Hot answers tagged vix
13
A synthetic model for the VIX would be quite useful. I just mention this since it has been covered elsewhere in the past, although I don't think that it's a real solution to your problem (for a number of reasons).
Several blogs posted on the "William's VIX Fix" (WVF) in the past: marketsci, trading the odds, mindmoneymarkets. The WVF is intended to be a ...
11
Increased volatility (high VIX) signifies more risk. To keep their portfolio in line with their risk preferences, market participants deleverage. Since long positions outweigh short positions in the market as a whole, deleveraging entails a lot of selling and less buying. The relative increase in selling causes downward pressure on stocks.
10
VIX also has a lot of complexities that make it a less-than-ideal hedging tool if you're buying a VIX ETF.
http://vixandmore.blogspot.com/ goes into it at length and can probably also answer any questions you have about the VIX as a hedge.
To expand on what @barrycarter said, the VIX is better as a hedge against kurtosis, not against downward movements.
9
A few thoughts.
Yes, your return series are autocorrelated (i.e., stocks don't exactly follow a random walk), so you should use Newey-West standard errors.
If you do this as a univariate regression $$R_{i,t} = \alpha_i + \beta_i R_{j,t-1} + \epsilon_{i,t}$$ then there's almost certainly an omitted variable inside $\epsilon$ that is moving both $R_i$ and ...
8
Technically, yes, the VIX is a measure of implied volatility. But practically speaking, it is a measure of market uncertainty: when market participants are uncertain of the future, they buy options to protect their positions, driving up option premiums and increasing implied volatility.
The broader market hates uncertainty, however, so that same uncertainty ...
7
The best theoretical model for pricing vix futures and options is a variance gamma model.
However in practice that class of models is difficult to get robust results...
In practice, most floor traders in vix products base their hedging off of the SPX option chain. Vix is calculated from those options, in the first place, so this approach makes intuitive ...
6
Generally, one holds VXX (or VXZ) for the same reasons one holds any long-volatility position, either (a) as a directional bet on volatility or (b) as a hedge to large directional moves or implicit short volatility positions. Obviously the former reason is often shorter-term.
In the second case, it's relatively easy to see that, say, an equity portfolio ...
6
VIX is mechanically determined from the price of S&P500 call and put options. So if the demands for S&P500 calls/puts rise, then the prices rise, then the implied vol from these options rises. During a down market there's a lot of demand for portfolio protection. If you're diversified, then S&P500 puts are good protection, so the prices for puts ...
5
Short Answer : Futures don't have Greeks
Long Answer : Assuming a non strictly mathematical (i.e. false) point of view.
Well, having Greeks on VIX Futures is not relevant, VIX value is itself a "Greek" (and Futures don't have Greeks).
Sensitivity to
Price of the Underlying : Insensitive (ν = 0)
Volatility of the Underlying : Delta Δ = 1 (to Volatility ...
5
Richardh is spot on. The price of the VIX option is a weighted sum of put (strikes < forward) and call (strikes > forward) options on the S&P 500. The weights are proportional to 1/strike^2. As the S&P goes down the out of the money puts become more valuable and those have the highest weights.
I will leave arguments about the market as a whole to ...
4
The key in vix based etn's, or any exotic etf/etn in general is the tracking error.
Compared to the spot vix (or short spot vix), even considering the long-short term structure features that xvix has, the tracking error is going to be nontrivial.
Even leveraged equity basket etfs have terrible tracking error.
The exotics are even worse...
Just compare a ...
4
Short answer: yes.
Long answer: the challenge in trading these things, like you mentioned, is that each contract is not perfectly hedgable. This is an intentional choice made by the exchanges that list these products, so that they can provide an incentive to trading firms(locals) to provide liquidity for these new products and help boost trading volume.
...
4
I'm going to go ahead an assume the spread you were looking at involved exchange traded options. As you presumably know, the actual implied volatility on your screen is a number derived from option prices by running the Black-Scholes model "backwards" from quoted option price to volatility. Higher prices imply higher volatility.
That last statement is the ...
4
VIX is calculated from a basket of SPX options, and VIX futures expire into following expiration, e.g. September VIX futures that will expire next Wednesday will use SPX October options chain to calculate settlement value. If $B$ is the value of the basket then VIX value at expiration is $\sqrt{ B }$. Then VIX futures price is the expectation of the basket ...
4
VIX is a measure of implied volatility, specifically, model-free implied volatility, a concept originally developed by Demeterfi et. al. at Goldman Sachs in the 1990s. One of my recent questions, How to extrapolate implied volatility for out of the money options?, addressed some aspects of MFIV, and the papers mentioned in the question and answers will give ...
4
You have to ask yourself what the ultimate purpose of this parameterization is. In their case, they imply the "end-goal is martingale pricing or maximum-likelihood estimation", both of which are ultimately about capturing long-period dynamics rather than intraday or interday behavior.
For this reason, the fact that intraday variance may, ahem, vary around ...
3
Well vix is a measure of volatitity which would make it an estimate of a second moment for S&P 500 so you might try an arch/garch in the mean type model on S&P.
A good starting place for a project like this is to just do Vector Autoregressions on industry groups that you think might be related and see what comes up.
N+30 is a long way in the ...
3
Van Belle describes a basic correction for autocorrelation in a t-test, although it may be hard to wedge it into the regression t-test. For the 1-sample t-test of the mean, the correction is to multiply the t-statistic by $\sqrt{\frac{1 - \rho}{1 + \rho}}$, where $\rho$ is the 1-period autocorrelation (or estimate thereof).
3
to match the constant 30-day VIX horizon, I think you would want to trade two straddles in the first and second expiration cycles and delta hedge, gradually rolling the weight towards the second month straddle and then finally to a new straddle at/near expiration each month. Here are some problems I can imagine for this approximation.
Hedging error - the ...
3
I've been looking around for the holdings of this device, and so far I can't find it listed anywhere. I'll keep looking, but unless I find something to the contrary, it looks like UBS is your credit risk (if they go down, this thing goes down). And, remembering Lehman Bros, that possibility is something to think about.
3
If you look at tick data, you will probably get an even better analysis. However, vix correlation tends to be negative with spx but remember that this is generally more true for when spx tanks. When spx goes up, the correlation isn't as strong. Why? People panic after a drop, therefore leading to people buying options. They don't care about black scholes ...
2
XVIX volume today was 11k shares. Back month VIX futures volume is almost 2k contracts in Mar13 and higher from there as you get nearer in time. Given the multiplier in the futures I don't see the problem, esp. now that the back month bid/ask spreads are usually one or two ticks wide.
If the ETN product did really take off, UBS could do what Credit Suisse ...
2
One final thought: you want something that depends on volatility, but
not on price. In other words, if SPX goes up, your VIX replicant
wouldn't necessarily change at all.
Would an SPX option calendar spread behave something like this, since
option prices change w/ volatility, and short-term options change more
than long-term options?
2
You are very close. VIX vol is indeed a vol-of-vol. However the way VIX options actually work is that they expire into the futures, which themselves have value derived from 30-day options on expiration day.
That is to say, the VIX spot index today has no direct relationship to the VIX options you can trade today.
A VIX option vol is the volatility of ...
2
I would calculate implied greeks based on the expectations for the underlying S&P option basket. Unfortunately, these are just expectations as I have a database of 17 years of S&P options pricing that will tell you your expectations are likely wrong more often than not. If you had a pricing model that had these expectations built in, I think the ...
2
The VIX is designed to "represent the implied volatility of a hypothetical at-the-money [SPX] option with exactly 30 days to expiration." (via the CBOE) The calculations are available from the CBOE in this white paper.
Note that your question is wrong -- it is the implied volatility, not the vega. Moreover, you wouldn't predict a change in vega (which is a ...
1
Generally speaking, volatilities at all points of the vol surface are (positively) correlated in both empirical and theoretical models. So if you feel you have a prediction strategy for the VIX, you have an associated directional prediction for other volatilities, and you can take advantage of that.
Directional volatility bets are most often expressed (as ...
1
I don't know if I understand your question correctly but the procedure how to calculate ATM option prices with publicly available implied volatility indices (like VXO) for the vol parameter can be found in the mentioned paper on pages 5-7:
How Students Can Backtest Madoff’s Claims by Michael J. Stutzer (2009)
1
Yes, all of VIX futures are based on THEIR RESPECTIVE front month options, so you have to realize that for long-dated VIX futures these are long-dated options. So for example settlement value of VIX DEC 12 futures will be based on SPX JAN 13 options, which will be front-month options at the time of VIX futures expiration.
1
Simple explanation of VIX formula is that it is a square root of weighted sum of out of the money SPX options. If options are more expensive (implying that market is paying for insurance from a major move) VIX will higher, if options are cheap (implying that the market does not think that there will be a lot of movement in the SPX)
The weighting formula ...
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