http://www.theoptionsinsider.com/tradingtechnology/?id=6921
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker
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The Options Insider: Your Inside Source For Options Information
Read more: http://www.theoptionsinsider.com/tradingtechnology/?id=6921#ixzz1MzaI8H5C
The Options Insider: Your Inside Source For Options Information
Has the VIX topped Out?
Posted on 5/5/2011 in Trading & Technology by Mark Sebastian
Has the VIX topped Out?
Option traders, the market was down more than a standard deviation today based on yesterday's closing VIX (more if we are looking at ATM IV). Yet, the VIX rallied a measly .4% what gives?
If we dig deeper and look at how IV moved on the 1345 strike in both May and June was can see that IV on those strikes was flat to down.
May:
June:
When I see something like this it leads me to believe we could have found some sort of temporary top in the VIX. The VIX being up today, is more about it moving up and down the curve than it is about IV being up (this is somthing I have been through several times. like here for instance). Another volatility factor I am seeing in SPX that makes me think we may have topped is that IV's between 30 and 60 days are diverging not converging:
Notice how the 30 and 60 IV seemed to be coming together until today. When IV's are rallying, we will generally see short term IV run up at a faster rate than longer term months (authors note: Some people like to call this the 'gamma of volatility' of VOMMA. I do not like that term since it is not truly related to vega. Instead I usually just weight the months so that I get a better idea of how the vega's of the short and long months will interact. For instance, right now, I might give a multiplier of 1.4 to May vega relative to June). When IV's start to fall the two months diverge with front month IV falling faster.
Finally, I made a big adjustment to my SPY trade by taking of the top end short call spread for a .20 profit on average. I now own a straight up 137-135-134 Christmas tree.
I have been updating it every morning during the AM Pit Report. For the time being, if we catch a rally I am killing this trade as soon as it crosses 135.50. I have no desire to turn a trade that is a decent winner into a loser or a wash. I would also note that I am holding this partially against an OEX butterfly.
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
Read more: http://www.theoptionsinsider.com/tradingtechnology/?id=6921#ixzz1Mza6nmyN
The Options Insider: Your Inside Source For Options Information
