As I stated yesterday I think that the VIX spike is a little over done. While certainly the market has moved over the last 4 days as if it deserved a VIX of 27.31 (55 points in 3 days is nothing to sneeze at), I do not think this pace will continue. The market is much more orderly than it was two years ago. There are many investors who are very skittish, this is causing the spike. Let’s quickly run down the facts
1. Calendar spreads have gone from a negative skew of 2 points to even, with the weekend being taken out Friday they may actually be positive.
2. This is the highest VIX level since November 5th.
3. The market has given up just under 5% from the very top on Tuesday
As a trader what is my approach? Before moving on, please take the time to read the article below. It goes over my thought process of selecting a negative vega spread. http://www.option911.com/option-education/how-to-select-a-negative-vega-trade-strategy-based-on-implied-volatility-spikes/
There is one factor that the above article does not address, intermonth IV skew. Very few of the past IV spikes have seen the volatility spreads tighten up this much. Knowing this, what do you traders think approach I would take if I wanted to:
1. Get short Vega
2. Take advantage of the Intermonth volatility spread
3. Have room in the trade to avoid the actual volatility of the underlying.
If you traders said a Double Diagonal set up as a flat to negative vega spread, you hit the nail on the head congrats. If I have enough bullets, and I’ll be honest I am running low personally, I think this is the best approach to the current market. This is a little ditty I put together that is conservative, and has a nice chance of working well. However, it is a little pricey. It is a flat vega spread today, but actually gets longer as time passes, that is because of the intermonth spread. Traders, what are your thoughts? What are you guys trying to trade right now?
Sign up for email updates, please support our sponsers, sign up for the forums, check us out at Seeking Alpha, and follow us on twitter-ID @option911!
Popularity: unranked
Loading ...
{ 6 comments… read them below or add one }
Interesting, but what about just shorting VXX? VXX is based on implied volatility swaps so that should give you a straight short vega position on this month. It will not let you take advantage of inter-month spreads though.
This trade looks interesting. In this environment (slight positive skew on SPX options) how would it compare to a double calendar, say 1115 calls and 1045 puts?
Also, what do you think of a put ratio spread here? Maybe 1SD OTM for the long strikes and 20 SPX point lower for the shorts?
Hi Mark, I was looking at just selling a 980/975 put spread for about 0.95c. I have the “top half” of a butterfly (having exited the vertical spread to the downside) – 1130/1175 – and this then makes a nice vertical spread to convert into a condor – and the benefit being i can do that 9 times over without putting up any margin… will watch with interest what happens to your double diagonal.
Hey Mark,
Nice idea, can be good trade. But there is a problem with regulations for Banks and this VIX spike can be a sign of longer move down. I hope this won’t happen, but little fear has come into Market recently, I think. Second problem is (from my personal perspective) that I was loaded in Market with half of my income money before these down days. So from my point of view biggest problem for now is to defend existing Calendars and Condors strategies. I’ve already done adjustments for all three Calendars for DIA, SPY and IWM because they hit BE. And even more fun, my DIA – now Double Calendar – is near BE again. For me it’s worst start of everymoth Income strategies that I trade. I do not panic, it’s paper account anyway, but it shows me that I have a system work to do with insuring my trades. Learning is why I trade, so this time is interesting for me, despite this can be losing month. For income traders it would be better for Market to slow down. If I wasn’t loaded into Market before, maybe I would be completely out of the market this month – and I know this is not correct with income methodology. Anyway, we have cool time.
Regards.
Mark:
Why the PUT side is so far away from ATM?
Is it due to negative directional bias or it might be related to greek setup (vega) that you want to achieve?.
Today the diagonal PUT SPRD will see for 0 cents. Is this efficient in term of cost of capital?
Thanks
Ron
ill address all of these on friday!