VIX Volatility Spreads Flashcards
Why does the VIX get used to hedge portfolios
When the markets are down, the VIX is up. Therefore, it is effective to reduce losses on a bullish portfolio
What are the 2 parts of a VVS?
The sale of a put and the purchase of a call spread
How is the VIX calculated?
It takes the SPX options that are 23 - 37 days from expiration and weighs them to yield a constant
On what date was the “newest” version of the VIX calculation released?
Oct 6 2014
What does it mean that VIX is “Mean-Reverting”?
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)
As perceived risk (volatility) in the markets rises, investors tend to purchase ____ options for protection against a decline
put
as perceived risk (volatility) in the stock market decreases, investors tend to purchase _____ options for more profitability
call
In the VIX, where is there higher skew? Toward Calls or toward Puts?
Calls
In regards to trading in the VIX, what is generally a favorable position to be in?
Buying VIX option spreads are generally always more favorable than selling
If markets fall aggressively, the VIX does well.. if the markets rally aggressively, the VIX _______
does well also. Volatility is non-directional.
When placing a VVS, what VIX value range are you looking for?
9 - 14
When placing a VVS, how many days from expiration are you looking for?
23 - 40
When placing a VVS, what Delta values are you looking for when selling the put option?
-.22 to -.36 Delta
When placing a VVS, how wide do you want the call spread to be?
$3 - $5 wide call spread
If you don’t want to sell a naked put, what other option position can you utilize?
you can buy a MORE OTM Put to cover your naked Put
How do you calculate how much capital a VVS will hedge for you?
(Spread Width) * 0.75 = amount hedged per 1 unit
How much of your total portfolio risk should you try to hedge?
Less than or equal to 1/3rd
How do you estimate the VVS total risk?
(Strike price of the naked put sell) - 9 (the theoretical “bottom value” of the VIX)
What are the only 2 circumstances which you should close your VVS?
- If you make 70-80% profitability
2. if there is 2-8 days prior to expiration
You have a losing VVS. Which day of the 2-8 day closing window is the most ideal to close on?
A day when the VIX is up
You have a losing VVS. How should you handle closing the position?
- 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
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?
ABSOLUTELY make sure the naked put and the call spread are the same expiration
ABSOLUTELY AVOID Weekly Options!
