Thursday, April 12, 2007

VIX May OTM Calls

Once again, Jim Kingsland of The Kingsland Report is talking about significant buying activity in OTM VIX calls, this time the May 19s. You may recall the last time he made a similar observation and I commented on it here that is was only a couple of days before all hell broke loose on the VIX front.

This time around it feels a lot different from where I sit. The last time I could sense The Coming Storm and was surprised only that it took so long before it finally arrived. This time my intuition is tuned to things like the put to call ratio and is telling me not to worry, so I am more likely to be on the selling end of those May 19 calls. The problem is that my intuition, which is generally right about 51% of the time, is not as good at sniffing out a VIX spike as that of Jim Kingsland or not-so-random Roger Nusbaum. That's okay, though. It gives me something to work on while I watch the time decay on those May 19s.

7 comments:

Jim Kingsland said...

open interest on the Vix May 20s is already over 100k, so today's activity isn't has isolated as the last time. But an interesting and large accumulation of the 19s.

pleadership said...

i agree that the put/call profile is different at least looking from my stats...nerviousness still hanging out at the CBOE...and, generally when the 65 day average of the put/call ratio gets over 1 it can signal a low in the market which it did in late March.

F. said...

Carl Futia is predicting a big drop around that time in May too. My best guess is that inflation might be the culprit of future volatility.

Bill Luby said...

Thanks for the heads up about Carl Futia, F. For those who are not aware of him, Carl has a very interesting blog that is well worth checking out. I find his daily 'guesstimates' to be particularly noteworthy and worth checking out prior to each trading day.

rallymode said...

I wouldn't use the volume or OI in vix ops as an indicator of any kind. Could easily be a derivs fund hedging short vol exposure or even a prop trader. 16k lots in ops priced at a quarter is hardly significant. Further, all quarterly cycles consistently carry high OI as they approach cash.

Just my 2 cents.

Bill Luby said...
This comment has been removed by the author.
Bill Luby said...

In response to some comments I made last Sunday about the large open interest in April puts, a reader wrote to me as follows:

"Why you you think that someone is betting on a VIX drop? With firms like thinkorswim promoting the sale of naked VIX puts as a portfolio hedge and revenue enhancer, isn't it equally likely that the marketmakers have gotten long as the public and institutions have made opening sales of these puts?

As the VIX options are their own beast, it seems very plausible to me that they would behave more like equity options where the public sells calls and sells puts than the index options where most opening activity is institutional buying of puts for portfolio hedging."


For the record, my response, which I see no need to update at this stage, was:

"My hunch is that the public is not taking positions with this kind of size and the folks at thinkorswim are not influencing much in the way of VIX open interest -- but I may be wrong.

I think this 90,000+ open interest in the April 11 and 12 puts is most likely one leg of an institutional spread. There is 97,000+ of open interest in April calls from 18 to 25, with a lot of action at 18 and 20, but the distribution of open interest on the call and put side doesn't necessarily line offset the puts in an obvious way. There are several possibilities in this line of thinking though.

There are also very big numbers in play for May, with over 110,000 of open interest just on the May 20 calls, so I could see the footprint of a calendar or diagonal spread at work. There are big numbers also for May 15, 16, 17 and 20 calls, so there are quite a few possibilities with calendar spreads or diagonal spreads.

FWIW, I don't see any obvious answer from the COT data either."

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