Nikkei Stock Average Volatility Index

As written in previous post, I was looking for VIX equivalent for Nikkei 225 (N225) and KOSPI 200.  I am glad that I found VIX equivalent for N225 : Nikkei Stock Average Volatility Index (NKVI) at here.

The below overview is quoted from the website.  I have not studied in detail its guidebook or fact sheet.  At the mean time, I will interpret it the same as VIX.

Overview
The Nikkei Stock Average Volatility Index indicates the expected degree of fluctuation of the Nikkei stock Average in the future. The greater the index values are, the larger fluctuation investors expect in the market.

• (Underlying index) The Nikkei Stock Average Volatility Index signals the expected volatility of the Nikkei 225 in one month period.
• (Calculation method) The Nikkei Stock Average Volatility Index are calculated by using prices of Nikkei 225 futures and Nikkei 225 options on the Osaka Securities Exchange. In the calculation, taking near-term future price as the basis of ATM, the volatility of near-term option and next-term option are calculated with OTM option prices of each delivery month. Then, the index value is calculated by linear interpolation or linear extrapolation between the volatilities of each delivery month to make the time to expiration as 30 days.
• (Base date) The commencement date of the calculation was November 19, 2010, which had been retroactively calculated in the past on the end-of-day basis, to Jun 11th, 1989. The index is currently calculated every 15 seconds during the day session of the Nikkei 225 options on the OSE.

Looking the 1 year chart, it seems that NKVI usual range is between 20-30, with spike to 40+ in the month of May-June.

The 3 months chart show that it stay between 20-30 most of the time, except with a spike to 30+ in Feb.

The 1 week shows that NKVI close at 23.71 lowest in the week.  So, not a good time to sell options?  

I will take some time to study NKVI with N225 to have a better understanding on the correlation before I update my Money Management rules in the Trading Plan.

Interactive Brokers KOSPI 200 data feed is down

There is no data feed for KOSPI 200 (K200) since Monday, 24-Mar-14, when I reported the problem to Interactive Brokers (IB).  Last bar on K200 chart is Friday, 21-Mar-14.

Today is Thursday.  The problem is still not fixed.  Very disappointed with IB!

I have to refer to Korea Stock Exchange (KRX) repeatedly to check the K200 movement.  This is 27-Mar-14 close taken from KRX here.

Money Management Rules

I took the below Money Management Rules from Options Trading IQ Sample Iron Condor Trading Plan.  You need to register/sign up to get the access to the Free Tools/Resource page.

I have made some modification, to be bit aggressive in utilizing the capital for trading.  Not as aggressive as Karen the super trader (she uses up to 70%).

I have not found the VIX equivalent for N225 and K200.  As most of the indices are affected by the SPX (most of the time), I will use VIX as a guide for the time being.

Quadruple Witching

I wrote about the SPX Settlement Risk, not realising that it happens to be the Quadruple Witching.

The third Friday of March, June, September and December when Index Futures, Options on Index Futures, Single Stock Futures and Stock Options expired.

This often resulted in higher volatility (price will move up/down in a bigger move), as can be seen in SPX first 5 min trading on 21-Mar-14.  SPX gap up about 25 points and move down 15 points all within the 5 minutes of trading.

SPX Settlement Risk

SPX close at 1872.01 on Thursday, 20-Mar-14.

If you have a Short Call at 1885 or 1890 with ProbITM of 5.68% and 2.23% respectively (Delta of 0.06 and 0.02 respectively), you would have thought it was quite safe that your Short Call will not be hit or exercised.

However, SPX Settlement Value (SET) is 1893.30 on Friday, 21-Mar-14, despite SPX close at 1866.52.

Both Calls Strike price of 1885 and 1890 are all hit!  Your Call option contracts didn't expire worthless as expected.  They will be exercised!

This is a good real life illustration of Settlement Risk.  To avoid such Settlement Risk, we need to have 50+ points cushion between SPX price and short options's strikes.  Or simply close the position before expiration.  The last few pennies is just not worth the risk.

SPX Contract Spec

Expiration Date:
Saturday immediately following the third Friday of the expiration month until February 15, 2015. On and after February 15, 2015, the expiration date will be the third Friday of the expiration month.

Last Trading Day:
Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated.

Settlement Value:
Exercise will result in delivery of cash on the business day following expiration. The exercise-settlement value, SET, is calculated using the opening sales price in the primary market of each component security on the last business day (usually a Friday) before the expiration date. The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the option, multiplied by $100.

Difficulty In Trading Combo Order for K200 and N225

There is one big Order Execution difficulty in trading Combo Order in K200 and N225 using Interactive Brokers.

The 2-legs combo trade (Spread trade) is non-guarantee.  The 4-legs (Iron Condo) is not possible.  I didn't feel so bad until I started trading RUT.  Not only 2-legs combo in RUT are guarantee, so is 4-legs combo trade in RUT.

This becomes very frustrated and difficult when you want to close your Iron Condo or Vertical Spread that is only a few pennies. Assuming you have a sold a Call Bear Spread 267.5/270 (ie, Sold 267.5 & Bought 270), you want to close it by buying it back (ie Buy 267.5 & Sell 270).

You can see the spread is having a Bid/Ask spread of -0.03/-0.01 (above table).  If you submit a bid of -0.02 (mid-point), you will never see it jump in the queue.  That is to say, you will never see the Spread Bid/Ask narrow to -0.02/-0.01.  In order to guarantee your spread got filled, you got no choice but to buy back at the higher price -0.03.

Another way is to trade single leg separately, ie:  Buy 267.5 Call and Sell 270 Call.  So, you queue to buy 267.5 Call at 0.05 and Sell 270 Call at 0.04.

Best scenario: If both got filled, you got the best deal at closing the spread at -0.01.  This is very unlikely as the bid/ask size is usually very big when the option is only a few pennies.

Worst scenario: Say, the Sell 270 Call got filled at 0.04, the 267.5 Call price rallied to bid/ask of 0.07/0.08 or higher.  Firstly, your margin jump up immediately because your Long 270 Call contract in your spread is sold, leaving you having a naked Short contract 267.5 Call.  You have to quickly close this naked Short contract by buying 267.5 Call at 0.08.  You close the spread at -0.04, higher than simply buy at the market then.

Likely scenario: Say, the Sell 270 Call got filled at 0.04, you immediately buy 267.5 Call at the Ask price of 0.06.  You close the spread at -0.02, at mid price of the original spread bid/ask price.

Trading single leg separately is possible, not without risk.  And you need to stare at the screen when order got executed, else high chance you will end up in worst scenario.  Most of the time, I will just buy at the higher price spread to close it immediately, losing out to the bid/ask spread.

If there is any other broker that can offer guarantee combo trade (2-legs or even better, 4-legs) for K200 and N225, please let me know.  Thanks in advance.




Interactive Brokers Note on pricing: 
If you buy a spread and you owe cash (debit spread), enter a positive limit price. If you buy a spread and you receive cash (a credit spread), you must enter a negative limit price. Conversely, if you sell a spread and receive cash, enter a positive limit price. If you sell a spread and owe cash, you must enter a negative limit price.
For example, an April 20.0 xyz call shows a BID price of 6.60 and an ASK price of 6.70. An April 30 xyz call shows a BID price of 0.15 and an ASK price of 0.20.

If you buy a "debit" call vertical spread with the following legs:
Buy 1 OPT APR02 20.0 CALL (6.70),
Sell 1 OPT APR02 30.0 CALL (0.15)
For this transaction you pay: 6.55 (a debit transaction)

If you invert the legs and buy a "credit" call vertical spread with the following legs:
Sell 1 OPT APR02 20.0 CALL (6.60)
Buy 1 OPT APR02 30.0 CALL (0.20)
For this transaction you receive 6.40 (a credit transaction, enter a negative price)

But for RUT, I can see it immediately.

When do I need to consider Currency Hedging

With all the income/profit coming as KRW and JPY, when do I need to consider currency hedging?

I couldn't find any rule of thumb to guide me.  I probably should not spend time and cost performing currency hedging when the currency exposure is less than SGD 100,000.

At the mean time, I should probably just performing a monthly conversion to SGD.

Korean Won (KRW)
For KRW, it is not so straight forward.  There is no direct conversion between KRW and SGD.  I have two options:
1) KRW.JPY, then SGD.JPY
2) KRW.USD, then USD.SGD

Since USD has a tighter spread, I should use the second option.

Japanese Yen (JPY)
For JPY, it is simple, there is a SGD.JPY for conversion.