mosaic

thanks everyone for their thoughtful ideas!

Hi Kim, AAPL seems like the stock could be volatile with an upside bias given the battle with Greenlight. Do you have any thoughts on how to best structure an options trade to capture potential volatility with a bias to the upside over the short and interim 2-6 month time frame? Thanks,

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.

Hi Kim, That was a very informative post. I have some follow up questions to ensure that I completely understand when to identify a cheap trade in different option strategies. Can you provide examples on how to calculate the implied moves with a RIC and a strangle? Thank you,