Wednesday, November 7, 2007

Brian Overby on Trading VIX Options

Steven Smith of TheStreet.com has a video interview up in which he asks Brian Overby for his thoughts on how to trade VIX options.

Overby, who is Director of Education at TradeKing and authors an informative options blog, Options Guy, tackles some of the idiosyncrasies of the VIX and has some excellent suggestions for those who insist on trading the volatility index. Frankly, there is close to 100% overlap between what he says and what I believe about the VIX.

I recommend clicking through to the video, but in a nutshell, Overby’s thinking boils down to the following:
  1. VIX options do not follow the (cash) VIX index

  2. To understand the price action in VIX options, look at VIX futures

  3. When trading VIX options, trade the front month (closest contracts to expiration)

  4. Trade VIX options when the VIX is at the extremes of its trading range

  5. Utilize a mean reversion trading strategy

  6. Look to sell vertical spreads (sell puts when the VIX is low; sell calls when the VIX is high)

6 comments:

AJ said...

Bill,
The video was for trading UA options. Could you post the link for trading VIX options please?
Thanks,
AJ.

Bill Luby said...

Thanks for the heads up, AJ. I've corrected the links.

Cheers,

-Bill

AJ said...

Hi Bill,
Thanks for the link. Would you happen to know what 'Sell Put Spreads' and 'Sell Call Spreads' means? I know what a Bull Put Spread and a Bear Put Spread is .. but not sure what Selling a Put spread is.
Thanks,
AJ.

Bill Luby said...

AJ,

I think the nomenclature originally derives from the assumption that the 'typical' call spread is bullish, so that the lower strike is the buy and the higher strike is the sell, hence a bull call spread. Flip the position and sell the lower strike while buying the higher strike and this becomes a bear call spread, aka "selling a call spread" (I realize that there is always a leg you are selling in a call spread) or establishing a vertical credit spread. It's confusing in that there are so many names for the same thing.

The same holds true for puts. With a bull put spread, you are selling the higher strike and buying a lower one. Because this is done for a credit, it is also called selling a put spread or establishing a vertical credit spread (this time with puts.)

The nomenclature keys are to determine the whether the position is established for a credit or debit (i.e., is the strike that is sold closer to the money or farther out?) and the direction the market needs to move to maximize profitability.

Options gurus please feel free to correct me.

Cheers,

-Bill

Daniel said...

Bill,

You are spot on IMO. I don't know why some retail seminars seem to confuse the issue...at least it seems more confusing to me and I was on the CBOE trading floor for many years. For simple 1 to 1 same month call and put spreads if you collect a credit you are 'selling' and if you pay a debit you are 'buying'.

For example if I bought the Nov 25 call and sold the Nov 30 call for a $1.50 debit I would say I bought the Nov 25/30 Call spread for $1.50 and everyone would know exactly what I did. If one is trading options they should know enough to know that I bought long deltas and would be long the market without throwing bull and bear in there!! I've heard some talk about 'buying' a SCV or Short Call Vertical when they are actually selling a call spread but since they are initiating the trade they say they are 'buying'...confusing IMO.

Mixed month spread lingo can vary even from exchange to exchange. At the CBOE it was typical to call a mixed month spread a 'buy' or 'sell' based on what you were doing with the 2nd or farthest out month. If you bought the Dec 25 call and sold the Nov 25 call you were 'buying' the time spread. If you bought the Dec 30 call and sold the Nov 20 call for a credit, you were still 'buying' the spread (diagonal time spread). At the CBOT/CME when dealing w/ future time spreads this convention may be reversed. So there is no right, even though it would be nice to have a standard lingo.

My 2c.

Anonymous said...

Trading verticals are a waste of time. There are better spreads to trade on the vix.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics