What I’m Watching for in VXST Option Trading Tomorrow

The volatility trading community is counting down the hours until the market opens and trading on VXST options begins at CBOE tomorrow.  CBOE has compiled historical data on VXST going back to 2011 and the price action has been nothing short of astounding.  The chart below shows the VXST closing prices from January 1, 2011 to March 31, 2014.

VXST Daily Chart

In 2014 we have seen VXST close below 10 (9.97) and well above 20 (23.95) for a low to high range of about 140% and this has been a relatively calm year.  Looking back to August 8, 2011 the all-time closing high has been 68.00 with lowest close occurring a few weeks ago at 9.97 on January 10th this year.

I have been asked lots of questions about VXST options and the expected price behavior.  Everyone in the volatility trading space has some ideas of how the pricing for VXST options will shake out as trading gets underway.  Beginning tomorrow there are some specific things I am going to be keeping an eye on.

First, the implied volatility of VXST options will be interesting to watch.   April VIX options expire next Wednesday and many of those contracts were pricing in implied volatility over 100% today.  It stands to reason that VXST options with just a week or two remaining to expiration would price in very high implied volatility as well.   Another factor that leads me to expect very high implied volatility is that VXST has had higher highs, lower lows, and much higher historical price volatility than VIX.

I also am hopeful that we get some unique spread trades coming through the pit.  Of course it may take a while for traders to get a feel for how VXST options are priced, but I am always taken aback by the ingenuity of option traders and spreads that are executed in the VIX pit.  I expect to be intrigued by spreads in VXST options as well.

Finally, I am very curious which expiration series attract attention.  With options expiring each week VXST options and futures allow trader the opportunity to be very specific on the timing of an expected move in volatility.  I have already noticed small bumps in the VXST futures curve and wonder if that will lead to more option activity based on some sort of macro market event such as a fed meeting or major economic report.

The clock is ticking and there’s a little over 12 hours until we go from anticipating how VXST options will trade to seeing how they trade.  I for one can’t wait for the market to open tomorrow as a new era of volatility trading commences.