Option- General points

Option/ portfolio risk:

• By steve place Option risk = 1) Direction risk 2) Vol risk 3) time risk 4) gamma risk
• By steve place: 1) dont use mkt order 2) ck earning date 3) dont trade naked bcos of gamma risk 4) Understand the real risk (vol/ gamma/ time risk) 5) dont trade close to exp 6) dont day trade option
• Steve place mentioned 80/20%. you will make 80% of your trading gains from 20% of your winning trades, and 80% of your losses from 20% of your losing trades.
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VIX related:

• If there is no special future event and the market didn’t buy a sell off, but the VIX futures did, we will usually bounce back, but then quickly turned around again.
• In the options world, a very rough estimate of a company's bankruptcy risk is to take the lowest strike puts (as long as they are below $5 in strike), and calc the MaxGain (in % terms). Subtract that number from one, and that gives you a bankruptcy probability (sort of). By Vol pro on 10/3/11 http://livevol.blogspot.com/2011/10/bac.html
• If the market drop only a little bit in the morning but VIX up big (Eg, drop 9 pt SPX but 3% up in VIX,, this is big)....then usually have an ugly day
• The following is from the monday of the option expiration week. The VIx future expires on Wed.....see the following for Option pit comment as to why he thinks this signal a immediate fear and think we will have a few ugly day coming....

VIX cash: 33.1

VIX OCT: 34.2

VIX NOV: 32.9

VIX Futures have 1 day and a wake up to expire yet are trading at a significant premium to the VIX cash. This means there is immediate fear of the VIX popping in a product where there is little wiggle room to be wrong. The VIX futures should be correlating much closer to VIX cash right here yet, that crazy premium exists. This is a very bad sign for the next couple of days.

• When an option Implied volatility still right in between the HV20 and HV180 – in a simplistic view, it is about fair value thus not considered that expensive

Skew:

• * option pitt mentioend : SPX term structure is really wide. I have talked about this a couple of times. When two SPX months (implied vol) get too wide (2 point when he wrote this) the market is about to make some sort of big move. Currently with 42 days left to expiration, the SPX OCT 1100 NOV 1100 spread is over 2 points wide. (at the time, nov 1100 call is 20.87 and oct 1100 call is 19.38)
• * IV ususally got destoryed before the long weekend
• * IV stages and skew option pit article

• The SKEW quantifies the implied volatility of out of the money S&P 500 Index option contacts versus options that have strikes closer to the current market. If the implied volatility of farther out of the money options is equal to options with a strike price closer to the market the SKEW would be quoted at 100.00. The higher the SKEW the more demand for portfolio protection against a large drop in the overall market.