Hi,
I am reading a Year End letter to Investors where the Fund manager explains how they position to be long volatility:
"[Fund name] achieves a unique and anti-correlated return stream by forgoing expensive first order and linear movements in volatility to finance higher order non-linear movements. In practice, a mild first order linear rise in volatility (decline in markets) is often expensive to hedge. For example, if the VIX drops to 12, you are not unique in thinking it will rebound to 15, and that expectation is already priced into forward variance and skew. At the same time, few anticipate the VIX will, hypothetically, rise to 50 over 10 straight days with significant volatility-of-volatility and a -30% crash in markets. Higher order movements in volatility are not widely anticipated including volatility trend, volatility-of-volatility, and serial correlation of volatility. By dynamically and systematically selling off some first order and second order movements, while purchasing the higher order movements, Artemis constructs positions that combine elements of tail risk and yield."
Do you think that is a put backspread*? If so, DOTM puts would be the "higher order movements".
(*) Or Call backspread on Vix options
Thanks
I am reading a Year End letter to Investors where the Fund manager explains how they position to be long volatility:
"[Fund name] achieves a unique and anti-correlated return stream by forgoing expensive first order and linear movements in volatility to finance higher order non-linear movements. In practice, a mild first order linear rise in volatility (decline in markets) is often expensive to hedge. For example, if the VIX drops to 12, you are not unique in thinking it will rebound to 15, and that expectation is already priced into forward variance and skew. At the same time, few anticipate the VIX will, hypothetically, rise to 50 over 10 straight days with significant volatility-of-volatility and a -30% crash in markets. Higher order movements in volatility are not widely anticipated including volatility trend, volatility-of-volatility, and serial correlation of volatility. By dynamically and systematically selling off some first order and second order movements, while purchasing the higher order movements, Artemis constructs positions that combine elements of tail risk and yield."
Do you think that is a put backspread*? If so, DOTM puts would be the "higher order movements".
(*) Or Call backspread on Vix options
Thanks
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