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VIX and Volatility General Discussion


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VIX and Volatility General Discussion

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  #101 (permalink)
DameDeHasard
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ajk1 View Post
Just came across this great thread ! Thanks for that!
One clarification please
"VIX options are not the ViX, they are essentially VIX options on futures. This is an unfortunate nomenclature confusion that has brought many a person to grief. The VIX is an index, not a product, and is also known as Cash or Spot."
What do you mean by VIX options on are on futures ? There is such thing as VIX options on the cash/index right ?

You get paid out on a cash value of the VIX settlement at expiration, so the options are priced based on the expected value of the VIX at the expiration date. That value is represented by the VIX futures. The practical importance is that when spot vix falls or rallies, the forward price reacts much less and the options move less too. Partly that's driven by liquidity and partly by the fact that mean reversion is being priced into the curve.

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  #102 (permalink)
 suko 
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UVXY is now just over 6.

I looked around for a reverse split announcement but there is none. Did I miss something?

Usually they reverse split UVXY before it gets to 5, either 4 to 1 or 5 to 1. Last time was Sept. 2018, post-Volpocalypse.

Practically speaking, if you have long dated UVXY options you may want to trade them in. The bid/ask spreads tend to widen out on the split adjusted option series.

VXX is just under 12, and I expect they will also be announcing a reverse split, too. The last one was in August of 2017, pre-Volpocalypse. As a VXX watcher, incredible to think how long it took VXX to breach the $25 zone conclusively and then get to where it is now under 12.


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  #103 (permalink)
 suko 
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Futures contango effects the speed of decay of VXX. 9% is pretty decent this far out in the cycle, and also note that with 28 days to go, M1 is pricing almost 3 points above spot. Normally you would expect this to be less than 2 points, so that premium is very juicy.

Screen Shot 2021-03-23 at 8.53.50


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  #104 (permalink)
 shodson 
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I'm still short 3,500 shares of UVXY from 11.36, I have an April 10/20 bull call spread as a hedge, also waiting/wondering when a new reverse split will be announced. I'm not worried about my call spread, it's pretty much worthless already at this point.


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  #105 (permalink)
 Erikie 
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Hello, thanks for sharing! can you share a bit about the total price being short vxx in combination being long the callspread. How do you use riskmanagement in this combination?
Thanks!

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  #106 (permalink)
 suko 
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shodson View Post
I'm still short 3,500 shares of UVXY from 11.36, I have an April 10/20 bull call spread as a hedge, also waiting/wondering when a new reverse split will be announced. I'm not worried about my call spread, it's pretty much worthless already at this point.


Thanks for sharing this trade with us in detail.

Do you do this kind of trade on a regular basis?


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  #107 (permalink)
 suko 
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Erikie View Post
Hello, thanks for sharing! can you share a bit about the total price being short vxx in combination being long the callspread. How do you use riskmanagement in this combination?
Thanks!

I am not quite able to parse your question (which was not directed to me anyway) but if you are an Elite member you can see an example of risk management with long/short vol options trades in my elite journal starting here (maybe this addresses it).

Especially this post but maybe some earlier ones a couple pages back:



Ideally the way it works is you end up selling out your short vol for a small profit or a scratch and owning the long vol to expiry. Get your juice for free.

Owning the UVXY stock like in this case, you would just peel off enough shares to pay for your hedge at 21 days out then re-establish the hedge at 45 or 60 days out and so forth. At some point the long vol will come in.

You can also do this with VXX or UVXY strangles.

Of else VXX puts hedged with wide VIX call spreads similar to the UVXY spread above.


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  #108 (permalink)
 Erikie 
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Thanks I will have a look. Sorry my question was not clear. I asked Shodson what he paid for the callspread.


suko View Post
I am not quite able to parse your question (which was not directed to me anyway) but if you are an Elite member you can see an example of risk management with long/short vol options trades in my elite journal starting here (maybe this addresses it).

Especially this post but maybe some earlier ones a couple pages back:



Ideally the way it works is you end up selling out your short vol for a small profit or a scratch and owning the long vol to expiry. Get your juice for free.

Owning the UVXY stock like in this case, you would just peel off enough shares to pay for your hedge at 21 days out then re-establish the hedge at 45 or 60 days out and so forth. At some point the long vol will come in.

You can also do this with VXX or UVXY strangles.

Of else VXX puts hedged with wide VIX call spreads similar to the UVXY spread above.


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  #109 (permalink)
 shodson 
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Erikie View Post
Thanks I will have a look. Sorry my question was not clear. I asked Shodson what he paid for the callspread.

@Erikie - I bought the call spread for 1.00

@suko - Yes, I am frequently short UVXY. I also use stops, but pretty far out, like 2x my entry price so I give it a lot of room for temporary spikes/tantrums, that's why I have the call spread, to buffer me between the price and my 2x stop. I got hurt pretty badly during the Volpocalypse of Feb 2018. Up until then, I had been hedging over and over again, spending money for hedges that I didn't need, then I stopped hedging, and then it happened. Just hedge, and be happy with what you get. UVXY leverage is now 1.5x instead of what it was before, 2x, so that makes it safer too. If you manage the risk it's the next best thing to an ATM machine in the markets. I want to put on a new hedge, closer to the current price, but I don't want to be stuck with a call spread when it reverse-splits so I'm exposed up to 10.0 for now. The calls expire next week so I should decide by then.

R.I.P. XIV - https://www.forbes.com/sites/jimcollins/2018/02/06/it-works-until-it-doesnt-work-the-death-of-xiv-shows-the-folly-of-gaming-market-volatility/

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  #110 (permalink)
 Erikie 
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I remember 5th of Februar 2018 like it was yesterday. Liquidiation of the XIV. Is there such a risk with VXX ?
I am a professional trader and mainly vix


shodson View Post
@Erikie - I bought the call spread for 1.00

@suko - Yes, I am frequently short UVXY. I also use stops, but pretty far out, like 2x my entry price so I give it a lot of room for temporary spikes/tantrums, that's why I have the call spread, to buffer me between the price and my 2x stop. I got hurt pretty badly during the Volpocalypse of Feb 2018. Up until then, I had been hedging over and over again, spending money for hedges that I didn't need, then I stopped hedging, and then it happened. Just hedge, and be happy with what you get. UVXY leverage is now 1.5x instead of what it was before, 2x, so that makes it safer too. If you manage the risk it's the next best thing to an ATM machine in the markets. I want to put on a new hedge, closer to the current price, but I don't want to be stuck with a call spread when it reverse-splits so I'm exposed up to 10.0 for now. The calls expire next week so I should decide by then.

R.I.P. XIV - https://www.forbes.com/sites/jimcollins/2018/02/06/it-works-until-it-doesnt-work-the-death-of-xiv-shows-the-folly-of-gaming-market-volatility/


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  #111 (permalink)
 Erikie 
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Interesting. How do you define “not a three day high”? I got some interesting strategy for vix trend during day. Will share later


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  #112 (permalink)
 suko 
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Erikie View Post
I remember 5th of Februar 2018 like it was yesterday. Liquidiation of the XIV. Is there such a risk with VXX ?
I am a professional trader and mainly vix

If you dig down into the prospectus on any leveraged ETF there is a termination clause.

They can all go to zero. VXX is not subject to the exact same scenario as XIV, but there's still a threat to the upside involving some strange market dynamics -- see what happened with TVIX last year.

At the time a little over a year ago when TVIX was heading toward $1000 there was a great fear that the whole vol complex would break.

Those of us in the vol space already knew that TVIX was an unkosher product, and nobody was surprised when it went haywire, just as nobody was surprised over XIV.

UVXY is a big question mark in my mind.

1) Since it survived Volpocalypse and also March 2020, you could say that it's battle tested in the most extreme conditions.

After Volpocalypse Proshares did lower the leverage on UVXY, again due to legal boilerplate in the prospectus that allowed them to do it, but the fact that they were willing to tweak the product and then kept it going tells you that it's too important of a money maker for them.

And if you look at the options volume and spreads on UVXY it's actually gotten a lot stronger and maybe even more liquid than VXX on some days. Which seems incredible if you think back to the relatively poor liquidity it's had in the past during times like Brexit.

Right now you've got a penny wide spread on the 50 delta calls for next week, not too shabby for the likes of UVXY. I guess this must be due to retail fascination. Pros tend to eschew it but retail loves it.


2) That being said, since September of last year UVXY options are known to be broken, pricing is screwy. So if you know how to exploit the anomalies in pricing them when they arise, power to you, but if not then you need to roll up your sleeves and figure it out.

No such issues as to management or pricing occur with VXX AFAIK, so in my view it is the safer product of the two to play with. At times of peak VIX, the liquidity tends to go into VXX and the spreads become tighter than any other risk management product. I think you get about the same amount of convexity as UVXY, too, on atm calls bought at the beginning of a crisis.



@Erikie do you trade VIX options or futures or both, and what kinds of strategies do you prefer?


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  #113 (permalink)
 Dreadwind 
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suko View Post

2) That being said, since September of last year UVXY options are known to be broken, pricing is screwy. So if you know how to exploit the anomalies in pricing them when they arise, power to you, but if not then you need to roll up your sleeves and figure it out.

Can you suggest any resources for learning about pricing on VIX/Volatility ETF options? AFAIK these options are not priced using the Black Scholes model, but I can't find much information about how they are priced. I know there are lots of custom models being utilized by market makers and firms that are scalping second level greeks (gamma, vanna, charm). All I can find are a bunch of white papers on various models I've never heard of (stochastic volatility with jumps, Hawkes jump, Jump-Garch, etc).

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  #114 (permalink)
 suko 
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Dreadwind View Post
Can you suggest any resources for learning about pricing on VIX/Volatility ETF options? AFAIK these options are not priced using the Black Scholes model.

First I have heard that.

The guys at Option Pit, who are vol gurus, have both ongoing courses and an extensive library of videos on the subject. Andrew's "VIX Made Easy" and VXX Made Easy" video series are extremely good. I think I wrote about learning this material in my elite journal mentioned above.


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  #115 (permalink)
 shodson 
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Dreadwind View Post
Can you suggest any resources for learning about pricing on VIX/Volatility ETF options? AFAIK these options are not priced using the Black Scholes model, but I can't find much information about how they are priced. I know there are lots of custom models being utilized by market makers and firms that are scalping second level greeks (gamma, vanna, charm). All I can find are a bunch of white papers on various models I've never heard of (stochastic volatility with jumps, Hawkes jump, Jump-Garch, etc).

Options are priced according to supply and demand. Black Scholes and other pricing models are only useful for suggesting an option value. However, UVXY options are skewed, i.e., they favor the puts, because it's in a near-constant down-trend, so the puts are more expensive than similarly OTM-distanced calls. Plus, since UVXY can't go lower than 0, but it can go up to infinity, that also adds natural reverse skew experienced by most equities.

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  #116 (permalink)
 SMCJB 
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Hmmmm.....

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  #117 (permalink)
 Dreadwind 
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shodson View Post
Options are priced according to supply and demand. Black Scholes and other pricing models are only useful for suggesting an option value. However, UVXY options are skewed, i.e., they favor the puts, because it's in a near-constant down-trend, so the puts are more expensive than similarly OTM-distanced calls. Plus, since UVXY can't go lower than 0, but it can go up to infinity, that also adds natural reverse skew experienced by most equities.

I'm a little confused about this. Looking at the options pricing on UVXY I see that IV and price are much higher for OTM calls than puts. This makes sense to me as the UVXY will tend to make slow and steady moves down but sudden and violent moves to the upside. This is the opposite of most stock or index options which would price OTM puts much higher as the risk is for sudden moves to the downside.

Am I missing something here or possibly getting bad data from Fidelity?


UVXY

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  #118 (permalink)
 Erikie 
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The primary product is the VIX and yes there is upwards skew because there is the uncertainty. I have never seen the implied volatility in the vix lower then 8 so that means the putcurve flattens on those levels


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  #119 (permalink)
 Dreadwind 
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Erikie View Post
The primary product is the VIX and yes there is upwards skew because there is the uncertainty. I have never seen the implied volatility in the vix lower then 8 so that means the putcurve flattens on those levels.

I'm guessing you mean that you've never seen the VIX below 8, since the volatility on the VIX (VVIX) has never dropped below 50. So that makes sense that VIX options would flatten out at 8 - they currently have a low strike price of 10, not sure if that's always been the lower end though. But for UVXY the lower end would theoretically approach 0 if it weren't for the reverse splits (from the carry cost of holding futures in contango)

I've noticed that like VIX options, UVXY options have greeks that do not behave like normal equity/index options. But maybe that's the mispricing that @suko was eluding to in an earlier post. I'm also not ruling out crappy data from Fidelity. They only recently starting pricing their VIX options correctly (based off the corresponding VIX futures rather than the VIX index.)

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  #120 (permalink)
 suko 
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Here's the show of Vol Views where they talk about UVXY broken pricing (AFAIK this issue has not been fixed either):

Volatility Views 419: Regrets from the UVXY Whale



discussion starts around the 11:53 mark



"at hercules investments this week sir i
11:53
am so
11:53
angry at uvxy i've got 55 million
11:56
dollars in calls in this thing and it is
11:57
not behaving like it should
11:59
we have been we have been uh slamming
12:02
this thing"


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  #121 (permalink)
 suko 
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Erikie View Post
The primary product is the VIX and I have never seen the implied volatility in the vix lower then 8
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8 was quite shocking when it happened a couple years back, and it could happen again with the CB's actions, etc. VIX spends much more time at 12, though.

The mode of VIX is somewhere in the range of 11 to 13 and this is the range that people intend when they say it's mean reverting.

It's now headed back to 12.


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  #122 (permalink)
 shodson 
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Well, look at that! I guess I'm wrong, at least for the current market. I guess since the VIX can explode violently to the upside, this would rapidly reward call buyers. The VIX rarely goes down as fast as it can go up, unless it's returning from the highs if an extremely volatile and uncertain event, like an election with an unknown outcome.


Dreadwind View Post
I'm a little confused about this. Looking at the options pricing on UVXY I see that IV and price are much higher for OTM calls than puts. This makes sense to me as the UVXY will tend to make slow and steady moves down but sudden and violent moves to the upside. This is the opposite of most stock or index options which would price OTM puts much higher as the risk is for sudden moves to the downside.

Am I missing something here or possibly getting bad data from Fidelity?


UVXY


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  #123 (permalink)
 Erikie 
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Sorry yes never below 8. It means a 30 days expected 0,5% volatility. 2017...


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  #124 (permalink)
 Erikie 
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I think in 2017 the S&P only 1 time went down more than 1% intraday.


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  #125 (permalink)
 Erikie 
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What are the adjustments when vxx got a reverse split? Size, strikes, multiplier


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  #126 (permalink)
 suko 
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Here we are, 20 days out and almost 3 points over spot. We should be at 1.5 or less. So there is a huge premium in M1 still.

Screen Shot 2021-03-29 at 9.46.46


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  #127 (permalink)
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suko View Post
8 was quite shocking when it happened a couple years back, and it could happen again with the CB's actions, etc. VIX spends much more time at 12, though.

The mode of VIX is somewhere in the range of 11 to 13 and this is the range that people intend when they say it's mean reverting.

It's now headed back to 12.

That was epic when it was that low. You think well get there again or how soon?

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 Erikie 
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FinTrader1 View Post
That was epic when it was that low. You think well get there again or how soon?



I do not think so. In 2018 the structure of the VIX changed a bit but permanent. Because of higher realised vol on one hand but also in periods of lower realised vol the implied was higher. I think models are more sophisticated and more premium will be paid for intraday gamma.


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 suko 
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That was epic when it was that low. You think well get there again or how soon?

I think we'll see a VIX 80 sooner than 8.


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 suko 
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I love this ZH headline:

"We're Going To Need More Cocaine" - Cboe Plans To Launch
24-Hour-A-Day Trading In VIX, SPX Options

https://www.zerohedge.com/markets/were-going-need-more-cocaine-cboe-extends-vix-
spx-options-trading-24-hours-day


"The planned expanded GTH session would commence at 8:15 p.m. ET and
run until 9:15 a.m. ET the following morning. Regular trading hours
(RTH) then run from the U.S. market open at 9:30 a.m. ET until the
market close at 4:15 p.m. ET. The RTH session will also be followed
by a new curb session – an extra half hour session for electronic
trading beginning at 4:30 p.m. ET– which will be added Monday
through Friday in the third quarter of 2021. For each Monday
business day, trading in GTH would begin Sunday evening."


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 fivewhy 
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I love this ZH headline:

"We're Going To Need More Cocaine" - Cboe Plans To Launch
24-Hour-A-Day Trading In VIX, SPX Options

https://www.zerohedge.com/markets/were-going-need-more-cocaine-cboe-extends-vix-
spx-options-trading-24-hours-day

Definitely good for including Asian traders in cboe products. And I'm actually not against the CME running ES and CL 23/7, if it ever came down to that. Weekend risk has always irked me. But no I don't see it happening. Kudos to CBOE for 24/5 tho.

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 suko 
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Definitely good for including Asian traders in cboe products. And I'm actually not against the CME running ES and CL 23/7, if it ever came down to that. Weekend risk has always irked me. But no I don't see it happening. Kudos to CBOE for 24/5 tho.

I think this allows you to get into position at maybe a better price on Monday morning when something big is happening, like last March. Rather than get stuck in a traffic jam at the open.

It used to be that you had to buy UVXY stock in the premarket to do this.

Hopefully there will be liquidity.


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 Dreadwind 
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Barclays announced a 4:1 reverse split on VXX effective April 23rd at the open.

https://www.businesswire.com/news/home/20210409005089/en/Barclays-Bank-PLC-Announces-Reverse-Split-of-the-iPath-%C2%AE-Series-B-SP-500-%C2%AE-VIX-Short-Term-Futures%E2%84%A2-ETNs

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 suko 
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VXX has reverse split to 40 range and now continues on its "predictably crappy" descent.

In a low vol environment, the simple way to trade this is using long put spreads.

Take a look at Ophir Gottlieb's classic article on the trade mechanics of this strategy.

https://www.cmlviz.com:443/news/2017/08/22/the-incredible-option-trade-in-vxx-that-keeps-winning


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