously not a very likely scenario.

Reminder: VIX options expire on Wednesdays. The June VIX options expire June 17^th this cycle. The last trading day for these options is today, Tuesday, June 16^rd. (See the 2009 options expiration calendar for more the full 2009 options expiration schedule.)

[source: optionsXpress]

Disclosure: Neutral position in VIX via options at time of writing.

Someone asked me to explain how the VIX options trade I outlined yesterday in A VIX Butterfly Play turned out. I will try to keep the explanation short.

The original trade, which I described yesterday morning when the VIX was trading at 50.04, was as follows:

• long 10 VIX Feb 45 calls
• short 20 VIX Feb 50 calls
• long 10 VIX Feb 55 calls

To review, yesterday was the last trading day in VIX February options and today the VIX February contract exercise-settlement value was fixed at a special opening quotation (SOQ) of the VIX that was based off of the SPX March options series. Today’s SOQ (ticker VRO) was 48.40, which was 0.26 below yesterday's VIX close.

[Note that the reason the VIX has its own options expiration calendar is that VIX options settle 30 days prior to the options expiration date for SPX options in the subsequent month.]

To summarize, the profit zone for this trade was a VIX of 46.80 - 53.20, with the trade breaking even at the extremes of the range. The maximum profit was at a VIX of 50.00.

With a 10/20/10 position, the maximum potential profit for this trade was $3200; the maximum potential loss (with a VIX either at 45 or below or at 55 or above) was $1800. At 48.40, the VIX just happened to close exactly halfway between the maximum gain and the break even area. As a result, the trade gained half of the maximum potential profit, or $1600. Of course these profit and loss numbers are based on a position involving 40 calls (10/20/10). I consider that to be a 10 unit trade. With the accounting on an individual unit basis (long 1, short 2, long 1), the profit would have been $160 per unit.

In one sense, this type of trade is a pure gamble on volatility, but when volatility is unusually high, as it was last night, the profit zone can be large enough to make it a positive expectation trade, depending on one's forecast of overnight volatility.

I usually shy away from generating trade ideas, but here is a gamble that I know at least one trader is sure to be taking today: a VIX pre-expiration butterfly.

The butterfly trade highlighted below is for illustrative purposes only, but should explain the approach. The idea is simple. This butterfly trade will make a profit if the special opening quotation (SOQ) for the VIX is between 46.80 and 53.20 – about 6.4% in either direction from the current VIX level of about 50. In other words, if the VIX falls in a 12.8% band around the current price, the trade makes money.

Of course a lot can happen with the VIX in less than a day, but in terms of trading, there are about 3 ½ hours left in today’s session. Before tomorrow’s open, there are several important economic reports, including January building permits and housing starts, as well as January industrial production and capacity utilization. If those reports don’t bring the end of the world any nearer than it is now – or indicate that all the economic problems are suddenly solved – then the VIX butterfly trade should be in good shape.

Note that the maximum loss is about 56% of the potential maximum gain, which will happen if the VIX SOQ is ‘pinned’ at 50 tomorrow morning.

[source: optionsXpress]

VIX options expire tomorrow morning in a VIX special opening quotation (SOQ) and with only one hour of trading left today VIX calls that are still almost two dollars out of the money (November 75 calls) just traded at 1.20, suggesting that traders see a significant probability that market conditions could deteriorate over the course of the last hour or open down sharply tomorrow on additional bad news.

The graphic below, courtesy of optionsXpress, show the prices up through the 85 strike for the VIX November options, with the snapshot taken at 2:52 p.m. ET while the VIX was at 73.13:

[source: optionsXpress]

Last Wednesday, in SPX Options Carpet Bomb Pushes VIX SOQ to 63.04 (!) I reported on a series of transactions involving some 285,000+ SPX put contracts that one party apparently purchased at the open. At the time, my angle on these transactions focused on the ability of the purchaser to artificially create a sharp jump in the ‘special opening quotation’ in the VIX that is used to settle VIX futures and options.

As it turns out, whoever bought those puts did not need to make any money on their VIX positions. If they held on to those SPX puts for just three days, their positions gained 96% and if they held them through yesterday’s close they would be up some 124%. That is a gain of over $180 million according to my calculations. Not bad for less than a week of work…

Kudos to Adam at Daily Options Report for getting all over the VIX expiration story a little earlier. In Time for an In-VIX-Tigation? Adam wonders about the large number of SPX options trades at the open today.

In the table below, I have reconstructed the details of this attack, which appeared to involve the purchase of close to 300,000 puts (all of which were opening transactions for that strike) and a grand investment of about $150 million.

This transaction pushed the VIX from a close of 53.11 on yesterday to a special opening quotation (for the settlement of VIX options) of 63.04, a 9.93 (18.7%) jump over yesterday's close. If I am able to unearth any additional details about this transaction, I will pass them along.

[source: VIX and More]