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. 


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:


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. 


NOTE: Check out the LiveVol Pro software at:   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!


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.

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):


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:


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.

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.