Anything about XJO

[Fox]

Hi Mazza,

Good to have our resident quant back! Going cold turkey without your insights has not been easy .

If you are going to contextualize stat vol without using statistical methods, its better to use vol cones than eyeballing a graph with subjective lookback periods.

My "eyeballed" mean vol (20.5%) came surprising close to the vol cone average (20.6%) . Great suggestion ie. using vol cones. Less subjective and in the case of XJO, the "eyeballed" mean was arrived at without having to manually discount the 40% and 60% peaks.

Competition update:
skyQuake 15%
Grinder 18%
Cutz 30%
Fox 20.5%

With vol cone validation, I'm glad that I picked 20.5%. However, the latest 30 day HV of 17.9% puts Grinder in the lead (and he doesn't even trade XJO!). As things stand:

• I need to have faith in mean reversion.
• Cutz is praying for another Global Financial Crisis.
• skyQuake might just give Grinder a run for his money.

 

[cutz]

Cutz is praying for another Global Financial Crisis.

lol,

Yeah a pickup in volatility would certainly be nice, quickly running out of time.

Actually I should be careful what I wish for.

 

[mazzatelli]

lol...too many commitments so won't be around much [not that you need my bs], but sick this week

I haven't modeled anything relating to ASX for years now, but have seen proprietary iv indexes [similar to VIX] constructed using XJO options for forecasts [10 - 20 days is optimal].

I'm guessing cutz is loaded up on back month wrangles Can't blame him, after watching MQG for such a long time :

 

[cutz]

I'm guessing cutz is loaded up on back month wrangles

Geez mazza, you can read me like a book.

Gotta love those wrangles, and I still can't keep my hands off MQG.

 

[Grinder]

lol,

Yeah a pickup in volatility would certainly be nice, quickly running out of time.

Actually I should be careful what I wish for.

Your wish may be granted very soon. Think a leadership change could be in the making, is that a tsunami I see in the distance?

 

[cutz]

Good call Grinder,

30 day at 16.7, 18 is pretty close.

 

[Fox]

Yep, Grinder's the winner. Hoadley's 30 day HV is 17.1%. Congratulations Grinder a.k.a Soothsayer of the Month. What is your secret to success?

 

[Grinder]

What can I say? guess I just have the midas touch eheh.. shame I can't do that when it counts.

Lads, I'd like to be referred to as Soothsayer for the remainder of the month

 

[Fox]

I need the voice of experience here. Any advice is much appreciated.

XJO's IV is at it's lowest in the last 12 months. If I were to make a vol bet, it would be for IV to rise. As such, I am planning to avoid short vega positions.

The recent Santa rally saw XJO rise approx. 7% since 18 Dec 2009 when Grinder won the Soothsayer of the month award. Given such rapid moves, I am nervous about putting on XJO calenders. That leaves me with either a DD or a custom built vega neutral/positive theta position.

Any thoughts/comments on the following:
a. Given the fact that IV is ultra low, would it be reasonable to bet that IV will rise in the next month or two?
b. Would you consider a DD for the Feb expiry? If not, how would you play it? ie. how would you grind a theta profit from this low (and trending lower) IV environment?

 

[sails]

Hi Fox - might be worth looking at a weekly and monthly xjoiv chart before deciding on which strategy to use. I remember IV levels being quite low on the index at times, so it would be interesting to get a longer range view of IV.

 

[Fox]

I remember IV levels being quite low on the index at times, so it would be interesting to get a longer range view of IV.

Thanks Sails. You are certainly right about longer term IV figures being low. IV went down as low as 4% four years ago.

 

[Grinder]

I need the voice of experience here. Any advice is much appreciated.

XJO's IV is at it's lowest in the last 12 months. If I were to make a vol bet, it would be for IV to rise. As such, I am planning to avoid short vega positions.

The recent Santa rally saw XJO rise approx. 7% since 18 Dec 2009 when Grinder won the Soothsayer of the month award. Given such rapid moves, I am nervous about putting on XJO calenders. That leaves me with either a DD or a custom built vega neutral/positive theta position.

Any thoughts/comments on the following:
a. Given the fact that IV is ultra low, would it be reasonable to bet that IV will rise in the next month or two?
b. Would you consider a DD for the Feb expiry? If not, how would you play it? ie. how would you grind a theta profit from this low (and trending lower) IV environment?

ahh.. these are some of the paramount questions a premium seller must face in this type of environment. Wish I had the answers... at some point a vol prediction needs to be made and an analysis of where IV is at in relation to HV over 30, 60 90 days. DDs are one way, but needs to be managed carefully & closely if IV drops.

A few things I would consider in a low IV environment for grinding out profits is to not go out too far in months, keep position sizing in perpective, be patient for any movement of an opportunity to open a position when IV jumps & most importantly manage the downside with added protection.

 

[mazzatelli]

a. Given the fact that IV is ultra low, would it be reasonable to bet that IV will rise in the next month or two?

More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.

 

[sails]

More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.

Profound, Mazza! So much packed into two sentences...

By "vol clustering" do you mean the points where vol spends more time?
Haha - it's obvious I'm no quant - I'm sure you would have a much more professional and efficient way of wording my question!

 

[mazzatelli]

Profound, Mazza! So much packed into two sentences...

By "vol clustering" do you mean the points where vol spends more time?
Haha - it's obvious I'm no quant - I'm sure you would have a much more professional and efficient way of wording my question!

lol, not really...I'm rehashing verbatim from textbooks :

yes, cluster - its when high[low] vol tends to follow high[low] vol before any reversion to the mean occurs - and even then for most datasets I have worked with, I haven't seen any with very strong long term mean reversion.

So simple example, todays variance is dependent on a [past var x weight] + error term + constant. The weight parameter and number of past terms will help determine the amount of cluster.

@Fox
If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.

 

[Fox]

yes, cluster - its when high[low] vol tends to follow high[low] vol before any reversion to the mean occurs

Is serial correlation another term for vol clustering? Interesting that vol clustering dominates mean reversion. That's a valuable piece of info.

@Fox
If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.

A bit too late for that . Put on my first ever calender (ATM) on 18 Dec 2009 thinking that vol could only revert to the mean and that Christmas would be a quiet period ie. little spot movement. Of course the Santa rally lead to a 7% lightning fast upward move and IV dropped by 1.5%. Ouch! Christmas wasn't too merry this year .

 

[mazzatelli]

Is serial correlation another term for vol clustering? Interesting that vol clustering dominates mean reversion. That's a valuable piece of info.

A bit too late for that . Put on my first ever calender (ATM) on 18 Dec 2009 thinking that vol could only revert to the mean and that Christmas would be a quiet period ie. little spot movement. Of course the Santa rally lead to a 7% lightning fast upward move and IV dropped by 1.5%. Ouch! Christmas wasn't too merry this year .

Serial correlation/auto-regression [AR] attempts to describe vol clustering mathematically rather than being vol clustering. e.g. you could model interest rates as an AR process.

Ah, Fox - better luck next time . Perhaps look at combinations involving short front month, long back month.

 

[Fox]

More weight should be given to vol clustering than mean reversion to the long term average. Analysis of rate of mean reversion and average time for it to do so can help determine the r:r & duration of the play.

Serial correlation/auto-regression [AR] attempts to describe vol clustering mathematically rather than being vol clustering.

Ahh! I now understand your faith in, and penchant for, AR modelling when it comes to predicting vol. Not quite a crystal ball, but the next closest thing to it . Thanks Mazza.

 

[Fox]

If you want to play calendars, better that they are otm imho, so not to get killed by spot vol. Not an income strategy on its own.

Does anyone trade calenders as an income strategy? What I have gathered so far is that for a calender to be successful, you need contradicting circumstances ie. spot prices should ideally remain still while IV stays still or increases.

In the real world, IV goes down if the spot stays still or rallies. IV goes up if the spot falls quickly. Either scenario hurts the calender. It would appear then that calenders can only be an income strategy only under very specific circumstances, and not something you put on every month.

1. Are there any traders out there trading calenders on index options as an income strategy?
2. If calenders require contradicting requirements of a quiet spot AND rising IV, why does the Dan Sheridan in his CBOE videos rave about calenders as a monthly income strategy?
3. Should calenders be used primarily for directional bets or delta hedging purposes only?

 

[Toothyfish]

Hi,
I was wondering if IB has CFDs for the XJO? Would anyone know the ticker symbol?
Or is there anyway to trade the XJO Point for point?.... with minimal slippage.
(Short of doing a basket of it's components)
I have been trading the AP but slippage for options is too high. It's too hard to get out quickly and keep to my money management rules.
Also I would like to set up conditional orders and can't do that too well with options.
Many thanks