Jun 25, 2020

Deribit Extreme Put Skew

I am watching Deribit, and 8000P expiring in 11 1/2 hours is 0.0005 bid for 100 contracts. This just ticked to be 200% vol. While we've seen these levels back in March, that was then. Either someone is really nervous about almost 1300 point drop, or forgot that they have an active order and went to sleep :)
And ... it did not last too long, I think someone was also watching this strike vol creeping up and as I was writing the post lifted all bids on the line.

Update: 7.5 hours left, and buyer is back with 600 contract bid at 250% vol. What is going on? Does someone knows something others don't?  Is someone forced to hedge margin? There certainly not many sellers left.

Update: And the contracts traded; markets @ 0.0005 x 38
Final update: Expired far far otm. 

Jun 22, 2020

Expiration Dates For VSTOXX, VNKY, RTSVX, VHSI

For anyone tracking all domestic and international volatility futures I put together this guide. Email me if I am missing a contract
  • CBOE: expiration is 30 calendar days before options expiration, Wednesdays, AM special opening quotation. Source.
  • VSTOXX/EUREX: expiration is 30 calendar days before options expiration, most of the time same day as CBOE, Wednesdays, settled to an average index value between 11:30 and 12:00 Central European Time. Source
  • EURO STOXX 50 Variance Futures/EUREX: One business day before the third Friday of the maturity month; settlement based on the average of the EURO STOXX 50® index calculations between 11:50 and 12:00 CET on the third Friday of the maturity month. Source.
  • RTSVX/MOEX: expiration is 7 calendar days before options expiration (which is around 15th of the month). Settled to the average index value of the evening trading session. Source.
  • VHSI/HKEX: 30 calendar days prior to the second last business day of the next month, settled to the average of the last half hour. Source, source.
  • VNKY/OSAKA: last trading day is the day preceding the day that is 30 days prior to the 2nd Friday of each month, Tuesdays. Source, source.
  • INDIA VIX/NSE: weekly contracts, expiring on Tuesdays. Source.
  • V-KOSPI/KRX: day after 30 calendar days prior to the following month's KOSPI200 options last trading day. Source.
  • AVIX/ASX: expiration is 30 days prior to the third Thursday of the following calendar month, generally day before CBOE volatility expiration; settling into the average value of the S&P/ASX 200 VIX between 11.30am and 12.00pm on that day. Source, source.

Apr 27, 2020

VIX - Simple and Intuitive Explanation of Volatility Index

Few years ago I published two post trying to give simple explanations and intuition behind complicated formulas used for calculating vol indexes. However few of you emailed that some charts are missing from these older posts, and for technical reasons since I could not restore them, I decided to re-created new charts from scratch, and re-write the posts. In this post I will make many simplifications and sacrifice rigor to provide intuition behind calculations. 

There are two formulas that are used to calculate vol indexes: the theoretical variance swap formula

and its practical discrete reformulation:




While these formulas may look complicated it is actually really simple if viewed in a chart. Below are 3 charts that will illustrate step by step what the formula means, and I hope will provide intuitive understanding behind the formula. For the charts below I used simulated prices of calls and puts on a hypothetical stock with time to expiration = 0.1 and 20% annualized volatility, so we should expect the volatility index  in this theoretical example to be about 20. I plot prices of calls and puts vs strike.


Let's consider just OTM options:


The higher the perceived risk, the higher volatility will cause higher options prices, and "taller" price curves on the chart. Conversely, lower prices = lower curves. The intersections of these two curves looks like a curved pyramid. Higher prices, higher vol would create taller pyramid.


The old VIX index and any other ATM / ATMF based index has a very simple meaning - it is proportional to the height of the pyramid - red line on the chart - which is just ATM price of a call or put. Approximate formula for ATM option ( call or put ) is 0.4 *  volatility * index price * √ time to expiration . The reverse of the formula is volatility  = height of the pyramid / 0.4 / index price / √ time to expiration . In our case height is 2.53, and volatility  = 2.53 / 0.4 / 100 / √ 0.1  = 0.2 or 20% , exactly the vol we were expecting. So, in summary - ATM vol is height of the curve

Current VIX formula has a slightly different meaning - which involves an extra step. First, prices are re-weighted, or multiplied by 2/√ time to expiration  / strike2 . Then the area of the new pyramid is volatility squared. 


In our case the area is 0.04, or 20% squared, just like we expected. 

In summary - old VIX / ATM vol is the height of the pyramid, and current VIX ( or VSTOXX, or other vol indexes ) are the area of the pyramid. 

Send me an email if you want a copy of excel spreadsheet with calculations.

Interested in learning how to trade VIX futures and ETFs? Do not miss out the next great opportunity to short vol.
Find out more at VIXMon.com's trader seminars.

Apr 12, 2020

Machine Learning for Asset Managers

Marcos M. López de Prado's new book "Machine Learning for Asset Managers" is temporarily available online. Link, download link.
Check it out!

Interested in learning how to trade VIX futures and ETFs? Do not miss out the next great opportunity to short vol.

Find out more at VIXMon.com's trader seminars.