Traders, today certainly started out with a bang and ended with a whimper. I was as surprised as you that we didn’t take off. I personally am taking this as a sign that the market is not in the mood for any large moods. I thought instead of an article this week I could answer a few questions:
From Trading Options into the Holiday Season Sell Premium Early And Often
Mark,
Any thoughts about the large positions on the VIX?
http://bloomberg.com/apps/news?pid=20601087&sid=aB9XDRQbaJ_c&pos=2
Eric
Eric,
The big problem with actual VIX plays is that the underlying on the VIX contract is the futures. The futures simply do not move with the underlying. Also, the future is so illiquid it can really be moved around by one big order. That said, large bets like that should not be ignored. I would suggest rather than selling actual VIX contracts use the knowledge of what major players are trying to do in that product and apply it to your regular trading. For instance, major betters on the VIX falling might cause me to go in and play a few ‘pure vega’ plays by selling some condors. If a trader were to insist on trading VIX options I would say what I tell all traders: “Follow the paper.”
Hi Mark,
What do you mean by wing skew? Thanks
Ajesh
Ajesh,
When I say wing skew, it is another term for vertical skew. The wings of a contract month will become more or less smiley as their implied volatilities rise and fall. The wing skew is how much higher the implied volatilities of downside options are than the at-the-money options, and how much lower the upside implied volatilities of upside options are than the at-the-money options are.
Hi,
I have noticed that the deeply in the money puts on the VIX hardly moves while the futures move a lot. Those have very high bid-ask spreads, so I am wondering whether it is possible that the market makers are deliberately misleading traders using the mid-point. For example, let’s say that the fair value for the Dec 35 VIX put is $15. What if the market maker displays 14/18? If someone tries to buy for 16 the market makers takes it. If someone tries to sell for 16 the market maker leaves the order unfilled. Any thoughts?
mktmkr
Mktmkr
I think the term mislead is the wrong term. Market makers are constantly 
moving their markets based on their internal inventory of options. When market makers are long or short a large amount of options in a particular month it would be natural for them to skew their markets based on inventory. I would imagine that this scenario is possibly what you are seeing. Secondly, it could also have to do with what other orders are sitting in the book. If there are orders in the VIX book to buy large amounts of delta’s from the market makers that will cause the traders to skew their offers higher. With a contract that has an illiquid underlying like the VIX traders would much rather trade the options than have to trade the future. . Finally, the term fair value is a very loaded concept. What is ‘fair value’ it is where the market has an equal number of buyers and sellers, good luck finding that price. To sum things up, the market makers are not trying to manipulate anything; they are probably just better buyers than they are sellers
Hi Mark
I just read your article Gamma Scalping Part One - Pay the Day, and found it very interesting.
I currently trade IC and double diagonals and am interested in trading more actively throughout the day.
Do you have more information on Gamma Scalping (how to find the right underlying...); do you offer a course, e-book etc?
Thank you
Alexander
Alexander,
I do not personally have any e-books (although that is not out of the questions) or offer a course right now. My day job is spent working at Sheridan Options Mentoring. If you want a chance to work with me, that is the only way to do so currently. I think we have a good value and all of the mentors, not just me are EXCELLENT teachers, although, I am probably the guy to talk to about gamma scalping. Secondly, scalping gamma successfully is not an easy job, if you want more action there are probably approaches that will keep you busy from the theta positive side.
Hi Mark,
I enjoyed your article on Units.
You mentioned that for a $20-$70 underlying, a unit would be defined as a put with a value of less than $0.25.
In the case of RUT or NDX, would this guideline still apply or would you be looking at higher priced units?
For instance, I see that Dec 410 Puts are bid/ask 0.10/0.25. Would these 410 puts qualify as units? Would you consider the 400 Puts which are bid/ask 0.00/0.20?
When testing to see the effect of these "worthless" puts, do you raise IV by 5% (or 10%)?
How many SD are you considering when things go south (3 SD, 4 SD)
action?
Look forward to your reply.
Thanks,
Keith C.
Keith,
Wow, that is a lot of info you are asking for. Here are my thoughts. For more expensive indexes I think the trade will need at least a dollar to two dollars. If one considers a unit to be .1-.15 on a 70.00 stock, then a unit should be 1.00-1.50 on a 700 dollar index. Base on this I would say that the 410 puts and the 400 puts you brought up are not expensive. For me, I would want ATLEAST 1.25 or so on my units. When testing the effectiveness of a unit I have found that I want the unit to help avert disaster in the case of a move larger than two standard deviations, and the market implied volatility is up 10%. I would want the position to be an absolute homerun in a situation where the market has moved more than four standard deviations and implied volatility is up 20%. The one thing about units is they are not meant to hedge, they are meant to act as an emergency parachute in situations where the market is completely out of control.
Well, There you have it. I hope everyone enjoyed today mailbag, keep the questions coming, mark@option911.com. Have a great weekend!
