BBG - Traders Beware: The `VIX Elephant' Is Due to Stampede the Market

[TrustyJules]

Should you be less or more worried? Good question.

The simple truth is the VIX spike will come at some point. We all know it. It's not matter of IF but matter of WHEN. But the WHEN is very important here. If you just go long VIX (via futures or one of many existing ETFs), you need to be very good with your timing, otherwise VIX contango will work against you and the position will slowly bleeding money.

My biggest mistake in 2017 was trying to time the VIX spike. When VIX went below 11, I asked "how low can it go and how long can it stay there?" Guess what - it went to 9 several times, and it stayed below 11 much longer than most people expected. I got it right couple times, but overall it was a losing proposition in 2017. I also rolled some of the trades few times, but when you roll, most of the time you do it for a debit - again, due to contango (more distant futures are more expensive, so the options are more expensive as well).

As they say: the market can stay irrational longer than you can stay liquid.

 

[El OchoCinco]

@El OchoCinco - the article is wrong I think. I am pretty sure he was a seller of the put on the original trade and rolled it the same way. As far as I can remember, the original trade was done for a small credit but he must have paid something to roll it.

Two interesting data points
- this is a a very big real money player (I have a suspicion who that is)
- the original trade as well as the roll were done via upstairs brokers instead of dealer desks (some people were upset, lol)

That would make a little more sense since the short put credit covers the cost of the ratio spread and I could see a settlement between 12 and 16 leading to a nice profit.

 

[sle]

That would make a little more sense since the short put credit covers the cost of the ratio spread and I could see a settlement between 12 and 16 leading to a nice profit.

Again, I cannot remember exactly, but it was small credit as compared to risk. Based on the sell side color I got, it’s a large real money player (SWF, by the looks of it) hedging his book of equity.

 

[gkishot]

Should you be less or more worried? Good question.

The simple truth is the VIX spike will come at some point. We all know it. It's not matter of IF but matter of WHEN. But the WHEN is very important here. If you just go long VIX (via futures or one of many existing ETFs), you need to be very good with your timing, otherwise VIX contango will work against you and the position will slowly bleeding money.

My biggest mistake in 2017 was trying to time the VIX spike. When VIX went below 11, I asked "how low can it go and how long can it stay there?" Guess what - it went to 9 several times, and it stayed below 11 much longer than most people expected. I got it right couple times, but overall it was a losing proposition in 2017. I also rolled some of the trades few times, but when you roll, most of the time you do it for a debit - again, due to contango (more distant futures are more expensive, so the options are more expensive as well).

What VIX spike? The guy bought VIX puts & is betting on VIX to go down.

 

[El OchoCinco]

What VIX spike? The guy bought VIX puts & is betting on VIX to go down.

I believe @sle is correct and it was a put sold to further finance the call ratio spread and also because the risk of Dec VIX settling below 11 seemed small given past history. The trade makes money if VX goes sideways with small downside move at worst or moves higher.

 

[newwurldmn]

Again, I cannot remember exactly, but it was small credit as compared to risk. Based on the sell side color I got, it’s a large real money player (SWF, by the looks of it) hedging his book of equity.

I thought it was an insurance company out of the U.K.

 

[Martinghoul]

I thought it was an insurance company out of the U.K.

You might be thinking of Ruffer, the famous "Mr Fiddy"... I don't think he's the guy behind this concoction.

And it was definitely a short put vs a 1x2 call spread, 12, 15 and 25 strikes respectively. The initial credit was smth like $5 - $6 bucks. I'm not sure how much it cost to roll last time.

 

[El OchoCinco]

That seems like too high a credit estimation. 15-25 Call ratio spread is not going to be put on for a net credit but rather a debit since the 25 strike is waaaay OTM. Selling the 12 PUT will get you 1.20 to 2.00 at most since futures do perceive a VIX set floor at about 10ish. I doubt the initial credit was more than $1.50-$1.75.

 

[Martinghoul]

That seems like too high a credit estimation. 15-25 Call ratio spread is not going to be put on for a net credit but rather a debit since the 25 strike is waaaay OTM. Selling the 12 PUT will get you 1.20 to 2.00 at most since futures do perceive a VIX set floor at about 10ish. I doubt the initial credit was more than $1.50-$1.75.

I meant cumulative prem received was arnd $5 - 6mm...

 

[newwurldmn]

You might be thinking of Ruffer, the famous "Mr Fiddy"... I don't think he's the guy behind this concoction.

And it was definitely a short put vs a 1x2 call spread, 12, 15 and 25 strikes respectively. The initial credit was smth like $5 - $6 bucks. I'm not sure how much it cost to roll last time.

Yeah. I confused the two.