VIX Options pricing question

[Whetstone]

I have a question about pricing the VIX options.
I have been watching VIX options closely for the last month
and today I am confused. The VIX call options seem to be underpriced.
For example a call option that is 6 dollars in the money and priced at 5 dollars.

Here is what I know:
There is 4 days to Sept expiration on VIX options.
When VIX was 25.91.
VIXIE (Sept 25 calls ) were priced at .80-.90. ( underpriced by a penny ? )
VIXID (Sept 20 calls ) were price at 4.90 - 5.10. ( underpriced by 80 cents ? )
both option have 1.00 delta.

Next,
VIX price moved to 26.20
VIXIE moved to .95 - 1.05 ( I thought it should have been 1.20 - 1.30 )
VIXID did not move. ( also low volume )

At the time of this writing:
VIX is at 26.29
VIXIE 1.35 -1.40 ( these look reasonable to me now )
VIXID 5 - 5.20 ( but these look like the are under priced )

Any advice or guidance you can give would be appreciated.

Thank you.

- whetstones

stay sharp :D

 

[doug reich]

Where are you getting the quotes? Are both the VIX and option prices delayed or both real time?

Are you looking at last trade or bid-ask on the options? Use the latter, especially when trades are not getting executed. Look also at when the last trade was made.

When I go to the CBOE website and get a quote, I see similar "mispricing", but I don't know what the timing on each price is.

I don't know your level of knowledge, so I don't mean to insult you with basic questions.

 

[Whetstone]

Where are you getting the quotes? Are both the VIX and option prices delayed or both real time?

Are you looking at last trade or bid-ask on the options? Use the latter, especially when trades are not getting executed. Look also at when the last trade was made.

When I go to the CBOE website and get a quote, I see similar "mispricing", but I don't know what the timing on each price is.

I don't know your level of knowledge, so I don't mean to insult you with basic questions.

Thank you for your reply. No insult at all. I thought all the same things and it shook my confidence for a moment.

So I did a trade to see if their was something wrong or if I was really seeing a monstrous arbitrage opportunity. Although I don't like to pick off 'extremely' bad quotes, it gives me a bad taste. I would rather drop in a reaonable bid or offer to alert the market maker or specialist that his or her prices are wrong.

My trade:
I bought 10 VIX 25 calls at .85 when VIX was at 25.95.
VIX moved up to 26.20 and the calls only went up to .95 bid, I got spooked and sold them.
I received good executions so the prices were realtime.

Later in the day the options were trading at reasonable prices.
VIX 26.3 and the VIX 25 calls 1.45 - 1.55.

I am still scratching my head. Today I will do some research about the product and see if there is some type of special settlement.

Again, thanks for your reply, very much appreciated.

-- whetstone

 

[Whetstone]

Life long learning

Where are you getting the quotes? Are both the VIX and option prices delayed or both real time?

Are you looking at last trade or bid-ask on the options? Use the latter, especially when trades are not getting executed. Look also at when the last trade was made.

When I go to the CBOE website and get a quote, I see similar "mispricing", but I don't know what the timing on each price is.

I don't know your level of knowledge, so I don't mean to insult you with basic questions.

Thanks again for the reply. I think I figured it out.

I found this on VIX Options hedgefundconcepts.com
"The most important information to know is that VIX options are not valued based on the VIX index. Instead, the VIX options are valued based on the VIX futures contract. "

When I charted the futures with the index overlay I can see why the options looked underpriced. The futures stayed flat while the index increased.

Time to recalibrate the model.

- whetstone

 

[doug reich]

Makes total sense. The options are there to hedge the futures, whereas the index is not tradeable (is it?)