On 9-April I put this pseudo buy-write in play: VXX at 102.68, Bear Spread--short VIX 30 Apr Calls, long 42.5 Apr Calls for a 8.45 credit. Bid-Ask spreads were substantial on both of these orders. I think about 0.35 on the VXX and more on the calls. With the credit spread order I was able to get fairly close to the asked side of things on the 30 Apr call, but I ended up chasing the market a bit on my limit orders on VXX, so I ended up offering the ask price at the end.
There were a couple of surprising things with this trade. I tried to create the spread with the long side with May expiration--and failed. Since the Apr options expire on Wednesday and I am only buying the calls to keep the broker happy there wasn't much extra cost associated with going out to the May call. A few minutes after I put in the order I got a call from my broker telling me that my order was cancelled. The spread has to be in the same calendar month! The broker didn't sound all that confident that he knew why, but he mentioned the European expiration, and the fact that volatility doesn't have calendar premium that other options do. I can see the dynamic to a degree--if volatility jumped up dramatically, the longer out call would not respond as directly, and would probably even drop below the strike price.
For me the additional exposure was not a concern because I am hedging with the VXX, but I can see the normal tracking of equity options and most index options might not happen with the VIX options. Not to worry, it was easier, and cheaper to establish an April position on the long side.
The other surprise was the amount of premium available on the 30 April call. With 4 days left this deep in the money call (7.70 in the money) had 1.15 of premium accessible--an implied volatility (IV) of around 275%! The ITM call is around 90% I think. This amount of IV pretty confidently states there is no hedge around for the VIX--hopefully the market is wrong on this one. I went for a call this deep in the money, giving up more premium, because I wanted the down side protection that this call provides--the market could easily climb some more this next week. The good news is that even though the bid-ask spread is very wide on these ITM options the market is willing to deal--at least half way in-between.
I have been tracking the VXX vs. the VIX index for a while. I'm pretty sure the goal of the VXX is to match the short term deviation of the VIX, not the percentage variations. The graph below shows the behavior:
The VXX , VIX, and SPY values are shown relative to the mean of the three instruments for January / February. I waited until the absolute value of the VXX was low, the relative VIX was pretty close to the VXX, and tried to take advantage of the known tendency of the VIX index to drop on Fridays and rise on Mondays to reflect the time value decay over the weekend.
The VIX options expire Wednesday morning, so I need to reestablish the spread for May on Tuesday to stay hedged. I don't know how much the premium will decay on Tuesday--I've never watched them that close to expiration before. The exercise value for the options is established at Wednesday market open, so I suppose there isn't too much risk in waiting until Wednesday morning opening to re-establish the spread.
Overall debit for the position was 94.23. At the end of Thursday the position was at 93.81.
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