Been too long…

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

Sorry for my absence, my real job as a physician gets very busy and it’s hard to find time to write…

My last post was done the morning of 6-May-2010 right before the big crash. 

Boy was I right when I said, “I need more + Vega”.

My OEX combo really did well when IV spiked as the market tanked.

Well, today we’re back down at VIX of 25 and I’m getting more long vega and short delta… Again, this is not a stand alone trade but rather managing an existing inventory for short gamma, long theta index options.

This time I used a “ratio diagonal” in the OEX and NDX.  I’ll show you the NDX trade:

Prior to putting on this trade I’m short delta, short gamma, long theta and very short vega. 

The trade is as follows:  Long 10 Jul $1950 puts, Short 7 Jun $1975 puts for a net debit of $295 ($29,500). This produces short delta, slightly negative gamma, short theta (short now but gets long as time goes on), long vega.  It looks like this in the Thinkorswim analyze tab: (click any picture to enlarge)


The two vertical lines at the extremes are the high on 26-Apr-2010 and the low on 6-May-2010.

Below is the change of Vega vs. underlying price.


You can see Vega is positive throughout the entire chart.  This is because we’re long Jul options and short Jun and because we’re long more contracts than short.

The below LiveVol Pro skew tab shows that I’m buying and selling at the low end of the IV smile.  This benefits me by buying more Jul options than shorting Jun options in that not only is the ratio in my favor selling higher IV than buying, but also the Jul options have much greater Vega than the Jun.


So, you can see I’m acheiving my goal of long Vega, short Delta with a bit of upside ‘cushion’ if I’m wrong although if Jul IV drops more than the Jun decay, I’ll lose a bit on the way up.

If you’re interested in analyzing the other OEX trade I put on, here it is: +25 Jul $520 puts,  -20 Jun 525 puts for a net debit of $30 ($15,000)

NOTE: I wrote this entry this AM and just got around to publishing it.  Needless to say, I was again timely in my trade as the market tanked and VIX went up late this afternoon.  Both of these trades did well today.

Market Rally (in the VIX)

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

Instead of my usual commentary on the Volatility of an individual equity, I’m going to make a few statements about market Volatility today. 

Below is the LiveVol Software chart of the VIX year to date. (Click any picture to enlarge)  You can clearly see the run up since 4/27/10 has continued today.  Below the VIX chart is the year to date chart of the SPX.  Interestingly, the SPX correction in Jan – Feb was more severe than the recent correction yet VIX is moving more on this correction. Below the VIX candle chart is the Implied Volatility of the VIX, or the volatility of the volatility. It is clearly higher than back in Jan – Feb.



I was thinking of why the VIX was so much more active in this correction vs. the last one.  I came up with a few ideas and I’d love to hear your feedback on this subject…

  1. Leading up to this correction we’ve had a much steeper and longer run up from the recent 2/5/10 bottom.
  2. Longs had given up on buying index puts for protection that lost month after month and are now scrambling to buy them.
  3. I read a rumor on StockTwits that someone had a very large short VIX futures position that is getting a big short squeeze.
  4. According to my inside sources, many retail customers were very short naked puts, ETF, Index and Equity.  This would cause a panic short squeeze to cover the naked puts.  These puts would have been sold in Mar and Apr when VIX was bottoming.  Selling naked puts at the VIX  bottom is a dangerous thing. 

I’d love to hear your comments here.  Please post comments agreeing or disagreeing with 1-4 above and/or add 5, 6, 7…

Personally, I’m dealing with this VIX run up as I’m short (bearish off-center) strangles in SPY and OEX which is hurting. Luckily I bought some cheap OOM puts that are doing quite well offsetting my very short Vega.  Additionally, when VIX was bottoming I bought some RUT back spreads that I’ve adjusted to be delta neutral and very long Vega which is working well.

Mark Sebastian at  often talks about buying these OTM puts called “units”.  He also talks about hidden delta which in this case is short delta these OTM puts acquire as the market drops and Vega increases.  (Mark correct me if I’ve misquoted you.) I highly recommend reading Mark’s blog posts on this subject.