Trading VIX Options? Good Luck To You! Jason Goepfert Apr 24, 2009 12:35 pm |
![]() |
![]() |
|
||||||||||||
|
There were 2 articles out recently about the structure of volatility derivatives. One suggested the worst was probably over; the other suggested investors bet on a return to volatility.
The note out today from BNP Paribas suggested that investors buy call spreads on the VIX, which would profit if implied volatility made a strong comeback by mid-June. If the VIX closed above 55 at expiration, then the options trader could pocket up 12.5 points per trade. If it closed below 42.5, then...well, your position would probably be about as useful as a third nipple.
The problem with these trades is that derivatives on the VIX don't always move as planned. Check out Adam Warner's blog, he's been all over this topic.
The following chart shows the May VIX futures contract versus the cash VIX index that we're all used to. As we can see, they don't always move in tandom.

The CBOE site itself suggests that VIX options traders look at VIX futures instead of the cash VIX index to get a better handle on how their options may fare. Remember, you're not necessarily betting on where volatility will be in June, you're betting on how traders think future volatility will be priced in June.
Buyer (or seller) beware.
Source:
Morgan Stanley Says Risk of ‘Sizable’ Equity Moves Now Lower
Bloomberg, April 22, 2009
VIX Set to Increase on ‘Fading Excitement,’ BNP Paribas Says
Bloomberg, April 24, 2009

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
discuss this article and more on the mv exchange |
|
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
| add rss feed | free article alerts |
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
DC
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennesee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Local Guides
















