VIX Graph March 5, 2010

As the markets March higher – RUT is 666, easily a new high for the year – volatility indexes are heading lower.  Both VIX and RVX established new lows for the year.

There may be lots of money to be made by betting on a continued decrease in the volatility indexes.  I'd prefer a portfolio more vega neutral.



Above: VIX

Below: RVX




4 Responses to VIX Graph March 5, 2010

  1. John 03/06/2010 at 7:13 AM #

    Hi Mark,
    1) Is buying extra put/call the only way to hedge vega risk in an iron condor?
    2) According to your observation from trading for so many years, what is the largest % out of money option that gets exercised? I mean sometimes even if an option is 3% OTM it can still be exercised (at a loss to the holder), but 3% might not be the largest number, this is just the highest figure I have heard.

  2. Mark Wolfinger 03/06/2010 at 11:16 AM #

    1) No. Extra options give you +delta and +gamma and are helpful.
    But you can buy call spreads and put spreads.
    You can buy a kite spread.
    You can buy a calendar spread to gain vega.
    2) ZERO percent. ZERO percent. The owner owner has the right to exercise, but it’s a very stupid thing to do and the vast majority are not that stupid.
    Sometimes it makes sense for a market maker to exercise an option that is one penny OTM. But NEVER prior to expiration.
    Sometimes a customer makes a mistake and exercise the incorrect option. He owns the 60 and 65 calls, but exercises the 65 instead of the 60.
    Otherwise it does not happen. The only exception occurs when news is released immediately after the market closes on expiration Friday and the stock gaps higher in after hours trading. [Or lower and the put is exercised].

  3. John 03/06/2010 at 2:12 PM #

    Thanks, especially for the kite spread suggestion. I have seen it before but I only figure out its essence now. Do you think it is a good idea to establish a kite spread immediately after opening an iron condor, or is it better to wait until there are signs that stock price is swaying to one side?

  4. Mark Wolfinger 03/06/2010 at 5:01 PM #

    Kite spreads tend to be costly.
    If you are someone who insures positions early, you should think about the cost and decide if it’s worth it to you. Buying early does make them less expensive.
    I prefer to wait. But not too long.
    If you only insure spreads that threaten to cause harm, then you should wait. There is no need to abandon your basic trading style.
    If you are short a call spread, for example: 770/780, then a decent kite involves buying 750s, 760s, or 770 calls. The longer you wait the more the kite costs. But you may never need the insurance.