The final presentation of the first day at Cboe RMC in Hong Kong matched Eric Frait, Vice President, Product Advancement and Strategy at Cboe Global Markets with Kristin Boyd a Director with Credit Suisse. Their session was titled Sourcing Liquidity in Index Options.
Eric started out noting the continued growth of proprietary markets that trade at Cboe Global Markets, even in the low volatility environment. He highlighted the rapid acceptance of SPX Weeklys (which may expire on Monday, Wednesday or Friday). A chart that accompanied this presentation showing the growth of SPX option volume appears below.
Probably the big takeaway from the SPX volume chart above is that on an average day over half the daily SPX volume occurs in the various Weeklys series.
A couple of trades were discussed and I’m adjusting the pricing for current markets. The first involved using SPX options to guard against a drop in the first half of 2018. The recommendation was buying a June SPX put that is 5% out of the money and selling a put with the same expiration that is 15% out of the money. A similar trade using today’s pricing (12/26/2017) would involve buying a SPX Jun 29th 2550 Put for 51.60 and selling the SPX Jun 29th 2275 Put for 19.60 resulting in a net cost of 32.00. These prices and strikes were determined with the S&P 500 just under 2680. Here’s the payoff at June expiration for this long put spread.
Another trade discussed was a favorite of this space, selling a VIX put and purchasing and out of the money VIX call spread. This was referred to as a VIX Call Spread Collar. Again I decided to use an updated trade as an example of the trade discussed earlier this month. Today with VIX at 10.25 and the February VIX future trading at 12.20 a trader sold the VIX Feb 10.50 Put for 0.45, bought the VIX Feb 15.00 Call at 1.04 and finished the “Call Spread Collar” by selling the VIX Feb 20.00 Call at 0.61 resulting in a net credit (before commissions) of 0.02.
The payout above is as of February settlement, but this sort of trade will usually be monetized (exited for a profit) at a predetermined level that would accompany an upside move in VIX.
Finally, Cboe hosts Risk Management Conferences year round with the next edition just over two months away in Florida – more information can be found at www.cboermc.com or if you have specific questions feel free to email me at email@example.com