August 25, 2014

Volatility Views 124: Volatility Pairs Trading

57 minutes

Volatility Review: Yellen and Putin both, but not collectively, having an effect on volatility. VIX futures: August settlement comes in a little more in line, as opposed to last month. VIX options: Top Strikes: Sept 19 calls, Sept 20 calls, Sept 16 calls. VXST options: A lot of activity in VXST: Aug 17 calls 1,500 contracts. RVX options.

Volatility Voicemail: Listener questions and comments.

Question from Vizible ‏@VizibleApp - What happened to Don S.? Sorry if we missed something, but loved him on the show. Great #podcast btw!

Question from NOVIX - I have read some material related to pairs trading for equities and I understand the process of finding non-stationary pairs price series that can be co-integrated to form a stationary series. The basic idea being to trade on the oscillations about the equilibrium value of the spread. While I understand how this is accomplished with equities, I am not sure how suitable implied volatility pairs on equity options are identified since both implied volatility series would already be stationary and so co-integration would not be required. Can someone please explain to how suitable implied volatility pairs are identified?

Question from T. Stark - Great podcast. I cannot start my week without my dose of Volatility Views. You guys really do a great job breaking complicated stuff down so that even non-pros like myself get it. The one area where I’m still somewhat confused comes in the relationship of implied vol across an expiration month. I realize that when you say October vol is X you are referring to the at-the-money volatility. But how does that at-the-money volatility relate to the rest of the strikes? If the ATM volatility gets crushed do all the rest of the strikes get crushed along with it? Or are there scenarios where only a few strikes are impacted but the rest are not? How does this relationship work? Are there models or greek variables that explain the volatility relationship between one strike and another? Thanks again for walking this noob through this stuff. Fan for life.

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