Tag Archives: Option Trades

Why Is The VIX So Weak?

*Update Aug. 16th: FTAlphaville takes my thinking a bit further. (here)

Sometimes I can’t help but wonder.

Watching an obviously weak S&P, I was expecting the VIX to be climbing, but to understand why the VIX is falling it’s worth a refresher on how the VIX functions and wikipedia does a decent job (here).

The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. For example, if the VIX is 15, this represents an expected annualized change of 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down 15%/√12 = 4.33% over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the change in the S&P 500 in 30-days will be less than 4.33% (up or down).

VIX 6 Month Chart
The short answer to this curiosity is: option traders are NOT expecting higher volatility over the next 30 days even with the downturn in the S&P, which often (but not always) signals higher volatility and hence a rising VIX. In other words, option traders are not expecting the S&P to deviate up or down greater than 4.12% over the next 30 days (based on the VIX at 14.23) and that translates to 5.77 points on the S&P and 57 points on the ES.

The VIX and option traders are saying today that the S&P should be bound by 134 and 146 over the next 30 days.

This 6 month chart of the VIX is interesting because at the moment the VIX is low and options are relatively cheap.

I’m often bearish during periods that feel complacent, though traders have a real dilemma with the VIX at 5 year lows and the S&P at 6 month highs. For me the obvious response is reversion to the mean, only time will tell.

VIX Chart

Is the VIX Flashing a Warning Sign?

For the entire length of this 3 month rally, the upward steps have lingered under 1% and usually under .5%. Only in the last 10 days has the VIX started to signal caution. The VIX is now solidly over 20 and approaching it’s recent high of 22.

Yesterday at the close we saw an unusual large pop at the close, and today we saw AAPL collapse 25 points in 5 minutes. AAPL lost it’s luster very quickly today, and that’s worrying… Euphoria is the word I’d use. Everyone has AAPL, literally, so sell. It’s hard to write that, given how popular, rich and well regarded that stock is. For how long the euphoria might continue is hard to say, but I read here that they accounted for 90% of the gains for the NASDAQ in yesterday’s trading. Strange. Buy some protection if you’re long AAPL.

VIX Chart

Option expiration is coming up this Friday, and tomorrow’s PPI and claims numbers risk to add fuel to this VIX fire.

NTAP Trade Idea

Look at the IV pre-earnings for NTAP. The front month is 158 and back month is 59.

You can sell the Feb 39 for ~2.00 and buy the Mar 39 for ~2.50… The spreads are .06 on each.

Currently: $38.82 Earnings after the close tomorrow. I’m aiming low, I’d like to see how this plays out.

Under the Radar on 4 Legs

Adding a puppy to a relatively consistent routine brings a dimension of humor to a “normal” workday. Over the last year, I wake up late, have a coffee, check out the european markets, ramble on brandnet, work, study, etc. Since Sunday, I’ve been trying to house-train a puppy, which for those of you who’ve tried, is akin to hoping a stock will move in your favor. Sometimes she does, sometimes she doesn’t. Over the past 3 days, I’ve learned to identify some important signals. She sleeps then she pees – my RSI. She eats then she pees – my MACD. She drinks then she pees – my VIX. Now these are important indicators, but the trick she NEEDS to learn is: She goes outside then she pees – my P&L.
Lab PuppyI’m counting on Galaxy to be a precocious puppy.

During my man’s best friend walks in the frigid cold, I ask myself; what market activity has me recently perplexed, what current trading opportunities should I dig into, and how should I be evolving my option portfolio in light of this slow grind upwards? All of this while attracting the most beautiful women in Paris… Precocious I say.

Leaving the finer sex aside for obvious reasons, lets look at the evolution of an option spread. Good information on evolving a straddle, butterfly, or vertical spread is very hard to find. (Try to find some information on evolving a calendar spread, that’s nearly impossible.) I’ve a concrete straddle example which I’m working on this month:

  • FXI – ishares FTSE China 25 Index
  • Feb 37 Straddle

I bought the Feb. FXI 37 Straddle in the middle of January while the current price was $37.50.  I started to see profit on the call leg at about 39 with very positive delta, I needed to make an adjustment. Time was slipping away and my 37 puts weren’t going to compensate for a downward move (unless it was extreme). I might as well be holding a simple 39 call, and I had little downside protection. I’m still bullish on $FXI but wanted to widen the smile. So I rolled up the 37 calls and bought the 39 calls. At that point, I was holding a Feb 37 put and a Feb 39 Call, a strangle. The third evolution I made was to roll up my 37 puts to 39 puts, which put me back into a straddle position again. Today FXI is at 40.09 and my original straddle would have been solidly ITM. You might say I should still be holding the original straddle, but these transitions have the effect of taking a small amount of profit off the table over and over, while keeping my risk profile more in-line with my comfort levels. If $FXI approaches 41 in the near term, I’ll repeat and transform my current 39 straddle into a 39/41 strangle, if not I’m much better prepared for a downside move.

These three charts give you an idea:

The 37 Straddle


The 37/39 Strangle


The 39 Straddle


(Thought I’d try Pinterest…)

SLV Option Idea

An Intriguing Silver Trade

I spend a fair amount of time dissecting option flow for the following reasons:

  1. Copying from another can be the highest form of flattery
  2. Institional traders know a lot more than I do
  3. Puzzles inspire me

Yesterday I stumbled on an option trade in the Silver ETF, SLV which has intrigued me for the last ~12 hours, a call butterfly at the 40/50/60 Jan 13 strikes. IV at 42/44/46 and the risk profile looks like this:

SLV Option Idea
SLV is at $29.29 so this trader finds maximum profit at 50 or a 59% rise in SLV over the course of the year. Remember, the expiration is 11 months out. Now look at the yearly chart for silver:

SLV 1 Year Chart

This trader is betting that before the year is out $SLV will retrace it’s past year highs. On first glance I couldn’t quiet understand why anyone would want to take this trade. It cost $0.70 (x 10k) or $70,000.00 and granted if SLV tests last years highs the profit on this trade would be a factor of 10. So… Still why would you make this trade? A market makers hedge against something I don’t understand? Could it be a hedge against a short futures position? A pure macro play assuming Silver becomes a safe haven? Wouldn’t a long call with lower strikes or a bull spread at lower strikes bring the same risk reward? If anyone that reads this has any idea, I’d love to hear.