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)


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21 Responses to VIX Graph March 19, 2010

  1. John 03/21/2010 at 3:01 AM #

    Hi Mark,
    Some time ago you talked about option seller getting assigned by a random selection of buyer who exercised. Let say a seller has shorted 100 contracts, is it right to presume that there is a possibility of the seller getting a partial assignment, if there is insufficient exercising buyers to cover the whole of 100 contracts?

  2. Peter 03/21/2010 at 4:20 AM #

    I was wondering what you thought about ratio spreads. If I think the market is overbought but can continue its melt-up but at a weaker pace, maybe an OTM ratio spread on the call side of RUT might be good. If the market moves slowly up, IV can still go down from here, which would benefit the trade. Instead of a standard ratio spread, I might put on a closer to the money Kite Spread position with a further OTM call credit spread position – I don’t know what ratio but it has to be for a credit for the entire position so that there would be no RUT downside risk for the trade. Any thoughts? Thanks.

  3. Mark Wolfinger 03/21/2010 at 9:00 AM #

    Yes, partial assignments are common. Much less common at expiration.
    This question should be of interest to others and I’ll reply in a separate post one day this week (March 23 -26).
    I’m delaying to verify that the process still works as it did when I was a market maker.

  4. Mark Wolfinger 03/21/2010 at 9:23 AM #

    A distinction must be made.
    A. A ratio spread is selling more calls than you buy.
    If you want to buy (I’m randomly choosing options and have no idea of the prices) 10 RUT Apr 720 calls and sell 20, or 30 or ? Apr 740 calls, that’s a ratio spread.
    It’s an acceptable position for some traders, but I avoid it just for the sake of safety. And I never recommend it to anyone because I prefer not to be naked short any call (or put) options.
    If that does not bother you, and if your broker allows the sale of naked calls (many do not), and IF YOU ARE A GOOD RISK MANAGER, this play is viable. I cannot endorse it due to the risk of a sudden melt up, but that’s conservative me speaking.
    In requiring a cash credit please be certain that you do not sell too many calls. Sometimes a small debit has to be paid.
    B. If you are referring to a kite that sells extra spreads, that’s a different story. The risk there is far less and in fact, you prosper, if the rally moves far enough. Of course, there is a lot of suffering before that ‘far enough’ point is reached, and you may (as I would) feel an adjustment (or two) is needed during the rally.
    Thus, instead of selling 3 call spreads per long call (a C3 kite), it’s okay to sell a (C3 +2) kite in which two extra call spreads are sold. The risk is obvious, but the play is very acceptable.
    Be careful of having too much size.
    Comment: Think of this trade as selling a credit spread and buying CTM naked longs as protection. That’s what it really is.

  5. Peter 03/21/2010 at 12:51 PM #

    Mark, when I said Kite Spread and call credit spreads, I meant using a Kite Spread as the long position and extra credit spreads (in addition to the credit spreads in the Kite spread but further OTM) as the short position. But yes, essentially it would be having closer naked long options, and short further OTM credit spreads, maybe at various strike prices.
    Since the risk is all to the upside, I would put on more long calls than I normally would in an insured iron condor, and accept only little credit for the entire position. I guess another possibility would be to do a Broken-wing butterfly. Thanks Mark.

  6. Mark Wolfinger 03/21/2010 at 1:58 PM #

    Thanks Peter,
    Certainly a viable trade. Lots of profit potential – but there are still loss possibilities. Looking at those graphs is necessary when placing these trades.
    If you do any of these trades, let us know how they are doing.

  7. Peter 03/21/2010 at 3:24 PM #

    Thanks Mark. I will keep you informed if I do the trade.

  8. Jason 03/21/2010 at 9:44 PM #

    Hey Mark,
    Is there a % estimate of how much premium declines each week closer to expiration. Example: If I want to collect .40 on a credit spread and be out as far from current market value as possible with the shortest time on the books. 4 weeks from expiration I might be able to go out 6 strikes or 10% from current market level for this .40 credit. Week 3 in order to get my .40 credit instead of 10% or 6 strikes out I can only go 7% or 5 strikes out. 2 weeks to go the farthest I can sell and still collect my credit is 5% out … etc. These are of course arbitrary and hypothetical numbers and assume the market stays at the same level.
    I have heard that options lose 30% of time value after the weekend before expiration and another 30% the night before expiration. Trying to find a ballpark estimate on these statistics from 4 to 5 weeks out until expiration so I dont sell too early and take on extra time or wait too long and have to sell too close.

  9. Mark Wolfinger 03/22/2010 at 12:03 AM #

    I like to reply to all questions,and will – but IMHO you are asking for big trouble. In fact, I’d suggest this trading plan has a zero percent chance of ending happily – especially if you plan to use it for an extended period of time.
    The implied volatility (IV) plays a role here. The higher the implied volatility the higher the value of the spread. Thus, the arithmetic is not quite as simple as you would like it to be.
    When option spreads decline to inexpensive levels, they decrease in value far more slowly. One reason for that is that investors who sold those option spreads prefer to buy them back and let someone like you collect those last few dimes.
    There are also buyers of the spreads at low prices – just to ‘take a shot’
    My point is that you should have an easier time selling your spread at that low price than you may anticipate.
    But the bad news is that it will be very difficult to buy back the spread for much of a profit and you will probably decide to hold through expiration. I know that’s your current plan, but let me tell you one more time that you will not be a happy camper if you sell spreads @$0.40 in a $600 index (I assume that’s RUT) for an extended period of time.
    One crucial point you are overlooking. If an option loses 30% of its value (and you must understand that this cannot possibly be true for every option), then which option that is depends on strike and IV.
    BUT – you are trading a spread, not an option. Thus, if both options in the spread lose 30%, your gain is very small.
    Premium is proportional to the square root of time. For example, if you sell a four-week option, when all else is equal, it will lose half of its time value after three weeks.
    One week remaining: Sg Rt of 1 is 1
    Four wks remaining: Sq rt of 4 is 2; option worth twice as much
    The value of the 4-week option is twice than of a one week option. With that info, you are set.
    Take the value of the 4-week option. After one week it will be worth SQ RT (3)/SQ RT(4) as much.
    This is the answer to your question, but I cannot tell you which option spread will be sellable at $0.40. You can use a calculator to try to figure out which spreads are worth 40 cents and perhaps that will be an effective guide.
    But it is your money and you may trade as you wish.
    To your question:

  10. Jason 03/22/2010 at 2:58 PM #

    Thanks Mark. Are you saying this is a losing battle because of the credit amount I mentioned? If I had said .90 per spread would that be deemed more appropriate?

  11. Mark Wolfinger 03/22/2010 at 4:13 PM #

    The first thing I must tell you is that you should trade according to your needs and comfort zone etc.
    It is my experience, fortified by statistics, that selling low delta, inexpensive spreads on a volatile $600 index is a losing proposition. You win those $40 bills again and again, then one time you lose $500, $800, or even the full $960.
    And if you tell me that you will ‘adjust in time’ to prevent that possibility, then you will earn $40 less often and take more frequent losses of $100 or $200 of whatever your cutoff point is.
    It’s not a question of whether $90 is better. It’s a question of what you feel comfortable doing. If you do what I suggest (and I will not suggest anything to be certain this does not happen), then you will not know how to adjust, when to adjust, when to exit. Why? Because you will not be in your comfort zone and the decision-making process becomes complicated. You would think: What would he do? That’s totally inappropriate. You must do as you think best.
    So let me rephrase my answer:
    Selling the cheap spreads is a of of fun. It wins time and time again. But, big market moves do happen. Sometimes they are sudden.
    One good loss can wipe out one or two years worth of gains. Is that the scenario you want? If the answer is ‘yes’ – then please go for it. many, many people sell very cheap spreads and live to talk about it. The problem is that those who don’t survive don’t talk about it. Thus, we have no method for determining the real world results. But you can try to learn about the ‘risk of ruin.’
    My guess is that it’s a losing strategy. I do not know that for a fact. I do not know how well you manage risk. I really can’t tell you ‘don’t do it.’ I can only say I wouldn’t and you must go from there.
    You will find plenty of support for that strategy, if you look or it. My opinion should not be taken as gospel. It’s just my opinion.

  12. Jason 03/23/2010 at 7:16 AM #

    It makes sense what you are saying. March taught me that. Wiped out months of gains quick. I do like the consistency idea of index spreads but that sudden drop or rise has me on high alert now and taken away some of the excitement.
    Is there a option selling strategy that may be less volatile or potential risky that you have found to be viable for monthly income without the big threat of a sudden wipeout. I’ve done covered calls, put selling, etc but that produced some months of steep loss from a news report coming out of the blue. Credit spreads seemed ideal to me until this month. I’m open to suggestions.

  13. Mark Wolfinger 03/23/2010 at 7:54 AM #

    The key phrase is ‘monthly income’ and that means you are a premium seller who depends on being able to hold a trade long enough to benefit from the passage of time.
    When you trade with negative gamma and positive theta, you are going to face problems with volatile, or unidirectional markets. That cannot be changed.
    One choice is to choose a less volatile underlying asset. Example, SPX or XEO (not OEX) instead of RUT.
    Another idea for you is to reduce position size. That automatically makes your account value less volatile.
    Another method to reduce volatility – yes, it may also reduce profits – is to own some insurance. Extra long puts or calls.
    Jason – you can reduce risk easily. The question is: are you going to be comfortable trading positions with much reduced theta? That’s a question only you can answer.

  14. Jason 03/23/2010 at 1:49 PM #

    Thanks … the SPX is what burned me in March. Closed 3/18 at 1163 and I had 80 1170 shorts on the books. Thought I was safe. Thought wrong. Settlement price came in at 1172.95 next morning. I dont have any clue how it can be that much more but cost me $30,000.

  15. Mark Wolfinger 03/23/2010 at 2:49 PM #

    Naked shorts? A 70-lot?
    I’m curious to know where these options were trading at the bell on Thursday.

  16. Jason 03/23/2010 at 5:38 PM #

    Not naked … 1170/80 spread but still hurt. Closed around 1163 on Thursday

  17. Mark Wolfinger 03/23/2010 at 7:39 PM #

    I should have known it was a spread.
    I means the price of the 1170 calls, not the price of the index.
    If you tell me they were 35 cents, you lose all sympathy.

  18. Jason 03/24/2010 at 12:48 AM #

    I plead the fifth

  19. Mark Wolfinger 03/24/2010 at 9:10 AM #


  20. Jason 03/27/2010 at 9:06 AM #

    I’ve been mulling over your earlier comment on this thread. Ordered your “Lessons” booklet (very interesting) and as I started skimming through I read some Deja vu. Did great for a while, lost a bundle in an instance, got it back and felt overconfident, got side swiped again. You said earlier that low delta trades will be a losing battle over time but do advocate iron condors and credit plays in your writings. So have you found higher credit, lower probabilty trades to come out ahead with proper risk management? Is that what you were suggesting?

  21. Mark Wolfinger 03/27/2010 at 12:38 PM #

    The bottom line answer is ‘yes.’ with a lot of commentary.
    I’ll post the reply Monday, 3/29/2010