They all work. But there is a cost to holding a strong mean reverting product otherwise it would be free money.
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Can UVXY/TVIX "malfunction" like XIV and SVXY?
- Thread starter Saltynuts
- Start date
They all work. But there is a cost to holding a strong mean reverting product otherwise it would be free money.
ET180, what is the time decay present in VXX that is not present in trading spreads on the VIX? My understanding (consistent with Maverick's explanation) is that whenever there is "contango", both the VIX long ETFs and a long spread in the underlying VIX options would both suffer drag over time. Is there something else present in the VXX that makes it decay even more over time?
Thanks!
Actually, you're right. I got confused. When I trade VIX, I always sell spreads (put spreads if I expect volatility to go higher or call spreads if I expect vol to drop). Therefore, I collect a premium and the time decay works in my favor. VXX works the opposite because one is presumably indirectly buying VIX calls. So yeah, you're right about the time decay.
Although if I wanted to trade volatility, I'd rather just buy calls directly on the VIX so that I can choose the right expiration and strike for my expected move.
The better way to think about is this, when you are in the inverse ETF you are locking in losses everyday. There is no concept of "just holding it". Every day you lock in losses as they buy back at the highs and sell down in the next month. The only thing that is locked is the duration.
THIS is something most people don't understand. If you want to capture the selloff, you really need to just sell Feb and hold it into expiration. That way you can "ride it back down". The ETF does not do that, it holds and replicates a constant maturity. Do you understand that?
I understand this Maverick, makes sense. Reading up on the VIX index, it looks like it is very much the equivalent of buying a VIX future with a 30-day-in-the-future expiration date. So selling one would seem very similar to just selling a VIX as close as possible to being 30 days out. Sounds about right?
They all work. But there is a cost to holding a strong mean reverting product otherwise it would be free money.
It would be totally free money....even if you held onto vxx for 5 years under 10 you know eventually it's going to surge 3-4 fold in due time....
As for the other vix products they don't work as good as they should.....when you are tagging a product to the futures far out in advance they never seem to work out as they should... hence backwardation and contango.....
As for xiv shutting down....it shouldn't....they should keep it ipeo after the collapse and let it run the way it has.....
The better way to think about is this, when you are in the inverse ETF you are locking in losses everyday. There is no concept of "just holding it". Every day you lock in losses as they buy back at the highs and sell down in the next month. The only thing that is locked is the duration.
Which products are you referring to?
The better way to think about is this, when you are in the inverse ETF you are locking in losses everyday. There is no concept of "just holding it". Every day you lock in losses as they buy back at the highs and sell down in the next month. The only thing that is locked is the duration.
THIS is something most people don't understand. If you want to capture the selloff, you really need to just sell Feb and hold it into expiration. That way you can "ride it back down". The ETF does not do that, it holds and replicates a constant maturity. Do you understand that?
I get it
I think it is also about etf using daily percentage to calculate
Lets say vix future raise 100% in a day which was basically what happened
The etf drop to around 10% of original price
Then it would need to raise 1000% to original value
But short vix future can "hold" to its original value.
Short vxx would be much closer to short vix future and almost no "bust" chance?
Which products are you referring to?
Maverick is talking about XIV and SVXY I believe.
Which products are you referring to?
Any product that uses a daily rolling structure.
I get it
I think it is also about etf using daily percentage to calculate
Lets say vix future raise 100% in a day which was basically what happened
The etf drop to around 10% of original price
Then it would need to raise 1000% to original value
But short vix future can "hold" to its original value.
Short vxx would be much closer to short vix future and almost no "bust" chance?
Well...maybe. For example, say you shorted Feb with 8 days to go and it spiked going into expiry at say 35. So then you try to sell March to catch the retrace but March is trading at 20. Would you sell march VX at 20? You missed out on that 15 pt retracement.
The best way to capture the fallback would be to simply sell SPX puts. They will get crushed hard on any rally and you have time decay working in your favor.