Wednesday, October 1, 2008

A Week in the Life of VIX Calls

Last week I talked a little bit about VIX Options as Catastrophe Insurance and talked about how VIX options are priced off of VIX futures, not the cash/spot VIX index that is quoted in the press. A lot can happen in a week.

In the graphic below, I compare VIX October calls for selected strikes from 10 to 60 as they were quoted (using the midpoint of the bid and ask) at about 2:30 p.m. EDT on September 22nd and again after the market closed on September 29th.

During the course of the week, the VIX jumped from 31.74 to 46.72, a 14.98 point gain or 47% increase. As you can see, even the deep in the money VIX calls (i.e., the 10 and 15 strikes) failed to move even half as much in absolute terms as the cash VIX. The 30 strike, which was below the cash VIX prior to the spike, only moved about ¼ as much as the cash VIX. Looking out to the 45 strike, those VIX options gained all of 0.75, or about 5% as much as the cash VIX moved during the week.

For the record, from September 22 to September 29, the VIX October futures advanced approximately 21%, from a little over 25 to a little over 31.

I will have much more to say about the behavior of VIX options and futures, particularly in and around the September 29 VIX spike, going forward.

[NOTE: The grayed out numbers means there was no bid, so the calculation above is half of the ask]


John said...

Interesting... With single strike stocks, vol falls and calls tend to lag what one would expect from a delta perspective. i.e. 100 delta calls don't keep pace with the underlying point move.

With the Vix a measure of vol, and vol clearly going higher... I would have expected a different result, but I guess the vol of the Vix, as well as the gamma might be more like a futures contract on currencies or commodities where the leverage to the contract behaves differently as price goes up.

Your future posts on this are going to make for great reading... So much for Vix calls being a good hedge for the SPX... Something I have felt is not a good idea despite one of you recent posts... Too low a correlation at times, and too difficult to tell what your delta hedge is at any point.

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