I asked a question a…

I asked a question a few days ago and got two answers, so thanks for those. However, I think I didn’t word my question well or else I don’t understand the answers so I’m going to re-ask my question.

I’d like to know why PITM and Delta are essentially the same for a given strike on SPY but very different on VXX. Here’s an example from today’s TOS trade tab.

June 2018 ATM Puts
SPY: PITM = 54, Delta = 50
VXX: PITM = 62, Delta = 37

Theoretically, ATM strikes should be about 50 for both PITM and Delta, and they are for SPY. What is it about VXX and the calculations behind PITM and Delta that throws both PITM and Delta so far apart and away from 50?


Original question and answers:

I have a question about VXX and delta.

During this wild bull market, I’ve been buying SPX calls and VXX puts. I buy the calls at about a 60 delta with a 200ish DTE. On the TOS and TastyWorks platforms, the PITM percentage is similar to delta. I use PITM because several years ago Sosnof made the case PITM is a better estimate for the probability of expiring in-the-money than is delta.

So this brings me to VXX. Delta and PITM are not even close to the same. At 200ish DTE, they are about 25 points apart.

My question is why are PITM and delta so different for VXX, and which is a better estimate of the probability of expiring in-the-money? I ask because it clearly affects strike selection and potentially affects when to roll or close.

from vxxkelly: Steve, The difference with $VXX is likely explained by the skew. Take a quick look at the June 18 options. ATM the puts and calls are trading almost equal, but go up $10 on the calls and down $10 on the puts. Massive difference in the pricing, the calls are going for more than 2X the puts.

1) $VXX is a decaying asset vs any given stock or index that isn’t, the market knows this
2) If there were a volatility spike, there is significant risk to the short calls, so people who are selling them want a premium for the risk they are taking.

From hcgdavis: And that is where you find the “edge” in trading vol. products!