All those instruments are based on the VIX so it should be technically possible to replicate your own VXX or UVXY with some combination of VIX options. Therefore, there may be some other combination of options that better suit your strategy. But if the ETFs work for you, that's great. Keep using them. I've also wondered if one could be profitable shorting both UCO and SCO to capture the decay, but I suspect that the borrowing costs make that strategy unprofitable otherwise everyone would be doing it.
How to play volatility
- Thread starter stockoptionstrader
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The VXX options are very different than VIX options. Again the transfer cost of transferring the front month to second month destroys the product. There is no way to capture that with VIX options, thestructure is completely different.
What I don't understand is, when you buy VXX puts when volatility spikes, why the premiums are high? If volatility spikes, the premium of the calls will be expensive, but the puts will be very cheap. Also sometimes after a big spike, there is some very high volatility up and down the days after. I see premiums from call and put options go x 10. If you would by a strangle then or other kind of neutral option strategy. It's almost certainly a win in those situations. What am I missing here in my uproach?
The price of the puts increases because everybody else is expecting the same thing, that volatility will decline and VXX will decay.
Nothing is certain; prices are generally bid until a point where the market expects an approximate 50/50 chance either way. Your advantage comes from seeing when it's really 49/51...
Not when you are buying them at the moment when volatility spikes, and the calls are up several 100%, puts will be cheap.
The underlying will decay, yes, but how sure can you be that it will happen at the speed you need?
What do you mean by speed?