When day trading any market, it is vital to review and prepare for tomorrow’s trading the night before. At VIX future expiration, i.e. the moment exactly 30-days before the subsequent month’s S&P 500 option expiration; 30-day implied volatility for the SPX is determined by applying the VIX calculation methodology, which is outlined in the VIX White Paper.
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After the Chicago Board Option Exchange’s (CBOE) introduction of VIX futures contracts, and the subsequent introduction of exchange-traded products for volatility investing, investors have allocated non-trivial portions of their portfolios to volatility-linked investments.
The daily roll is defined as the difference between the front VIX futures price and the VIX, divided by the number of business days until the VIX futures contract settles, and measures potential profits assuming that the basis declines linearly until settlement.
Because of this, VIX futures are very large contracts that should be traded cautiously, especially since the margin requirement to trade one contract can be as low as a few thousand dollars (the margin will vary depending on the brokerage firm and market volatility).
In brief, the themes covered are: volatility’s role in pricing options, controlling directional risk with delta neutral trading, predicting volatility based on forecasting IV from its current percentile, comparing historical and implied volatility to confirm trading ranges in percentile terms, trading implied volatility recognizing the trade off between being short premium versus long decay, reaffirming the relevance of the Black Scholes model with application of the Greeks, aligning a spread’s strike construction for trading the volatility skew, the aggressive calendar spread that expires within 10 days versus conventional inter-month calendars, using probability and statistics in volatility trading to rank the risk to reward profile of trades and expected return metrics to measure risk per $1 allocated.
Others may wonder why the put-call parity is violated for VIX options Then, there are the options that trade underwater, the vastly different vix futures curve implied volatilities for each expiration cycle and the question of arbitrage between S&P 500 derivatives and VIX contracts.