What Affect do the Weekly Options Have on VIX Methodology?
What Affect do the Weekly Options Have on VIX Methodology?
I was noticing that this is the lowest AMZN 30 day IV has been into an earnings announcement in two years. The LiveVol methodology for 30 day IV (the chart above) is similar to the VIX methodology that the CBOE is going to begin applying to 5 stocks including AMZN. I began to wonder why the IV was so low. There were several reasons I had in mind:
2. It could be hangover from other stocks have not moving as much this quarter (i.e. INTC, AAPL, GOOG)
3. Amazon may be a more mature company
Or...
Could the weekly options be affecting the outcomes of VIX methodology? Think about it, in the past if I wanted to play AMZN earnings, I would have had to use the FEB options which has a straddle price of about 16.00. While AMZN 30 day IV is elevated at about 43%, it is not as high as it has been in the past. Could it be that the extra 3-6% of volatility the straddle is missing could have moved to the weekly's? With a vega of .36 it would only take 1-2 dollars of straddle premium moving to the front month options to see a visable reduction in the 30 DAY IV the VXAZN.
the regular option, with about 3 extra weeks till expiration only pick up 5 dollars of straddle price:
Five extra dollars for three weeks does not seem like very much relative to the price of the underlying and in terms of total extra premium. Would I rather own a 22 day straddle for 16, or a one day straddle for 11? However, if spec paper is moving into the weeklyís we should see something like the prices above happening
Another thing to look at is the open interest. If VXAZN is being affect then some of the open interest in the regular option will have moved to the weeklyÖthere must be some betters on the earnings straddle moving from Feb to the weekly. Last year at this time, when there were no weekly options in AMZN, front month open interest on the two strikes surrounding AMZN was about 25k. Currently, the total open interest in the Feb contract is about 19k, the weekly's have an open interest of about 5k. That adds up to a touch less than 25k, certainly not proof by any means, but interesting none the less.
Now, this is totally anecdotal, and I am not making any claims, but I am going to be watching the AMZN 30 day IV to see if this actually could be something to take into account when trading. When there are weekly options, will the 30 day IV be a less effective tool than it was in the past? Do we need to adjust the VIX methodology for stocks with weeklyís? If weeklyís pick up in the SPX, what affect will they have on not only the VIX, but the VIX options and futures. I am just starting to wrap my brain around this, would love some thoughts. I could be just plain wrong for all I know, but to me intuitively there has to be some affect. Consider this the first blog where I ever thought out loud.
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