One of the first things I teach my options mentoring students, on their way toward a great options education, is to understand how to understand the relative value of VIX. VIX is not a standalone product; it is a derivative of SPX. Thus, if one wants to properly read VIX, one must take it in relation to how the SPX is moving.
For instance, yesterday, I tweeted that based on the lack of movement in the VIX, I think the SPX is primed for a bounce today. To which I got many a flabbergasted responses saying "16%" isn’t big? The answer was no, 16% was not big, not in relation to a 30 point drop in the SPX. Let’s examine why.
Since the listing of weekly options on equities, this blog has lamented the inefficiencies of the current system of trading weekly options. We have argued that it made little to no sense to list an option that has 8 days of life to it; especial when 2 of which are the weekend. The set up has led to spreads that are too wide, inconsistent option decay, and strange movements in weekly options. Well all of that looks like it is about to change. Under pressure from the CME, the CBOE officially changed how it is going to list SPX Weekly options.
I have been a constant bear of just about any volatility product that has existed over the last 6 months, essentially, since the VIX broke through 30 back in November. And I actually continue to be a bear. With the market not moving, VIX is a little overpriced, believe it or not. But that does not mean that I don’t think there aren’t times where call options or VIX straddles might make some sense. In order to buy VIX options, the following needs to exist collectively:
1. VIX cash needs to be in relative terms low
2. VIX futures need to have a low contango relative to VIX cash
3. VIX options need to have a low IV (VVIX needs to be low)
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I have to admit, there are very few traders that are as excited as me that the CBOE is relaunching options and futures on GVZ and OVX. While I like VIX, I think it has some flaws to it that possibly make the product more difficult to use as a hedge: