VIX update

Posted by: Admin: "The Vol_Trader"  //  Category: Volatility Trades

In my may 5th blog post I commented that the VIX had run up much faster and higher from 27-Apr to 5-May than it did when we had a market correction in Jan-Feb which was actually more severe at that time. 

Well, I spoke too soon about the ‘severe’ part.  If you read that post you saw I was trying to come up with ideas as to why the VIX behaved this way.  Had I put a #5 bullet saying, “tomorrow will be a historic down day”, I would have been a genius (and very rich). 

Conspiracy theorists would say that the GS’s of the world were buying SPX puts the day before the ‘crash’ driving up the IV.  

Moving forward, My 06-May post and 13-May posts both discussed me getting long Vega and short delta.  Boy was I right on both occasions.  06-May was a nice day to be long vega, short delta into the crash.  I took some nice profits then.  13-May turned out to be a great day to get long Vega, short delta in the AM, and it continued Friday, 14-May leading to my best ever two day streak. 

You can see the action in the SPX and VIX here in the LiveVol Pro software.  In the below chart the first candle is 23-Apr-2010.  The recent high is the next day 26-Apr.  The bottom line chart is the 30 day IV. 

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You can see the IV went up and stayed pretty high and curved up Friday, the last candle.

Below is the LiveVol Pro chart of the VIX for the same time period:

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At the end of the day Friday ,15:45 EST, I decided that I didn’t want to carry my very short delta risk into the weekend.  I sold a lot of (expensive) Jun OEX $510 ATM puts to get less short delta and shorter vega.  Looking at the Thinkorswim SPX chart below, you can see I was not the only one getting less short / long at the close… from 15:30 to 16:00 the SPX rallied  +$9.11 from a low of $1126.57 to close at $1135.68. 

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NOTE: Check out the LiveVol Pro software at: www.livevol.com   I  just love it so much that I couldn’t trade without it anymore. 

Hopefully next week, I’ll find some time to post some individual equity trades again.  Please stay tuned! Thanks for reading Vol Trader Blog!

Lawrence

I need more + Vega …

Posted by: Admin: "The Vol_Trader"  //  Category: Volatility Trades

I currently own off center short index strangles.  (Short puts and call skewed to the downside. This makes me short Vega and short delta). These do well if the market stays the same or goes down slowly.  In the recent correction IV has spiked and remained high.  My short delta has offset the short Vega, but I’m missing out on the ‘bang for the buck’.

How do I get short delta and long Vega without buying puts that decay and lose quickly if the market goes back up and in return IV drops?

One way is if I offset the long puts’  negative theta and make Vega work in my favor by trading a COMBO, long put, short call.  Picking the strikes is the hard part here.  I usually look for support and resistance above and below the market. 

Note: I’m not recommending COMBO’s as a stand alone trade, but rather a way to achieve the above goals when managing a portfolio of option greeks.

In this case I have a significantly large inventory of short OEX puts and calls. Today I chose the following trade: long Jun $475 puts, and short Jun $560 calls.

The P&L looks like this below (click any picture to enlarge):

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The white line is today and you see it behaves like a synthetic short but the strikes are different.  For this to profit you want the market to move down and do so right away if possible. 

Where this trade gets much more interesting (at least if you’re big geek like me) is when you look at the curve of Vega vs. underlying price:

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As you know, when the underlying goes up IV drops, and when the market goes down, IV increases.  Look at that beautiful curve above.  As the underlying moves up from the current price Vega is negative, and conversely as the underlying moves down from the current price Vega is positive. 

In summary, adding this combo to my current position allows me to benefit on the way down and hurt less on the way up.