One of the odd quirks of the VIX, (to me anyway) is that when markets chase higher, or there exists herding behavior causing performance panic in the markets, the call implied volatility doesn’t act like put volatility and rise dramatically, causing the VIX to rise. I suspect that the reason lies in that there are always call sellers regardless of market conditions, but not always put sellers when things get dicey. Thus, no imbalance of supply/demand on call IV.
Yet, you can make a fortune due to this fact. Take a calls on the SPY for June for example:
The 170 calls for June 7th rose 200% or so today. If you bought an equivalent call three weeks ago, you would have turned roughly 10 cents into $5. Look at the 160 calls, obviously trading for at least $5. That return, depending on your expiration, would be around 5000% over the last three weeks.
So, low volatility in a market such as this gives it to you both ways, in uber-cheap protection and major upside participation. Straddles may be a nice option if you are waiting for an inevitable dip but want to ride the herd at a nice price.
Expiration for the futures is in one week:
|VX K3-CF||S&P 500 VOLATILITY||May2013||16:39:33||13.55||-0.11||13.65||13.85||13.45|
|VX M3-CF||S&P 500 VOLATILITY||June2013||16:39:33||15.05||-0.07||15.10||15.20||14.95|
|VX N3-CF||S&P 500 VOLATILITY||July2013||16:39:32||16.10||-0.14||16.15||16.20||16.00|
That means that there is a five week option cycle coming up as opex comes before VIX expiration. That generally has implications for the market in the short-term and we will cover that later this week.
I apologize to readers for the sporadic posts. I’m dealing with the impending CFA exam, so the posts will be limited until after June 1st.