A 2-3% Correction Could Wipe Out Most VIX Short Sellers

[sle]

"30 day constant maturity futures contract" is correct, but number of N contracts may not be correct (or I might be interpreting wrong)

Here is the prospectus>
http://www.ipathetn.com/US/16/en/documentation.app?instrumentId=259118&documentId=6091544

on PS-24 page,
View attachment 179098

"equal notional amount" implies that it is dollar weighted. For eg: if first month contract VX1 value of 10, N contracts was sold for the amount of $1,000, then number of next month contract VX2 value of 11 bought would be be less than N.

I guess I stand corrected - just went through the math in the prospectus and it does look like roll amount CRW is weighted weighted by the notional value of the futures. This way you get roll proportional to the ratio of the futures, not to the absolute difference.
Although at these levels it’s an insignificant difference, it could make for interesting behavior sometimes. For example, imagine how quick vxx recovers value when the curve is inverted by 45% ratio like it was in October of 08 - the reverse decay is like 2% a day

 

[Daal]

Actually, selling OTM index puts has been a great trade, on average performing better than the index itself (risk adjusted).

My boss used to say that “selling risk premium is like sleeping with strangers”. I think it’s a good analogy - you want to do it when it’s attractive and you don’t want to do too much of it.

I'm referring to the really way OTM stuff. In those, what is not in the backtest data is even more important than what is in it. People will draw confidence from 10-15 year backtests, then one day their account gets liquidated by their broker

 

[Daal]

Perhaps I don't follow what you are saying but being short vol is being short vol(-$vega) at any given snapshot in time. Let's forget for a moment that the article is talking about selling vix futures so that maybe you can elaborate how strike dependency makes vol selling a lunacy compared to a long spy position.

Spitznagel has a backtest in this book. It shows how an index position that is paired with some put buying (really way OTM puts) can outperform an index position by itself but only if the put buying is reserved to periods where the market is overvalued (by his definition)

 

[sle]

Spitznagel has a backtest in this book. It shows how an index position that is paired with some put buying (really way OTM puts) can outperform an index position by itself but only if the put buying is reserved to periods where the market is overvalued (by his definition)

I’d be very skeptical of any back tests and methods involving the tail events. A very small number of parameters will let you fit the history very well without much relevance to real life. In real life, you end up either with a bunch of false positives (and keep buying puts) or you end up with a false negative when it matters the most. In the worst case, you will end up with both, overspending on protection in normal times and yet getting hurt in the downturn.