How to sit out when short volatility trade goes wrong?

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pantarhei

Lets assume I trade a strategy to short equity volatility, i.E. short VXX calls. I would trade it small so I could absorb any losses if volatility spikes. What will be a good strategy to wait out the phase of high volatility?

The VIX futures will be in backwardation, rolling VXX short calls would probably only partially make up for my losses when volatility comes down again. I do not want to be assigned on the calls. So i have to take some action.

I assume it would be perfect to come as close as possible to a cash VIX position. As that is not possible what would be close to that? I never want to be long options. Only credit spreads are ok for me. I prefer not to go short VXX stocks. This ETF has huge price discrepancies to inner value in time of stress.
 
Short naked call on a Vix ETF sounds like a decent horror story.

IMO a "sit-out" adjustment would convert it into another position or just cap the losses.

However small you might trade it, in % you are always collecting pennies in front of a steam roller.
I see no point in being able to absorb (any) losses, that need many many more wins to recover.
If I limited myself to credit spreads only, as you state, I would probably opt for something like a bear call atm.
 
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pantarhei said:
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Waiting for new entry? Or Waiting to close the position? Assuming the latter, why not roll out in time enough for a better exit.
Regarding the product: VXX fell off the wagon some time back and failed to follow it's algo regarding the relationship of the two Futures products. Unclear if the issue was resolved, so I would chose a more reliable product. UVXY has more leverage, and UVIX even more leverage, but less liquidity. UVXY liquidity should be fine if you were comfortable with VXX.
Curious if you swing trade (catching the drops and avoiding being in on the spikes) or if you merely try to maintain short positions? (perhaps both) -- likely, no wrong answer here.

Your statement suggests you are Short a Call option on VXX, yet, you state: "Only credit spreads are ok for me." && "I prefer not to go short VXX stocks."! Can you clarify (your short Call option is one leg of your credit spread, perhaps?)! Would like to understand what you meant!
 
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[QUOTE="stepandfetchit, post: 5709758, member: 489317"Would like to understand what you meant![/QUOTE]

I never want positions were time decay runs against me.

I plan to short OTM calls on VXX. As VIX futures trade 70% of the time in contango rolling indefinitely would be profitable in the long run. BUT when VIX rallies the futures are in strong backwardation. I would have a huge loss, and I would profit a lot less as linear when VIX comes down after a large spike. In theory VXX fair value could stay equal or go up while VIX is falling (because of backwardation). Add to this that volatility products like VXX traded in the past far above fair value when volatility was high. This would lead to lesser profit when VIX is falling after a spike compared to loss when VIX is rising. If I would short VIX futures and roll them at least the risk of anormal pricing of VXX or any other ETF could be avoided. But rolling the futures in backwardation still cost a lot.
 
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