Hedge XIV with VXX options?

[TskTsk]

Quote from luisHK:

Any feedback on selling those than ?

It's like all volatility investments, either a slow bleed or a quick death. Selling them makes profits most of the time but can wipe you out in a 2008-like scenario. That being said it's been my main profit driver for some time now, but I have very spesific plans on what to do if it spikes. Do not sell these without a good plan and spesific stoploss. It WILL spike sooner or later and you need to be prepared for that.

Lately though I've cut VXX and gone straight to VIX options. The principle is the same, but by going straight to VIX options you avoid the "derivative of a derivative of a derivative". Also liquidity and volume is great vs VXX options, which is my main reason for it.

 

[luisHK]

Thanks for your reply. i'm considering selling some VIX futures or fop but it just adds to the risk of short ES options, so I would prolly need to reduce the amount of ES options. Any input here on wether short premium is richer on VIX than ES ? I'm selling atm and ctm options.

 

[TskTsk]

Short VXX/short VXX calls/VIX calls are all investments in contango. Richness isn't really a big concern here, unless you want to use delta neutral strats, but then you miss out on contango. I suppose it could count as a secondary profit driver for someone long contango who uses options sale to get their profits. I sure don't mind some theta, but it's not my main source of profit.

 

[newwurldmn]

Quote from luisHK:

Thanks for your reply. i'm considering selling some VIX futures or fop but it just adds to the risk of short ES options, so I would prolly need to reduce the amount of ES options. Any input here on wether short premium is richer on VIX than ES ? I'm selling atm and ctm options.

It will depend. There are people who run relative value positions against listed vol, VIX, and VAR. Most index books are structured this way.

It's a complicated problem because you have different second, third, and cross risk factors. When these come into play, it can get very tricky.

 

[sellindexvol66]

Quote from luisHK:

Thanks for your reply. i'm considering selling some VIX futures or fop but it just adds to the risk of short ES options, so I would prolly need to reduce the amount of ES options. Any input here on wether short premium is richer on VIX than ES ? I'm selling atm and ctm options.

did you really mean that you are considering "shorting" some vix futures? i wanted to make sure my eyes are not deceiving me.

 

[luisHK]

Yes, front month, or further out, when in contango. There are studies around and a CBOE index showing it's profitable. One link was posted here as well abt a dirty hedge, short front month short ES. I'm still thinking abt only, the drawdowns are a bit scary, and the ones I already face are not insignificant

 

[bologeorge]

Quote from AAAintheBeltway:

VIX has a high tendency to auto regress, so buying XIV when VIX spikes is an obvious approach.

That's not always true. If vix spikes and keeps to be high, vix futures will be backwardation. So buying xiv will result in big loss. Check out the situation in 2008.

 

[newwurldmn]

Quote from luisHK:

Yes, front month, or further out, when in contango. There are studies around and a CBOE index showing it's profitable. One link was posted here as well abt a dirty hedge, short front month short ES. I'm still thinking abt only, the drawdowns are a bit scary, and the ones I already face are not insignificant

again, you are trading lots of basis risk.

VIX is correlated to ES, but not always and often this divergence can be huge.

Risk premiums and cross risk premiums exist for a reason.

Are you willing to sell them?

 

[AAAintheBeltway]

Quote from bologeorge:

That's not always true. If vix spikes and keeps to be high, vix futures will be backwardation. So buying xiv will result in big loss. Check out the situation in 2008.

I said there was a high tendency to regress, not that it would always regress immediately. But your point is well taken. Short vix can blow up in your face.

An extreme backwardation situation could offer the trade of a lifetime, if one could handle the risk. VIX futures by their nature will certainly trade in contango the vast majority of the time.

 

[bologeorge]

Quote from AAAintheBeltway:

I said there was a high tendency to regress, not that it would always regress immediately. But your point is well taken. Short vix can blow up in your face.

An extreme backwardation situation could offer the trade of a lifetime, if one could handle the risk. VIX futures by their nature will certainly trade in contango the vast majority of the time.

Actually it is the vix index which has a high tendency to regress. As for vix futures, the premim/discount is the key. I would long vix futures when vix is high and short it when vix is low. This is a question of conditional probability.