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VIX prices off of the midpoint of the posted b/a. You would
never drive anything off of last sale in options, because
last sale could be a delayed report. If last were a size
trade not done electronically it could easily get keypunched
minutes after it occurred ... so try to avoid using last
sale, in anything that could trade quickly or have multiple
reporting stations, for analysis. A bulge in VIX tends to
occur because VIX prices off of a cash model where as actual
trading in OEX options is based on a SPU model. So what
happens is that the implied vol. calculation used in VIX
would give you different vols. than the actual vols. you
would calculated for trading purposes. This will eventually
wash out in VIX because you use both puts and calls... so in
effect one set would look cheap compared to actual and one
set would look expensive. If a large order came into a
particular series at a time when the SPU was at unusual
premium or discount(as it was for much of today)you would
get a momentary bulge in a particular option quote ... now
assume that option goes into/comes out of VIX because of
price action and viola! you get momentary distortion. It
will wash out quickly ... that is why you use 8 options to
calculate it.
Hope I didn't over complicate it. Call me at CBOE 312 786
7843 if you want to discuss it further. I'm traveling part
of this week, but I'll be in on Thursday.
Gitanshu Buch wrote:
> >Come on Gitanshu, tell us your secret for finding fair
> value using options.
> >You know, the one you call Implied Fair Value. What can I
> say Bob - 40 OEX points in a day Implies Fair Value for a
> hard day's work :) >and created this one showing our
> trades today.
> >Sorry, code is locked in a bank vault. Ah well - another
> one of those black screen boxes. Hate those black
> boxes. Old timers on the list would celebrate the Return
> Of Bob The Jedi to the vocal e-world. I can assure you he
> isn't always like this, so milk his brain while Bob the
> Groundhog sniffs spring air at RT. He gets excited by the
> process of discovery of a new indicator he can put to use
> (called Indicatoritis), or by the process of poetry in
> motion on a price chart as you have seen the before-after
> cases yesterday and today from his cone charts (real
> trades, real money). Maybe The Doctor can help us here. I
> use VIX to "understand" what the market is implying the
> ATM volatilities are on a minute by minute basis. Since
> VIX is only reported at one minute intervals, it
> presumably has some inherent weaknesses: - Say OEX moves
> through 2 strike sets within 1 minute, thereby causing a
> sudden dis-continuous hump in VIX as old strikes rotate
> out in favor of new ones. Is there any way this time lag
> gets rectified in the VIX computational algorithm? For
> example, OEX 680 Calls and puts moved around much more in
> the bid-ask spread than normal around the time Bob
> indicates purchase - and yet the price move in the options
> was not as violent within that same timeframe. VIX gets
> computed basis last trade, not basis the varying bid/ask.
> Correct? - Since bid-asks on days like today are half or
> more point apart, how does VIX compensate? - What happens
> to VIX's calculation if 2 or 3 of the 8 options used to
> index implied vols do not trade within that 1 minute
> between last reported vix and newly reported vix? On OEX,
> homework done over the weekend showed that- today was a
> multiplicity of signals going off as of Friday close:- We
> had an Inside Day- which was also the Narrowest Range Day
> of the past 4 AND 7 trading sessions- which did nothing to
> alter the downtrend begun on the slower MA used in ANTI-
> and brought out the breakout traders who entered long on a
> break of Friday's high within the first 6 bars of trading-
> helped along by Momentum Index Buyers on the strength of 2
> bullish Connors Vix Reversals- conservative ones exited
> into strength at the 2 std deviation cone reading - since
> from that point on the momentum - statistically - could
> only carry the market sideways into the close tracking the
> cone, or reverse - either way the money on the table would
> be idled and therefore exposed to risk of time decay, and
> of uncontrollable variables- aggressive traders therefore
> reversed long positions and/or patient stalkers entered
> short, fading the morning pop (as Bob has illustrated
> using OEYQPs) knowing that momentum had reached its
> statistical peak for the day- trailed stops and booked
> profits at test of morning lows (too fast, did not work)
> OR Friday lows (did work)- market bounced but found
> resistance at Friday lows - and 1 sigma cone - so they
> re-entered short positions- booked partial profits this
> time at the -2 std deviation cone- but never got stopped
> out since Friday highs were never tested- and at the
> close, they had the choice of booking profits on the
> remaining positions and starting Tuesday seasonality with
> a clean slate- or carry their puts or put spreads home in
> the hope of some early morning follow-through where they
> could squeeze out money for a few hamburgers/pizzas from
> their positions- or prepare a defense for their carry-home
> positions by pricing some call spreads while the world was
> giving them away.- Or leave everything alone and just
> concentrate on figuring out WHY crude keeps rallying but
> the products (HU and HO) can't keep pace. At least that is
> what my trading diary wrote at 3:30 PM. Chart attached. As
> to vaults and volatile implications for Tuesday, you never
> know, my friend, you never know. The market is the sum
> total of some of the sharpest minds and the richest
> wallets in the world. All we can do is prepare for the
> next move, hoping it will be what we think it should be,
> but just in case it isn't, it ain't "Game Over"... And so
> we get on with the homework for Terrible Tuesday - like
> figuring out where the parabolic moves we see on the
> charts to follow on the next email lead to conclusion...
> at the 50 day MAs or the 100 day MAs or at a 100%
> retracement... Gitanshu
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