VIX Volatility Spreads

Question 1

Why does the VIX get used to hedge portfolios

Answer 1

When the markets are down, the VIX is up. Therefore, it is effective to reduce losses on a bullish portfolio

Question 2

What are the 2 parts of a VVS?

Answer 2

The sale of a put and the purchase of a call spread

Question 3

How is the VIX calculated?

Answer 3

It takes the SPX options that are 23 - 37 days from expiration and weighs them to yield a constant

Question 4

On what date was the “newest” version of the VIX calculation released?

Answer 4

Oct 6 2014

Question 5

What does it mean that VIX is “Mean-Reverting”?

Answer 5

over time, it will generally return to or move back toward its historical average. Volatility cannot move higher in perpetuity, and it cannot move to zero

it oscillates in a wide range around a mean (which changes over time)

Question 6

As perceived risk (volatility) in the markets rises, investors tend to purchase ____ options for protection against a decline

Answer 6

put

Question 7

as perceived risk (volatility) in the stock market decreases, investors tend to purchase _____ options for more profitability

Answer 7

call

Question 8

In the VIX, where is there higher skew? Toward Calls or toward Puts?

Answer 8

Calls

Question 9

In regards to trading in the VIX, what is generally a favorable position to be in?

Answer 9

Buying VIX option spreads are generally always more favorable than selling

Question 10

If markets fall aggressively, the VIX does well.. if the markets rally aggressively, the VIX _______

Answer 10

does well also. Volatility is non-directional.

Question 11

When placing a VVS, what VIX value range are you looking for?

Answer 11

9 - 14

Question 12

When placing a VVS, how many days from expiration are you looking for?

Answer 12

23 - 40

Question 13

When placing a VVS, what Delta values are you looking for when selling the put option?

Answer 13

-.22 to -.36 Delta

Question 14

When placing a VVS, how wide do you want the call spread to be?

Answer 14

$3 - $5 wide call spread

Question 15

If you don’t want to sell a naked put, what other option position can you utilize?

Answer 15

you can buy a MORE OTM Put to cover your naked Put

Question 16

How do you calculate how much capital a VVS will hedge for you?

Answer 16

(Spread Width) * 0.75 = amount hedged per 1 unit

Question 17

How much of your total portfolio risk should you try to hedge?

Answer 17

Less than or equal to 1/3rd

Question 18

How do you estimate the VVS total risk?

Answer 18

(Strike price of the naked put sell) - 9 (the theoretical “bottom value” of the VIX)

Question 19

What are the only 2 circumstances which you should close your VVS?

Answer 19

1. If you make 70-80% profitability

2. if there is 2-8 days prior to expiration

Question 20

You have a losing VVS. Which day of the 2-8 day closing window is the most ideal to close on?

Answer 20

A day when the VIX is up

Question 21

You have a losing VVS. How should you handle closing the position?

Answer 21

1. WAIT until you’re in the 2-8 day window

2. Buy back the put and leave the call spread to expire worthless or possibly make money on the last days

Question 22

When it’s time to build the VVS in the Options Chain, what is one thing you ABSOLUTELY need to do, and one thing you absolutely need to AVOID?

Answer 22

ABSOLUTELY make sure the naked put and the call spread are the same expiration

ABSOLUTELY AVOID Weekly Options!