Those AUG options are NOT volatility hedges. In fact, as the OP pointed out, they could actually go DOWN in value with a rise in the vol on the short end (backwardation). Hell, if we got a pop in the VIX in front, I would likely be a huge seller of Aug vol.
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How liquid are VIX options?
- Thread starter darkshogun
- Start date
Those AUG options are NOT volatility hedges. In fact, as the OP pointed out, they could actually go DOWN in value with a rise in the vol on the short end (backwardation). Hell, if we got a pop in the VIX in front, I would likely be a huge seller of Aug vol.
Disagree completely. Most of variance of the VIX futures curve comes from the correlated moves in the same direction. The only difference is that when the back is far less volatile and thus will move less, but it will still move in the same direction. Backwardation based on inversion (that is, a rally in the front accompanied with a decline in the back) is very rare and usually happends in smaller moves.Those AUG options are NOT volatility hedges. In fact, as the OP pointed out, they could actually go DOWN in value with a rise in the vol on the short end (backwardation).
Also, Aug options will gain on both delta (change in VIX) and vega (change in vol of vol), so I would not be so sure if they are bad hedges.
Disagree completely. Most of variance of the VIX futures curve comes from the correlated moves in the same direction. The only difference is that when the back is far less volatile and thus will move less, but it will still move in the same direction. Backwardation based on inversion (that is, a rally in the front accompanied with a decline in the back) is very rare and usually happends in smaller moves.
Also, Aug options will gain on both delta (change in VIX) and vega (change in vol of vol), so I would not be so sure if they are bad hedges.
I didn't say they would not go up. But they will absolutely move less and that is an economic cost to you. Especially if your reason for being long is to actually
"capture" a spike in vol that is suppose to "hedge" the assault on your short exposure in the front. Good luck with that. LOL. I'm talking about relative change here. If I buy Y in place of X and X goes up 10% and Y goes up 5%, that is a 5% loss to me in economic cost. And we are trading relative value here or why else are we doing this. Certainly not to earn index.
A month out. I'm interested in using further OTM VIX options, using them as temporary volatility hedges in the short term and cashing them in if the market moves violently against my position, or holding them if they go down in value and start losing money, until they become profitable again. I'm fine with the lag. It comes with the territory. I'm more concerned about liquidity and getting filled quickly should I need to close out the position fast. BTW I'm still using a demo, not playing with real money yet until I've polished my strategy and it's ready to roll live.
So essentially you're hedging 1-month vol w/ 6-month vol (Aug). You are taking massive term structure risk. You're not really hedging vol, but betting on backwardation / contango in the structure...if mkt spikes, your 6-month vol will barely respond. This will be even worse if your SPY/IMW vol is not ATM...On a spike, vol will blow out hard on front months, even harder on the skew, and barely on further out.
"LOL"? Seriously? If you have a good reason to be short the front you can hedge it with the longer-dated futures (options) in the right hedge ratio.I didn't say they would not go up. But they will absolutely move less and that is an economic cost to you. Especially if your reason for being long is to actually
"capture" a spike in vol that is suppose to "hedge" the assault on your short exposure in the front. Good luck with that. LOL. I'm talking about relative change here. If I buy Y in place of X and X goes up 10% and Y goes up 5%, that is a 5% loss to me in economic cost. And we are trading relative value here or why else are we doing this. Certainly not to earn index.
Not to be a dick here, but a simple historical analysis will show you that there is a stable (more or less, depending on the sophistication of your model) hedge ratio between all futures in the VIX term structure. So yes, you can hedge 1-month vol with 6 month vol and capture relative value this way.So essentially you're hedging 1-month vol w/ 6-month vol (Aug). You are taking massive term structure risk. You're not really hedging vol, but betting on backwardation / contango in the structure...if mkt spikes, your 6-month vol will barely respond. This will be even worse if your SPY/IMW vol is not ATM...On a spike, vol will blow out hard on front months, even harder on the skew, and barely on further out.
"LOL"? Seriously? If you have a good reason to be short the front you can hedge it with the longer-dated futures (options) in the right hedge ratio.
Sle, either you or I are missing something here. He is NOT putting on a spread trade as to my understanding to manipulate the vol curve, he already HAS the short exposure and he is using the back end as an emergency tail risk hedge. And you think that is a good idea? LOL. I mean look dude, maybe for you as your understanding of the curve is probably better then his, but you are not seriously suggesting a newbie to try that are you? I mean, this guy is going to get absolutely clobbered on the back. The right hedge ratio? He doesn't even know what the liquidity is on these. I'll bet a dime to a dollar he has not even executed a vix option before in his life. LOL. Yeah, tell him to play with the forward curve. I'm sure he will work out the details just fine. I might be missing something here, I'm all ears. Or better yet, tell him because I don't think he knows where the VIX option chain is on his broker's platform.
The lower volatility of VIX futures in far months has little to do with mean reversion and more with term structure of skew. In short, most of the volatility of VIX futures (the underlying for VIX options) comes from the volatility of SPX - as the spot moves, it "slides" along the skew and chances the price of the fair forward variance swap that in turn determines the price of the VIX futures.
Ah, ok. I guess I was thinking that vol is positively correlated with vol of vol and so the term structure would be expecting both to trend back in the direction of more normal levels over time. This was my idea of what drives the term structure. That make sense? Just stating it based on reading, not actual experience, so please correct me if I am wrong.
I was merely responding to absolute-sounding statements that Aug VIX futures can not be a good hedge to a short position in the front (in either other VIX structures or in non-VIX vol). The OP should, obviously, do his own homework and I sure hope he does it regardless of what month he's gonna hedge with. However, my general belief that on this forum we exchange general ideas and approaches, not specific advice.Sle, either you or I are missing something here. He is NOT putting on a spread trade as to my understanding to manipulate the vol curve, he already HAS the short exposure and he is using the back end as an emergency tail risk hedge. And you think that is a good idea? LOL. I mean look dude, maybe for you as your understanding of the curve is probably better then his, but you are not seriously suggesting a newbie to try that are you? I mean, this guy is going to get absolutely clobbered on the back. The right hedge ratio? He doesn't even know what the liquidity is on these. I'll bet a dime to a dollar he has not even executed a vix option before in his life. LOL. Yeah, tell him to play with the forward curve. I'm sure he will work out the details just fine. I might be missing something here, I'm all ears. Or better yet, tell him because I don't think he knows where the VIX option chain is on his broker's platform.
I was merely responding to absolute-sounding statements that Aug VIX futures can not be a good hedge to a short position in the front (in either other VIX structures or in non-VIX vol). The OP should, obviously, do his own homework and I sure hope he does it regardless of what month he's gonna hedge with. However, my general belief that on this forum we exchange general ideas and approaches, not specific advice.
Sle, if someone asks you a specific question and they sincerely are looking for help, I think a specific answer is better then broad. If we are speaking in general theory and tossing ideas around, that is different. By no means am I saying you are obligated to help the guy, but sometimes on here, you lose sight of your audience. Your speaking to him as if he understands what you are saying and he may very well not. A lot of people come on here, especially newbies, asking for very exact answers or solutions to problems. I'm not saying you have to VPN into his computer and put the trade on for him, but the problem when you or anyone for that matter answer broadly to a specific question is the thread goes on for 300 pages when a single post would suffice. Again, I'm not knocking you for trying to help the guy but you are going to lead this guy into the abyss. And he is not going to know what to do when he gets there.