VIX Graph December 26, 2009

VIX is under 20.  Down more than 75% from the highs of 2008. 



4 Responses to VIX Graph December 26, 2009

  1. 12/26/2009 at 1:56 PM #

    Dear Mark
    What do you think of the following scenario:
    I own a front month IC. There are 2-3 weeks left to expiration. The underlying moves too close to a short strike. I then buy the relevant side kite- but in the next month out. Will that work?

  2. Mark Wolfinger 12/26/2009 at 5:18 PM #

    It works.
    But it provides much less protection that a kite usually provides.
    Why? the negative gamma that comes with those front-month options is too much to overcome.
    I’m facing a similar dilemma right now. I’m still short a Jan call spread that is only 1.5% out of the money. I already own some Feb kites.
    Those kites offer great portfolio protection. In fact, so much that I would profit nicely on a continued rally. If it were not for that Jan call spread.
    But the gamma – of those front-month options I am short – changes so quickly, and losses would mount so rapidly if the strike I am short (RUT 640) is breached, that these kites cannot provide enough protection.
    Obviously you and I can buy many kites, but that’s works badly if IV continues to drop and if the market turns south.
    My conclusion is that a small number of these kite spreads is ok, but they, by themselves, cannot do the trick.
    We must face reality. Covering those near-term options is expensive, we don’t want to do it, and it’s difficult to manage a position with negative gamma (especially when it gets more negative every day, as it will do as time passes). But at some point, risk overwhelms potential reward, and prudence suggests covering.
    I would have already covered if I did not have so much protection for my portfolio. I have a bit of staying power. I will not hold out too long, and will cover if the rally continues.
    Use your comfort zone to dictate your action. Kites will help – but not enough.
    Good question. Thanks.

  3. John Doe 12/26/2009 at 7:42 PM #

    The next couple of months should prove interesting!
    I expect the next three weeks to be relatively quiet. A slight retrace before another slow grind upwards is in the cards. Earnings will start to trickle in before Jan expiration, but for the most part will occur during the Feb cycle.
    Imagine earnings will be good, but fear is increasing that the Fed starts to move rates higher, which should put a lid on pricing. The yield on the constant-maturity 2-year treasury has increased by 50% thus far in December (0.67 to 1.00)!

  4. Mark Wolfinger 12/26/2009 at 11:50 PM #

    Hi John,
    Whenever I see comments similar to yours, I want to ask questions.
    This time I will ask:
    With no disrespect intended: What is your track record when making predictions such as these? What do you have to gain – and what do readers of your comments have to gain – from these predictions?
    I ask because it would never occur to me to share my thoughts on future prospects for the markets. I know my predictions do not come true frequently enough for them to be of any value to anyone else. That makes me wonder why others offer their views of the future.
    Thanks for posting.