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VIX Options

VIX index and VIX options

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VIX options are very popular, but they are not what they seem.

Volatility Skew

Also check out a couple of articles about volatility skew

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Why does everyone hate the market makers?

Market makers serve a purpose. It may not be as honorable a of profession as being a surgeon or teacher, but they take a lot of abuse from individuals who trade options. I’m sure some complains are justified, but there is no reason to blame the market makers every time something goes wrong with a trade.

What bothers me most about such accusations is that they come from people who do not understand and have made no effort to understand. They don’t recognize the special circumstances of the vehicles they are trading (a huge mistake), then don’t understand the risk involved in a trade, and then seem to expect market makers to toss cash in the trash, just to satisfy the unreasonable demands of a customer.


There are still traders who buy and sell VIX options with no idea of what they are trading. Then when something goes wrong, they love to blame the market makers for cheating them. If these traders would simply read the rules, or ask questions of their brokers, there would be no problems. Instead they love to trade first and then find someone to blame. It’s the same for Europeans style index options. Many customers have no idea that these options are European style. Worse than that, they never bother to understand how the final settlement price is calculated. What they do very well is complain bitterly.

I trust that all readers here know that VIX options are different from other options. The underlying asset is NOT the spot VIX index. It is a VIX futures contract. And to make it more complicated, you cannot assume which contract is the underlying for a specific VIX expiration cycle. Care must be taken to learn which futures contract underlies the options that you plan to trade.

As if that were not sufficiently complicated, VIX options are European style and cannot be exercised prior to expiration. This is not a product for the under-educated trader. Yet many option rookies go out and trade these options and lose money – just because of ignorance. Do they accept the blame? Of course not. It must be the market makers who are cheating them.


On a forum run by one of the discount brokers, a poster complained that market makers ‘manipulate’ the prices of options, and that he, the intelligent customer, would never sell a position for less than it’s full value to such people.

What he doesn’t get is that when he wants to sell a position at full value (think of a call spread for which both options are in the money, the strikes are 5-points apart, and the spread will be worth $500 at expiration), he expects some market maker to pay him that $500, and also pay commissions for making the trade. That would guarantee a loss for the market maker. Nevertheless, this customer still wants someone to pay $5 for the spread he wants to sell. When he cannot get that price, he blames the market makers for bidding less than the spread is worth.

I am not suggesting that the market maker is your friend. I am not suggesting that he/she is working to give you free money. However, many are decent, honest citizens trying to earn a living. If customers were better educated and stopped trowing away money, there would be less reason to seek someone to blame. Each trader can begin by observing two simple rules: never enter a market order when trading options and be certain that the specific options you are trading do not have special rules.

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VIX Graphs May 21, 2010

There is no doubt that volatility has returned to the markets, and the graph below doesn't tell the whole story.  Intraday volatility has shown some remarkable swings.

Excluding 1987 and 2008, this week VIX visited a level seldom seen (>45).  There is definitely a lot of fear and investors are grabbing options to protect themselves – or to speculate on a big market move.  It's amazing to me that people seem to use option strategies to protect their portfolios only when everyone wants to buy options.  They choose to own insurance when that insurance is costly.


An expiration story

Last Thursday afternoon, the day before settlement prices were calculated, Jason posed this question:

I'm short the May 620/630 RUT put spread. Currently trading at 651. Settlement is
tomorrow. Settlement always scares me since getting sideswiped in March.
Could it settle more than 25 points down from close?

I told him that yes, it could, and suggested that he exit the trade.  In fact, after he wrote, the market declined further and RUT closed for the day at 640.

I held my 620/30's open. (Never again). Got busy, came home to
closing of 640. Lesson learned. Sleepless night ensued.
RUT settlement (ticker: RLS) finally came out at 629.95. Bullet avoided.

Restless night coupled with having to wait until after the market closed for the day (Friday) to see the results.  Not worth it.  And Jason agrees – I hope that 'never again' quote becomes reality.



"Your chapter on Equivalent Positions was the clearest explanation that I have ever read.  I
learned a great deal – and it made sense!  Thank you for making the
effort to put out such a fine book." DS

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VIX Graphs May 14, 2010

Implied volatility is lower this week than last, but there were still significant up and down moves.

To me, that means there is plenty of uncertainty in the markets.



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VIX Graph May 7, 2010

Once again volatility has returned to the marketplace.  This time it's fear generated.  I don't have the hourly data, but you can see VIX move up and down by substantial percentages during the trading day – as the world becomes afraid, or somewhat reassured, or frightened once again by world events.


The one big occurrence this week was the sudden disappearance of bids.  Large order flow resulted in a 700 point decline in the Dow Jones Industrial average over a 15-minute period.  The index moved from -300 to -1000 and back again to -300.

Investors who had placed stop-loss orders for their stock positions got unjustifiably hammered when there were no reasonable bids available.  It didn't happen everywhere, but some of those stop orders became market (not limit) orders and were filled at horrible prices. 

Then there were investors who sold 'at the market.'  I don't like market orders, but this time they were unmercifully hurt.  Some thinly traded stocks traded down to mere pennies, when that became the best available bid.  Such trades were supposed to be canceled, but I have no idea whether that truly happened.

The events of this week once again point out the desirability of owning portfolio insurance or eliminating stocks from your portfolio and replacing them with call options that are in the money (and thus have relatively low time premium).  Of course, after this week, those calls have much greater time premium, making this strategy more expensive.


Coming in the May 2010 issue (May 24, 2010) of Expiring Monthly Magazine:


Interview with Dr. Brett Steenbarger

Floor Stories by Mark Sebastian.  How market makers think

+ much more

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VIX Graph March 26, 2010

The stock market was more volatile this week, and VIX stopped it's current decline.  Whether this is merely a pause in the current downtrend, or signal that the lows in VIX have been seen, is anyone's guess.

The bulls remain in control of this market, but the bears are not in hibernation.  I can hear them growling.  Maybe it's just that noise than keeps option buyers in the marketplace.  Those buyers support option prices, and IV does not tumble.

Perhaps I'm grasping at straws in an effort to understand what's happening with VIX.  As the future unravels, we will learn more.




Lessons of a Lifetime:

My 33 Years as an Option Trader 

by Mark D Wolfinger

Buy Now


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VIX Graph March 19, 2010

When I began adding volatility graphs to the blog on Saturdays, I thought there would be something quite interesting to say on a regular basis.  I had been publishing these graphs at my web site for years before moving them here.

To tell the truth, I'm not finding much to discuss.  Perhaps the failure is mine because I know that other bloggers find VIX to be worthy of interesting discussion (see: Daily Options Report and VIX and More, for example).


VIX sets another new low for the year (16.62 on Thursday)


Expiring Monthly: The Option Traders Journal


Official launch date: 2 days from today: Monday, March 22, 2010

Read all about it 

$99/year; 12 monthly issues

Subscribe prior to launch and be entered into a random draw for gifts

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VIX Graph March 13, 2010

There's not much to say about VIX from my perspective.

The market marches higher, and VIX has been going nowhere.  What is not obvious from the data is the VIX is significantly higher than the realized volatility of the market.  We have not only been heading higher, but the average daily moves are much smaller than in recent memory.



Coming soon:

Lessons of a Lifetime: My 33 Years as an Options Trader by Mark D Wolfinger


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