(DISCUSSION) VIX March 2013 put calendar

[csensen13]

Thanks Marco - I was going to ask about VXX then, before Hannes mentioned it - I guess VXX is an ETN though so it does not exhibit the "unusual" behavior that makes VIX such an interesting short trade. But would it be a viable calendar trade the way Kim is setting it up? (my guess is probably not, since the prices seem to be a lot more conventional, like any other ET notes or fund)

[srf335]

Just wanted to follow up on my original post about ToS margin requirements on VIX calendars.

 

First off, I violated one of the hardest rules I've learned in my short time trading, fully understand the trade before you execute.  Have a pretty good handle on stock derived options, but haven't traded many futures derived options or European style options, of which VIX is both.  Have learned a bit more in the past day and this still looks like a good risk/reward trade that I would be comfortable executing.

 

That said, I had a chance to talk to ToS at length this morning and they are hard and fast on treating a VIX calendar as two separate trades and requiring margin separately for each leg.

 

Their position is that different month VIX option have different underlings which are calculated 30 day IV numbers on a specific date for each different month, unlike options on a stock where all months have the same underlying. Therefore they treat a VIX calendar as if you were creating one calendar with options from two different stocks.

 

I get it technically and understand that in the case of a call calendar a very quick and large spike in the VIX could lose significantly because the underlying calculated IV for the back month (long) option may not increase nearly as much as the front month and you could have a huge loss.  Plus, with calls, there is technically no ceiling as to how large the spike could be.

 

However, it's hard for me to create a scenario where a put calendar with strikes near the VIX at it's current level could see a price differential between the short put and long put that could ever get near the actual strike price (which is what their margin requirement implies).  ToS wouldn't (couldn't?) give me a credible scenario that would get there.  In studying up I found an old article (below) that probably explains why ToS have this policy.  I've also attached an explanation from OptionsHouse on why they have the same policy.

 

Just thought I share with others what I found.  Thanks.

 

 

 

http://online.wsj.com/article/SB123695294636919681.html

 

http://www.optionshouse.com/blog/the-special-risks-with-vix-calendar-spreads/

[Kim]

I see their point, but they take it to a real extreme. Even naked put doesn't require such margin. Their margin assumes that VIX can go to zero.

[srf335]

Yeah, when I asked the guy how exactly VIX would ever get to zero, there was a long, silent pause.  He then just played back that this was their policy and that it wasn't negotiable. I got the impression this wasn't the first time he'd had this discussion. Guy on the phone was decent and had a good understanding of options - got the sense he understood my argument but was playing back the ToS policy.  I've been weighing the IB vs ToS decision for a while and do like that ToS answers the phones and are knowledgeable.  May not always like the answers I get...

 

I think (per the WSJ article) they got burned on VIX calendars in late 2008 when the market tanked and probably had some customers wipe out accounts and then some.  Their reaction was a hard position on these calendars.

[Guest]

"Their position is that different month VIX option have different underlings"

 

I would be curious what they know as the underlying for the February VIX and then

I would be curious what they know as the underlying for the April VIX.

 

They should both be the volatility of the S&P500 (^VIX).

[Marco]

"Their position is that different month VIX option have different underlings"

 

I would be curious what they know as the underlying for the February VIX and then

I would be curious what they know as the underlying for the April VIX.

 

They should both be the volatility of the S&P500 (^VIX).

the respective vix futures (feb and april)

not that I share their point of view

[srf335]

Wayne,

 

That's what I thought as well before digging in to this and getting a bit more familiar.

 

The VIX, as we follow daily, is simply a calculated 30 day implied volatility for the SPX as of today expressed as a percentage.  VIX options are based on a calculated 30 day implied volatility for the date of the option.  So if you have a Feb/Apr VIX calendar, there are three "VIX" values involved: 1) the current VIX as of today, 2) the VIX future for the February expiration date, and 3) the VIX future for the April expiration date.  The three different "VIX" values  may not (and most likely will not) be the same.

 

That means that you see today's VIX percentage as one number, another VIX percentage is used as the underlying for your February options, and yet another VIX percentage is used as the underlying for you April options.  

 

Quick, significant changes in today's VIX may have siginificantly different changes on the future VIX numbers for the two future dates (i.e. one may change much more significantly than the other, usually the front month).

 

That's why this is a different beast than a normal calendar with stock based options.

[Thaze]

Anyone got any idea on how to take advantage of the extremely low VIX currently? I'm thinking it might jump back up here in the next few weeks as we approach the debt ceiling.

[Marco]

Anyone got any idea on how to take advantage of the extremely low VIX currently? I'm thinking it might jump back up here in the next few weeks as we approach the debt ceiling.

 there are a few ways described here:

 

http://steadyoptions.com/forum/topic/920-how-to-profit-from-a-volatile-market/?p=16061

[Stephen]

On my IB option chain VIX I am only getting last price of 13.79- No bid or ask. Is something wrong.  Thanks if anybody can respond.

[Kim]

On my IB option chain VIX I am only getting last price of 13.79- No bid or ask. Is something wrong.  Thanks if anybody can respond.

Are talking about VIX itself? You cannot trade it directly, hence no bid/ask.

[Stephen]

 Working now just was not getting data to the option chains. Thanks

[jr1221]

You may have to go into the subscription manager and be sure you are subscribed to index options, or something like that.  I had this same thing when I first loaded VIX, it had a button I could click if I wanted real time data, and the button took me to the subscription manager. 

[jaybird11]

I'm in this trade for 1/2 alocation because I never traded VIX before.(0.18 credit) Would it make sense to add another 1/2 allocation if I could get the calendar spread at 0.25 to 0.30 credit???

[Kim]

I'm in this trade for 1/2 alocation because I never traded VIX before.(0.18 credit) Would it make sense to add another 1/2 allocation if I could get the calendar spread at 0.25 to 0.30 credit???

First of all, if you don't fully understand the trade, I think it's a good idea to trade only what makes you comfortable. A good night sleep is more important than gains..

 

I believe that realistically, the real risk is this trade is no more than 50-60 cents. But even in the craziest scenario that VIX stays that low for the next 3 months (which I don't think ever happened, but there is always a first time..) - You probably still don't risk more than ~$1 per trade.

 

So take the risk and multiply by the number of spreads - this is the total risk on the whole account. Is it something you are comfortable with? Personally, I'm okay with 2-2.5% risk per trade, but everyone is different.

[Hannes Kury]

Today I bought more of the April/February 17 put calendar for a credit of 0.40.

[jaybird11]

Thanks Kim for explaining the trade so clearly. I think I'll stand pat and watch and learn. Thats one of the reasons I joined SO

[Xfanman]

Kim mid is around .34 credit at the moment and I hadn't gotten in this trade yet.  With VIX in the 13's is this still in good shape?

 

Thanks -- Scott

[Kim]

Kim mid is around .34 credit at the moment and I hadn't gotten in this trade yet.  With VIX in the 13's is this still in good shape?

 

Thanks -- Scott

If you believe that VIX at the low 13s is not sustainable for too long, then it is still a great trade. If it does stay there for the next 5-7 weeks, then the trade will lose money.

[Xfanman]

Thanks Kim.

[Beltdancer]

I added more today at $0.39.  VIX is nearly at a 52 week low here.  I would be stunned if it drifted much lower, especially with earnings season starting.

 

Edited January 11, 2013 by Beltdancer

[Turtle]

Kim

I did enter the trade early after reading Reel ken's article in SA. I am in the jan/mar 17 calendar spread and I am under water with only a few days left before the jan option expires. What is my best course of action as this point to help mitigate the losses. Roll the short option.?

Would appreciate your guidance

[Kim]

Kim I did enter the trade early after reading Reel ken's article in SA. I am in the jan/mar 17 calendar spread and I am under water with only a few days left before the jan option expires. What is my best course of action as this point to help mitigate the losses. Roll the short option.? Would appreciate your guidance

Yes, I would probably roll.

 

In general, it is always better to give yourself enough time. Going with Jan options was too short. It could work if VIX spiked, but as we see, it is taking more time.

[Turtle]

Kim

 

I did roll. Thank you.

 

With VIX at historic lows, wouldn t it be better to set up an ITM  calendar spread? I was looking at buying a May 12 call and sell a Feb 12 call against it. Net debit of $3. The short call is likely going to expire worthless as It is unlikely that the VIX would go below 12. It also covers about 50% of the debit on the long call. Am I missing something?

 

More genrally speaking, I often struggle with the choice between ITM vs OTM calendar call? Is it just a question of managing cash outlays (debit)

When is the one option better than the other? Thanks for sheding some light on this. Always appreciated

[Kim]

If VIX is above 12, the call does NOT expire worthless, it will have value. Usually you want to set the strike for the calendar at the price you think the underlying is likely to be. In case of VIX it works slightly different since the futures have different values, but still you want the underlying to be at the strike.

[coachcr]

If the VIX doesn't jump up soon, we're going to be hurting on this trade.  Is there an adjustment that we can make to improve it?  Would opening a second calendar help?

 

Thx

[kowski06]

Kim, what is the plan for this one?  Can you detail out how you would analyze this one as it sits right now - step by step, to determine if it needs to be adjusted, closed, what expectations are etc.?  

thanks

[Kim]

Not much changed since we opened it. We still need the IV to spike. If it doesn't, the trade will be a loser. Close to February expiration, I will roll Feb. short options to March if the IV is still at the current levels.

[Marco]

Not much changed since we opened it. We still need the IV to spike. If it doesn't, the trade will be a loser. Close to February expiration, I will roll Feb. short options to March if the IV is still at the current levels.

If VIX stays low and VIX term structure stays as steep as it is you might pay quite a bit to roll (rather then receiving a credit)

[Kim]

I know.

[Marco]

I know.

Didn't think you didn't know.

Faced the issue myself earlier in Jan. Sold the 15 puts for 0.50 - had worked like a charm a number of times in 2012 - clearly not in Jan13. Was looking at rolling it to Feb. missed the chance to roll it for nearly flat a few days before expiry (5 cents debit or so) when faced with roll cost of 0.40 debit I didn't think it made much sense to roll just to maybe end flat on the trade so rather took the hit, closed it and moved on.

New Years resolution to do that more often. If a trade doesn't work don't prolong the pain by rolling it along or adjusting too often. Trends can reverse (and VIX by design more than the market) but quite often waiting for it to reverse while in a bad trade is more expensive than to cut and jump back on the train when it moves in the right direction. Looking at my losses last year - a good part comes from being too stubborn and wanting to be right (hence fighting a trend)

Anyway this trade has still a bit more time but with the debt ceiling debate postponed I'm not quite sure what could boost IV significantly in the near term (well there are plenty of things that can happen that No one expects and hence increase IV, but I have a feeling it will might stay low for longer)

[Kim]

The good thing is that the long April put is reducing the loss and might continue to do so if April futures continue going down.

 

Looking back in time, VIX never stayed below 15 for more than few weeks, but of course this time it might be different. The indexes are overbought for a while and optimism has reached extreme levels - this usually when the pullback and the IV spike come. But again, nothing is certain and this trade doesn't look good now. 

[coachcr]

Didn't think you didn't know.

Faced the issue myself earlier in Jan. Sold the 15 puts for 0.50 - had worked like a charm a number of times in 2012 - clearly not in Jan13. Was looking at rolling it to Feb. missed the chance to roll it for nearly flat a few days before expiry (5 cents debit or so) when faced with roll cost of 0.40 debit I didn't think it made much sense to roll just to maybe end flat on the trade so rather took the hit, closed it and moved on.

New Years resolution to do that more often. If a trade doesn't work don't prolong the pain by rolling it along or adjusting too often. Trends can reverse (and VIX by design more than the market) but quite often waiting for it to reverse while in a bad trade is more expensive than to cut and jump back on the train when it moves in the right direction. Looking at my losses last year - a good part comes from being too stubborn and wanting to be right (hence fighting a trend)

Anyway this trade has still a bit more time but with the debt ceiling debate postponed I'm not quite sure what could boost IV significantly in the near term (well there are plenty of things that can happen that No one expects and hence increase IV, but I have a feeling it will might stay low for longer)

Thanks for the comments, Marco.  That's exactly what I was debating.  Had too many trades lately based on hope and wanted a more experienced evaluations of whether there was an adjustment needed, just hold on for vol spike or just take the pain and get out now.  Sounds like you think we have a little time to wait, so I'll hold on (fingers crossed )

[mosaic]

Goldman Derivatives Team argues for a lower vix regime as summarized below - one implication is a further shift down of the back-end of the curve.  I'll try to paste their historical graphs, if i can:

 

Is the VIX shifting into a lower vol 

regime? The statistics say YES. 

Our VIX analysis back to 1990 shows that the VIX 

has been through seven “statistically” distinct 

volatility regimes over the past 23 years. The 

model currently assigns an 89% probability that 

the VIX has shifted into an even lower gear, and is 

currently transitioning into its 8

th

 regime 

characterized by lower volatility levels. 

Central Banks have been a key driver 

Our statistical test allows us to track the 

probability of a regime shift over time. The 

probability of a new lower vol regime hit a low of 

14% in mid-summer 2012, and then accelerated 

higher post ECB President Draghi’s comments in 

July to do “whatever it takes” to preserve the 

Euro.  

After the official launch of QE3 in the US and ECB 

monetary stimulus in September the probability 

moved from the low 30’s to where it stands now 

in the high 80’s, over 6x its mid-July level. 

Our simulations show that a replay of VIX levels 

over the last two months would push our regime 

shift probability to 95% and make the new VIX 

regime official from a statistical perspective.  

What is a sub-14 VIX telling us?  

The VIX landed at 12.5 last Friday, and has 

averaged 13.7 YTD. VIX levels below 14 in early 

2013 suggest the VIX is “forecasting” sub-10 

realized volatility given its historical average 

spread of 4.4 vol pts over SPX 1m realized vol. 

Trading implications of a lower VIX 

Option prices are near decade lows: SPX 1m 

ATM calls were priced at 110 bp last Friday; that is 

within 6 bp of the decade low reached in Feb-05. 

Low option prices allow investors to implement 

directional views in a cost effective manner. 

The twist: In our view the back-end of the VIX 

curve still has room to decline, even if the VIX 

doesn’t move lower. The 7m-1m VIX term 

structure is currently 7.3 pts vs 4.9 when the VIX 

hit 9.9 in January 2007. The average level of 3m-

7m VIX futures in 1H2007 was 14 to 15, those 

futures are currently trading between 17 and 20.  

Lower correlation: A lower VIX and less policy 

risk should help reduce stock correlation inducing 

a shift in focus from macro to micro. 

 

 

 

[Kim]

Well, I definitely hope they are wrong.. look what one day of slight pullback can do do VIX, it's almost at 14 and our VIX calendar is at breakeven now.

[coachcr]

Kim, are you considering exiting this trade?  Or at least rolling it out since we are back to BE?

[Kim]

I think we might see a further increase in IV, I have an exit target of $0 for this trade (we opened it for 0.25 credit). If not reached in the next few days, I will be looking to roll the short options to March (currently can be done for even money).

[coachcr]

I think we might see a further increase in IV, I have an exit target of $0 for this trade (we opened it for 0.25 credit). If not reached in the next few days, I will be looking to roll the short options to March (currently can be done for even money).

Thanks, Kim.

[mcmatterson]

Rolled the short Feb put to March for $0.01.

[mcmatterson]

What would you think of another calendar trade? The Mar-Apr 14 put calendar is trading for about a penny. It's the same basis as the original trade, but with Vix at an even lower starting point.

[Kim]

What would you think of another calendar trade? The Mar-Apr 14 put calendar is trading for about a penny. It's the same basis as the original trade, but with Vix at an even lower starting point.

I don't like the strikes. If VIX goes to more "normal" 16-17 levels, the 14 calendar will be a loser. 

[Hannes Kury]

Kim,

 

How about the +May 16p/-Mar 16p?

[Kim]

16 sounds better, but if you want to enter, I would do it on a day when VIX is down not up like today.

 

I'm very close to closing the current calendar, but I think VIX might go a bit higher tomorrow ahead of the jobs report and I might get slightly better price.

[gofoptiontrading]

kim,  if the vxx goes to 17 level, this trade will be sold for credit, right?

Vxx is very volatility , it can be +-20% in one day.

[mcmatterson]

I don't like the strikes. If VIX goes to more "normal" 16-17 levels, the 14 calendar will be a loser. 

I don't understand. Wouldn't the 14 put calendar value go up if VIX increased in the same way as the 17 put calendar we have? Thanks Kim.

[Kim]

kim,  if the vxx goes to 17 level, this trade will be sold for credit, right?

Vxx is very volatility , it can be +-20% in one day.

You are talking about vix, not vxx, right? Which trade you are referring to?

[Kim]

I don't understand. Wouldn't the 14 put calendar value go up if VIX increased in the same way as the 17 put calendar we have? Thanks Kim.

I'm sorry, my mistake. It will not be a loser, but both puts will be worth very little.

 

In case of 17 calendar, if VIX goes to 17, the short put will expire worthless, but the long put will have considerable value.

[gofoptiontrading]

You are talking about vix, not vxx, right? Which trade you are referring to?

yes, vix:) and i'm talking about current trade we are having:)

Edited January 30, 2013 by gofoptiontrading

[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  

[Kim]

I'm out at +0.05.

 

The gain calculation is based on margin. IB requires $150 margin per spread (I saw someone posting lower requirements, but I'm using mine). We got $0.25 credit which reduced the risk to $125. The real risk is much lower, so we are really conservative with $125. The gain is 0.30 or 24% return on risk.

 

I will definitely do it again, but I want to see VIX lower and I want to be more conservative this time.