(DISCUSSION) VIX March 2013 put calendar

[Marco]

I closed this trade at -0.05. Not sure how to calculate the %gain. It was a small allocation with two lots: 12 contracts -0.267 and 10 contracts at -0.40. I received a $666 credit and closed the trade for $164. Is that a 75% gain? If yes, let's do it again  

you would calculate your return on the margin you had to post initially minus the credit you received. Kim is calculating with 150$ margin and 25$ credit per contract I think. So arrives at about 25% return on that. Not quite 75% but still very nice.

Edited January 30, 2013 by Marco

[Hannes Kury]

I closed this trade at -0.05. Not sure how to calculate the %gain. It was a small allocation with two lots: 12 contracts -0.267 and 10 contracts at -0.40. I received a $666 credit and closed the trade for $164. Is that a 75% gain? If yes, let's do it again  

 

 

Well, with Kim's formula the gain is reduced to 19.5% after comm. - still very good - my exit was not as good as Kim's but that is not new.

 

Kim,

 

- I am assuming the # of contracts is not an issue because the VIX is very liquid?

- What allocation do you recommend the next time we do this trade? 10% or more?

[Kim]

The number of contracts should not be an issue - in fact, I was filled at the mid.

 

I still wouldn't go beyond 10%. As we could see, the value of the spread can fluctuate wildly, and VIX can stay low longer than expected.

[gofoptiontrading]

i'm looking at march/may, it's 0.25-0.4 credit right now.

[jr1221]

experience from the last trade tells us that we could be patient and maybe get a credit as high as .80 or more on this trade.  Let's wait for the price to come to us.

[Kim]

I'm not sure I want to go with May/March this time, probably April/March, unless I can get much higher credit. .80 might not be realistic, it was very rare, but I think we can aim for 0.40. And I will probably go with 16 strike to be more conservative.

[jr1221]

that's right...it was the 2 month spread between the long/short that gave the .80 credit.  The Mar/April has a mid of .30 credit for 16 strikes and .35 credit for 17 strikes.  I'm curious why you aren't interested in having 2 months spread again.  What did you see in the first trade that makes you shy away from it?  Even thought the trade was down quite a bit before roaring back, it seemed we had an opportunity to roll the short strike forward a month if the trade didn't play out before Feb expiration.  Or put it this way, if we get a .80 credit on a trade with 2 month spread, do you fear that the credit has a chance to widen a lot further?  Thanks for your thoughts.

[Kim]

I think we had much higher credit for 2 months spread, and this was the main reason. If I can get .80, I will definitely take it. Yes, we have a chance to roll, but when the trade was down, we had to pay debit to roll. 

 

It's a close call.

[Kim]

Well, this could be a quick 25% gain. Woulda coulda shoulda..

[gofoptiontrading]

I tried -0.70, but not filled.  2 greedy:(

[Hannes Kury]

Kim,

 

I am thinking of legging in with 25% VIX<13.5, 25% VIX<13, 25% VIX<12.5, 25% VIX<12 and close the position if a decent gain is available. Which strike would you take? 16 or 17?

[Kim]

I would go with 16.

[Marco]

I think your model portfolio is full but in case it wasn't would you put on a new VIX calendar? And if yes how would you structure it?

thx,

m.

[Kim]

I think your model portfolio is full but in case it wasn't would you put on a new VIX calendar? And if yes how would you structure it?

thx,

m.

No, I would wait for lower VIX and higher credit. Would go with April/March or May/March 16 put calendar.

[Marco]

No, I would wait for lower VIX and higher credit. Would go with April/March or May/March 16 put calendar.

thanks, targeting 0.25 credit, as before?

[Kim]

Actually, I would like to be a bit more conservative and target ~0.40. It should be possible if VIX goes back below 13.

[Marco]

Actually, I would like to be a bit more conservative and target ~0.40. It should be possible if VIX goes back below 13.

thx.

[Marco]

VIX spot 13

Mar/May 16 Put calendar 0.25 cr (mid)

Mar/Apr 16 Put calendar 0.20 cr (mid)

[jr1221]

I'm going to be patient and wait for max credit on this.  The Feb/Apr 17P calendar went all the way to .80 credit for 2-3 days in January and is back in that range again today.  So the Mar/May calendar could see a similar credit.  If VIX gets all the way down to 12 over the next several days, we'd probably see that same credit.  The 16 strike will have a slightly smaller credit but I still think it can get better before the next volatility spike.

[Marco]

by the way, VIX spot is a bad thing to watch to judge how much 'VIX has dropped today' (if that makes sense)

VIX will drop more today (Fri) as the options are pricing in the WE and will jump again on Mon. If you look at the VIX future (front month or any you want) you'll see no jump (other that the 'market move') So you may have the front month VIX future relatively unchanged while VIX spot will be down 4-5% on Friday and back up 4-5% on Monday.

So I tend to look at spot and the future ...

[Kim]

I don't think we are going to see .80 for the 16 calendar (we had 17 last time), but .40-0.50 is definitely possible. 

[Kim]

by the way, VIX spot is a bad thing to watch to judge how much 'VIX has dropped today' (if that makes sense)

VIX will drop more today (Fri) as the options are pricing in the WE and will jump again on Mon. If you look at the VIX future (front month or any you want) you'll see no jump (other that the 'market move') So you may have the front month VIX future relatively unchanged while VIX spot will be down 4-5% on Friday and back up 4-5% on Monday.

So I tend to look at spot and the future ...

What makes the spread still not so attractive is the fact that March, April and May futures dropped only 0.20-0.25, compared to 0.60 drop in VIX spot.

[jr1221]

Are you targeting playing the trade with the 16 strike this time?  All of your initial backtesting indicated that 17 works better than 16.  If we're worried about the strike being too far OTM, I guess I don't share that concern.  Although I think the current rally may still have legs for another week or two, a leg down is definitely going to happen and if it doesn't happen sometime in Feb, it will almost certainly begin by March.  The 17 strike worked great for me last time, so I'm going to use it again and wait for a credit of at least .70 before I jump in. 

[Kim]

When we entered the 17 calendar, VIX was above 15. Now VIX is below 13. 16 seems like more conservative play, but of course it depends on prices. If I can get .70-.80 for May/March 17 calendar, I will jump with both hands. 

 

On a separate note, those rallies sometimes last much longer than you expect. The pullback usually happens when nobody is expecting it, and now it looks like everyone is expecting a pullback.

[Marco]

just read an interesting article in Expiring Monthly (you need to pay for a magazine on a one by one basis or can buy a yearly subscription (99$)) by Bill Luby (vixandmore).

He analyses VIX data over 23 years to draw some conclusions about mean reversion of the index. He brackets VIX (spot) levels every 2 points and then looks at VIX performance over the next 1,3,5,10,20,50 and 100 trading days. Unsurprisingly when VIX is high (26 and above) the performance over the next weeks and months tends to be negative and if VIX is low (~18 and below) it tends to go up. So far so good. The interesting bit is that for the current VIX level (12-13.99 bracket) the historical return over the next 20/50/100 trading days was +2.36%/6.22%/8.41%. So if you bet on a rising VIX from here you think the odds are on your side. HOWEVER if you look at the rise implied by the VIX futures (looking at ~ 1 month, 2.5 months and 5 months expiry or the closest available) the market prices in a 15%/24.4%/36.8% rise (VIX spot and future levels from 11th Feb close - vixcentral.com)

So any bet on rising VIX be it trough futures or options on VIX or a VIX future based ETN (like VXX) prices in a MUCH bigger rise than history suggests. There can be of course any event that pushes VIX to the implied levels or even higher - but the odds don't look as good as one might initially think. In fact you might think of taking the other side of the trade and you get quite a bit of a buffer before you lose money.

 

(I have no affiliation with any of the sites mentioned but use them all regularly and would recommend them)

[Kim]

off the track question: Can anybody please tell me what is options exercise/assignment fee in TOS for SO members. Also I am getting 1.50/contract as SO member in TOS while I know other people getting 1.25/contract.

deblina, I'm moving your post here http://steadyoptions.com/forum/topic/466-tos-discounted-rates-for-so-members/?hl=tos#entry16694 and I will respond there.

[Kim]

just read an interesting article in Expiring Monthly (you need to pay for a magazine on a one by one basis or can buy a yearly subscription (99$)) by Bill Luby (vixandmore).

He analyses VIX data over 23 years to draw some conclusions about mean reversion of the index. He brackets VIX (spot) levels every 2 points and then looks at VIX performance over the next 1,3,5,10,20,50 and 100 trading days. Unsurprisingly when VIX is high (26 and above) the performance over the next weeks and months tends to be negative and if VIX is low (~18 and below) it tends to go up. So far so good. The interesting bit is that for the current VIX level (12-13.99 bracket) the historical return over the next 20/50/100 trading days was +2.36%/6.22%/8.41%. So if you bet on a rising VIX from here you think the odds are on your side. HOWEVER if you look at the rise implied by the VIX futures (looking at ~ 1 month, 2.5 months and 5 months expiry or the closest available) the market prices in a 15%/24.4%/36.8% rise (VIX spot and future levels from 11th Feb close - vixcentral.com)

So any bet on rising VIX be it trough futures or options on VIX or a VIX future based ETN (like VXX) prices in a MUCH bigger rise than history suggests. There can be of course any event that pushes VIX to the implied levels or even higher - but the odds don't look as good as one might initially think. In fact you might think of taking the other side of the trade and you get quite a bit of a buffer before you lose money.

 

(I have no affiliation with any of the sites mentioned but use them all regularly and would recommend them)

Thanks for sharing Marco.

 

So from practical point of view, that means that we are better to go with 16 calendar spread than 17 since VIX will probably not rise as much as you would expect and 16 level will be more conservative. Would you agree?

[Marco]

Thanks for sharing Marco.

 

So from practical point of view, that means that we are better to go with 16 calendar spread than 17 since VIX will probably not rise as much as you would expect and 16 level will be more conservative. Would you agree?

I would agree that the 16 is more conservative however that made me rethink whether I want to play it from that side at all or actually play that VIX stays low (or lower than the futures imply)

[Marco]

apologies for getting slightly off topic now but one way to profit from the steep term structure described earlier (post#127) are inverse volatility ETN's. I like ZIV which is short 4,5,6 and 7th month VIX future (aiming to have an avg. maturity of 5m). As these futures drift down the curve ZIV makes money even with VIX unchanged or small up. It is obviously sensitive to spikes in volatility (then you lose money). However I like it as another way to be short vol and short that term structure. I just came across an article where a guy has found a quite nice timing indicator to trade in and out of ZIV. He basically looks at the ratio of VIX (spot) divided by VXV (which is the '3m VIX') if its below 1 that usually means VIX future term structure is in contango (upwards sloping) and ZIV can earn the roll yield. He buys ZIV every time that ratio drops below 0.917 (which proofed to be the best ratio looking at back tests) and sells it when it goes above. Basically when the ratio crosses 0.917 (so just below 1) often that is the sign of a higher vol regime and a backwardation in the VIX futures term structure so a time where ZIV usually doesn't do well. This way he missed a few rallies in ZIV but avoided all bigger downturns. I tested that ratio myself and will probably go with a slightly higher number (~0.95-0.98). With a higher number performance is a bit lower but the no of trades is reduced by 50-70% as you trade less in and out.

 

Please make sure you understand quite a bit about VIX, VIX futures, roll yield and ETN's before you get involved in ZIV and the likes.

[Kim]

apologies for getting slightly off topic now but one way to profit from the steep term structure described earlier (post#127) are inverse volatility ETN's. I like ZIV which is short 4,5,6 and 7th month VIX future (aiming to have an avg. maturity of 5m). As these futures drift down the curve ZIV makes money even with VIX unchanged or small up. It is obviously sensitive to spikes in volatility (then you lose money). However I like it as another way to be short vol and short that term structure. I just came across an article where a guy has found a quite nice timing indicator to trade in and out of ZIV. He basically looks at the ratio of VIX (spot) divided by VXV (which is the '3m VIX') if its below 1 that usually means VIX future term structure is in contango (upwards sloping) and ZIV can earn the roll yield. He buys ZIV every time that ratio drops below 0.917 (which proofed to be the best ratio looking at back tests) and sells it when it goes above. Basically when the ratio crosses 0.917 (so just below 1) often that is the sign of a higher vol regime and a backwardation in the VIX futures term structure so a time where ZIV usually doesn't do well. This way he missed a few rallies in ZIV but avoided all bigger downturns. I tested that ratio myself and will probably go with a slightly higher number (~0.95-0.98). With a higher number performance is a bit lower but the no of trades is reduced by 50-70% as you trade less in and out.

 

Please make sure you understand quite a bit about VIX, VIX futures, roll yield and ETN's before you get involved in ZIV and the likes.

Thanks for sharing Marco. Right now it is 0.88, so time to go long ZIV?

 

Why you are saying that number of trades will be less with higher ratio? Wouldn't drop below 0.91 happen more rarely, meaning less trades with lower ratio?

[Marco]

Thanks for sharing Marco. Right now it is 0.88, so time to go long ZIV?

 

Why you are saying that number of trades will be less with higher ratio? Wouldn't drop below 0.91 happen more rarely, meaning less trades with lower ratio?

Yes with ratio at 0.88 you would enter a new ZIV position now if you didn't have one (alternatively you could wait for it to go above your threshold and enter only when it drops below it again)

 

the ratio was between ~0.7 on the low and 1.22 on the high. avg. is probably ~ 0.95 or so. The ratio is often in the 0.85 to 0.95 range so having your trigger somewhere in there makes you trade more in and out than having it outside that range. Below the table from my back testing. I bought and sold 80 ZIV (~ 1000$ at the beginning of the back testing period (30/11/2010)) so thats non compounded

 

Timing with a ratio of 0.91 would have resulted in 52 trades and a P/L of 1845$ (no commission, trading at the closing price) so your 1000$ became 2485$ a direct buy and hold investment in ZIV over the same time would have made you 1286$ profit (your1k became 2286$)

Thats as of 4th of Feb - ZIV is up another 6.5% or so since.

 

I also looked at whether that would work as a general market timer (to trade SPY for example) but it underperformed a simple buy and hold on the SPY a lot. However seems to work well for ZIV since its inception.

 

Edited February 12, 2013 by Marco

[Kim]

Looks like just buying ZIV would produce almost the same results (before commissions and slippage, so the real difference is probably even less) with much less trouble..

[Marco]

Looks like just buying ZIV would produce almost the same results (before commissions and slippage, so the real difference is probably even less) with much less trouble..

well ~ 1800 vs. ~1300$ profit is quite a bit of out-performance, spreads are tight (~0.05 cents and you usually can get filled inside b/o) and comm is very low (I think IB charged my half a cent per share last time I traded)

 

But agreed I think the product works very well with a term-structure as steep as its now so quite a nice buy and hold as well. (this was published today on that matter) If you look at VIX and ZIV chart you'll see that the term-structure is more important than the actual VIX level (ZIV rose only ~ 8% when VIX collapsed from 45 to 19 in Q2/3 2011(as for a good part of that futures will have been in backwardation) but it rose ~88% from early '12 to late '12 with VIX roughly at the same level (~17 give or take - all approx no's)

 

 

Edited February 12, 2013 by Marco

[Gary]

What's a reasonable profit target / holding period for this position?

 

Also... curious if you saw some liquidity fees on this one.

[Kim]

What's a reasonable profit target / holding period for this position?

 

Also... curious if you saw some liquidity fees on this one.

The profit target is around 0.30-0.50 which is 30-50% return on margin. Holding period depends on VIX behavior, could be probably few weeks.

 

There is an exchange fee (not liquidity fee) of 0.45 with CBOE.

[Kim]

The mid of this trade is 0.60 credit now, so you can get it cheaper than me.

 

Please do this trade only if you agree with the thesis that IV will be higher (around 14+) at some point in the next 4-6 weeks.

[Marco]

The mid of this trade is 0.60 credit now, so you can get it cheaper than me.

 

Please do this trade only if you agree with the thesis that IV will be higher (around 14+) at some point in the next 4-6 weeks.

I've seen the light. VIX is gonna go to zero, no more options long. ever. (other than puts on VIX)

sorry just booking out losses on SODA and CF both in the green this mng and now quite sizable losses ... needed to moan

[Kim]

This light was the train..

 

Our previous VIX trade was also in red for few weeks - all it took was couple negative days to book a nice profit. Now we got more credit and have lower strike, so much better chances of success.

[Marco]

This light was the train..

 

Our previous VIX trade was also in red for few weeks - all it took was couple negative days to book a nice profit. Now we got more credit and have lower strike, so much better chances of success.

he we'll see about that train. All I see for now the trend (market up, vol down) seems to continue. I can think of many reasons why this market should correct but clearly I'm missing something. Hesitant to take the VIX PS as it will be positively correlated to the earnings plays and got enough on of those at the moment. And only a bit of ZIV on the short (vol) side... (ZIV btw. with new all time high - everyday VIX stays low and term structure steep this one will go up - contango between 4 and 7 month VIX future is now ~12.5%)

[jfouche]

What major brokers other than IB will require a small amount of margin for these?

 

Realistically, if we grind lower in the front month's VIX it does appear we could lose more than IB's margin for the trade. I would definitely not pile up a large # of contracts just because IB permits it -- especially since they are known for rapidly closing out positions when margin is low.

[Marco]

What major brokers other than IB will require a small amount of margin for these?

 

Realistically, if we grind lower in the front month's VIX it does appear we could lose more than IB's margin for the trade. I would definitely not pile up a large # of contracts just because IB permits it -- especially since they are known for rapidly closing out positions when margin is low.

I would VERY roughly estimate the loss if VIX spot stays here (12.30) until Mar expiry as follows.

the Mar 16 Put is worth 16-12.30 = 3.70 the May 16 Put is roughly worth what the April 16 Put is worth now (obviously depends on VIX future term structure and IV of VIX options at the time) thats ~2.30 so the spread will be at 1.40 so with 0.50 credit upfront your loss is 0.90 (90$ per lot).

Thats obviously not the max loss - If VIX spot and therefore futures drop even lower this loss will go up, same if term structure steepens more and/or VIX IV goes down ... many moving parts in this trade.

So while the max loss can exceed the IB margin I don't think they are super aggressive on that and clearly the point of margin isn't to cover the potential max loss.

[Kim]

Theoretically, the risk is higher than the margin. Practically, I don't see it happening. In our last trade, it went as low as 0.90 credit - but it was the 17 strike. Now we have 16, and the spreads should be less.

 

We don't need a serious correction. Last time all it took is 1% decline for VIX to jump from ~13 to over 14.50. When the markets go up in a straight line like now, even a smallest correction can cause a decent jump in VIX since people get nervous that it is a start of something more serious.

[Kim]

What a small pullback can do.. The indexes are down only 0.5%, but VIX jumped by 8% to 13.30, and our trade is up over 20% in one day. Nothing wrong to take some profits here, but if the "pullback" continues, I can easily see VIX above 14, in which case the calendar might gain 30-40%.

[Gary]

The VIX chart looks great today. I sold half my position for -.30. 17% return all-in... 18.8% ex-commissions. I'm coming along for the ride with the rest.

[Kim]

Closed at 0.15 credit, 35% gain in one day. VIX at 14.20. The mid is -0.10 now.

[Gary]

Nice trade Kim. I sold half at -0.30 and half at -0.15. I was in at -0.49 ... I probably should have been more patient on the entry.

[Kim]

Well, the mid is actually zero now, so I could be more patient as well - however, those trades can reverse very quickly if the markets rebound tomorrow, so I'm happy with 35% gain in one day.

[Marco]

I've seen the light. VIX is gonna go to zero, no more options long. ever. (other than puts on VIX)

still got it

[jfouche]

Nice job. I still think there exists a nightmare scenario for this spread. For example: if front month future at 9.5 [around the all-time spot VIX low], 2-month future stays at maybe 12.5, and VVIX is low enough, then you may have the short put at $7-7.5 and the long put potentially just $4 or $4.50.

 

Maybe an even higher contango is possible if some political events lined up correctly [like a major fiscal event known to happen in May]. Still, the risk/reward definitely is pretty good.

[Kim]

What are the chances that we go back to 9.5? Even if we do, I'm pretty sure that the futures will stay well above those levels. If VIX goes higher than 16 and stays there, then the short options will expire worthless and the long options will still have some value.

 

I backtested this trade 3 years back, it was very rare for it to go below -0.50, and when it did, it did not stay there for a long.