Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Trading VIX Options? Good Luck To You!


You aren't betting on where volatility will be in June, you're betting on how traders think future volatility will be priced in June.


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.


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.

< Previous
  • 1
Next >
No positions in stocks mentioned.

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 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos