Implied Volatility on Indices

[mazzatelli1000]

Never in my lifetime have I thought that I would see Implied Vols of 60, 70, 80% on the Dow!!!

The temptation is to sell premium, but the black swan moves are all too likely right now.

:couch

 

[Aussiejeff]

Never in my lifetime have I thought that I would see Implied Vols of 60, 70, 80% on the Dow!!!

The temptation is to sell premium, but the black swan moves are all too likely right now.

:couch

Are you implying the sight of a smug, leering Swan lurking the hallowed corridors of the NYSE caused panic??

:hide:

 

[chops_a_must]

Never in my lifetime have I thought that I would see Implied Vols of 60, 70, 80% on the Dow!!!

The temptation is to sell premium, but the black swan moves are all too likely right now.

:couch

Not to mention those on Ford and GM!

Unreal!!!!

 

[Grinder]

The temptation is to sell premium, but the black swan moves are all too likely right now.

:couch

Those black swans are looking more & more like the white ones, hard to tell the difference anymore.

 

[mazzatelli1000]

Those black swans are looking more & more like the white ones, hard to tell the difference anymore.

LOL

Not to mention those on Ford and GM!

It has been unbelievable to watch the vols, especially on Ford. 200 +%!!!!

I also trade Potash and that has gone through the roof!!!

Still plenty of more fun to be had

 

[wiseguy]

VIX recorded its highest reading last night

 

[skyQuake]

LOL




It has been unbelievable to watch the vols, especially on Ford. 200 +%!!!!

I also trade Potash and that has gone through the roof!!!

Still plenty of more fun to be had

NICEEEE

 

[cutz]

Hi Everyone,

It been mentioned that it may be a good time to sell premium due to extreme volatility, is an appropriate method to short a strangle on the index or could this be regarded as too high risk in these conditions, if this is the case what would be a strategy to take advantage of high IV without being exposed to total loss.

BTW just noticed the Dow Futures are down another 400 points, looks like the excitement is to continue.

Cutz.

 

[chops_a_must]

VIX up 18% to 75!!!

The VIX I don't think was even in the 20s until recently.

Just staggering.

 

[Grinder]

Hi Everyone,

It been mentioned that it may be a good time to sell premium due to extreme volatility, is an appropriate method to short a strangle on the index or could this be regarded as too high risk in these conditions, if this is the case what would be a strategy to take advantage of high IV without being exposed to total loss.

BTW just noticed the Dow Futures are down another 400 points, looks like the excitement is to continue.

Cutz.

Hmmm... that's the theory behind selling IV, however a short strangle is up there on the high risk scale, espacially in this climate. You might want to look at credit spreads, butterflys or condors to cap some of the risk.

LOL

 

[skyQuake]

Just write some oppies then delta hedge. And pray volatility goes down

 

[mazzatelli1000]

Hi Everyone,

It been mentioned that it may be a good time to sell premium due to extreme volatility, is an appropriate method to short a strangle on the index or could this be regarded as too high risk in these conditions, if this is the case what would be a strategy to take advantage of high IV without being exposed to total loss.

BTW just noticed the Dow Futures are down another 400 points, looks like the excitement is to continue.

Cutz.

Hmmm... that's the theory behind selling IV, however a short strangle is up there on the high risk scale, espacially in this climate. You might want to look at credit spreads, butterflys or condors to cap some of the risk.

LOL

Agree with Grinder, defined risk spreads that a short vega and short gamma are the way to tackle this high IV environment.
The movements in the underlying are making it difficult in selecting how far out the money one should be selling strikes.

Anyone with condors this month on any of the indexes would have seen their put strikes constantly violated despite any adjustments, not too mention the increase in IV's massacring positions.

Butterflys are definitely cheap in this environment, but its narrow range especially if applied on something like the Dow of late, makes this a low probability play. You could skew the butterfly (i.e. have an embedded short vertical ) but still the range is too narrow. This is assuming these wide moves will continue.

I agree Chops, it has been crazy, only two months ago I was musing that the VIX was low and was considering trading the VIX itself

 

[mazzatelli1000]

Just write some oppies then delta hedge. And pray volatility goes down

hahahaha

Praying hasnt been working of late

 

[cutz]

Hi all,

What do u guys recommend as far as software goes for working out hedging strategies.

 

[cutz]

Hi all,

What do u guys recommend as far as software goes for working out hedging strategies.

Please disregard, the answer was right under my nose

 

[chops_a_must]

Please disregard, the answer was right under my nose

And that answer was?

 

[cutz]

Hoadley options strategy evaluation tool

 

[sails]

Hoadley options strategy evaluation tool

Yes Cutz, Hoadley is a good one.

I have also used Hoadley's Open Positions Manager extensively which comes with the paid premium version and is useful when you have a larger number of option series on the go. There is a demo on the Hoadley site http://www.hoadley.net/options/demosaddin.aspx and scroll down to the Open Positions Manager Heading and you will find the demo links there.

 

[cutz]

Thanks Sails,

I have been playing around with the free version and experimenting with delta hedging on stock options but I was curious to know if XJO options are generally delta hedged using SPI futures, this does not appear practical due to the differing point specs.

Also do index options private traders prefer to use SPI options due to the direct relationship with the SPI and is the SPI option market highly liquid. I spoke to a MF global about trading SPI options but they said that orders are handled by their brokers over the phone, i.e. not via a platform and when I checked out the ASX website there doesn’t seem to be much going on in the way of SPI options, what am I missing?

Cutz.

 

[sails]

Thanks Sails,

I have been playing around with the free version and experimenting with delta hedging on stock options but I was curious to know if XJO options are generally delta hedged using SPI futures, this does not appear practical due to the differing point specs.

Yes, good place to start with the free version.

I understand that the MMs use SPI futures to hedge XJO options so it is no use using XJO index prices to calculate option prices as the MMs are calculating their bid/ask on SPI futures for their own hedging purposes - at least to the best of my knowledge!

Also do index options private traders prefer to use SPI options due to the direct relationship with the SPI and is the SPI option market highly liquid. I spoke to a MF global about trading SPI options but they said that orders are handled by their brokers over the phone, i.e. not via a platform and when I checked out the ASX website there doesn’t seem to be much going on in the way of SPI options, what am I missing?

I haven't looked at SPI options for a while now as they always seemed very illiquid, so it sounds like nothing has changed. I came to the conclusion that index options are best traded in the US where there is enormous liquidity - and fees are so much cheaper.

It would seem that XJO options are more liquid than SPI options, but then it's a bit messy with their pricing being based on futures and I'm not sure how the ACH would handle margins on sold XJO options if they are hedged with SPI futures.

Hope this helps - it is a bit out of my area at this time...

If you are getting into option greeks, you might be interested in Charles Cottle's ebook - found here: http://www.riskdoctor.com/books.htm
If you scroll down to the bottom the web page, there is a free chapter and free crash course - might be worth having a look.

Also, Cashflow Heaven (not a recommendation as I have never tried their product - just found it on a google search for the book!) are offering a free 91 page full colour lite version of Cottles "Options Trading: The Hidden Reality" for free after registraton: http://www.cashflowheaven.com/freebookoffer.asp. Personally, I found Cottle's writings extremely helpful in understanding options - but be warned - it's not bedtime reading