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.

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Coming soon:

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

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2 Responses to VIX Graph March 13, 2010

  1. TR 03/13/2010 at 6:42 PM #

    Mark
    It is interesting that you note that VIX has been higher than realized volatility. I did some online research today and it seems that multiple sources agree that there generally tends to be a volatility risk premium and that implied volatility (IV) tends to be higher than future realized volatility (RV) on average in the long run.
    I have a question related to this for you on VIX and considerations for an IC trader. I remember is past posts that you have indicated considering trading double diagonals instead of IC’s when VIX is low (I apologize in advance if I misunderstood you). I want to get your thoughts on this as I continue to fine tune my own strategy
    I consider myself a trader who is ambivalent about market direction (at least in the short to medium term) and I have grown to like buying IC’s because they fit this view.
    As VIX has declined it has crossed my mind that perhaps I should consider trading some double diagonals. I have never traded DD’s before. But I am asking myself a few questions about why I would do this as there seem to be a few reasons (based on my own beliefs) why I shouldn’t…1) If I don’t believe I can predict market direction why would I think that I can predict volatility and think that I can make the claim that IV is low. 2) The Risk/Reward characteristic for DD’s seems to be higher than for IC’s as are the margin requirements (I will need to choose spreads that are 2-3 strikes apart on RUT to avoid paying a large debit) and most importantly 3) If I don’t think I can predict if IV is low vs. RV and at the same time I believe that in the long run IV tends to be higher than RV, then shouldn’t I always be a seller of volatility rather than a buyer (i.e. shouldn’t I always sell IC’s and never sell DD’s)?
    I hope my question makes sense to you. I am looking forward to hearing your thoughts about what I am saying and what I am missing. Thanks again Mark for this awesome blog, I have learned a lot from you.
    Rgds
    TR

  2. Mark Wolfinger 03/13/2010 at 6:52 PM #

    TR,
    Thanks,
    You are not missing anything.
    One reason for trading DD is not so much that you predict an increase in IV, but that you FEAR IV is too low to be short vega.
    There is nothing wrong with taking the stance than being short vega is ok (yes it does exceed RV over time). But if you want a more vega neutral portfolio, then a combination of IC + DD makes sense. Most people like the idea of delta neutral, but don’t want to be vega or theta neutral. It’s a choice.
    You questions:
    1) Agree. No reason to believe you can
    2) Yes, wider strikes; greater risk; potentially much larger rewards. That comes with trading DD.
    3) Yes to a point. It’s probably right to trade IC all the time – if you never want to take a stance on IV. But if IV drops to 10 again (it was there just 3 short years ago), you may not like the premium available from IC.
    Makes perfect sense. Awesome! I like that.
    Regards,