Kill me but How do I short Vol?

klattermusen

klattermusen

I know. It's basic but the people I would ask would immediately know I was faking to get into their golf club. So.....

They keep saying "short the vol". I googled it. I don't understand it. It's volatility...like in gamma? delta?

Does it mean short the vix? Specifically what stock...UVXY?

I'm coming to you from a background in retail - not institutional trading. It's obviously got to do with options but I'm hoping for some help.


Thank you

KM
 
Yes short uvxy. Most brokers don't allow that. Long stay is another option.
When term structure enters backwardation start scaling in short vix. The drawdown can still hurt if backwardation persists longer as what happened between Feb 24 and mar 13.
You can now trade micro futures on vix. You can short them.
 
Here are few popular ways:
  1. Short VXX/UVXY are pretty popular. Can't borrow sometimes.
  2. Can buy SDS (2x inverse of SP500). Good for registered accounts and always can do it but it is not exactly volatility, might be close enough, it depends
  3. VIX options, but they are a bit trickier from my point of view
There use to be XIV (kinda the opposite of VXX but not really), which theoretically was supposed to only go up. Till it blew up.

Val
 
Those that know what they are doing, typically use terms like "short volatility" in reference to placing a trade that should perform well if volatility decreases. The actual implementation of that can take many shapes, time frames and products. If no product name is provided, most people assume SPX volatility, and perhaps more focused to VIX (a 30-day calculated value). UVXY and VXX products are based on the price of the front 2 months of VX futures, which can help to simplify volatility trading for many.
 
Not sure what the story was with SVXY, but that chart reminds about the dangers of those tricky instruments. Shorting VXX / UVXY looks pretty "safe" comparing to that and what happened to XIV

upload_2020-12-9_17-58-35.png
 
ValeryN said:
...
There use to be XIV (kinda the opposite of VXX but not really), which theoretically was supposed to only go up. Till it blew up.

Val
More...

For how long did people really believe the VIX was going to stay at it's historical low of 9-10? Shorting it forever was a silly concept.
 
klattermusen said:
They keep saying "short the vol". I googled it. I don't understand it. It's volatility...like in gamma? delta?
More...

Nope; volatility. Technically, it's the "fudge term" in Black-Scholes that makes everything else come out right, including gamma, delta, and so on; practically, it's the amount of movement that the market is implying (via the price of that option) for that option's price. In fact, if you think about volatility as a direct proxy for premium, you'll be pretty much on target.

As to trading it, think about this way: let's say XYZ has been waterlogged for ages, and its options have been dirt-cheap. Suddenly, something happens - they catch the CEO in bed with, I don't know, JPowell or something :) - and XYZ goes batshit for a while, until things settle down (new CEO, new Fedhead, whatever.) What do you suppose is going to happen to that stock's volatility, both right after that event and over time?

One of the main premises in options trading is that price is not mean-reverting, but volatility is. So certain types of events - or even simply watching premium levels for an underlying with which you're familiar - can give you a certain degree of predictability. For some people, that's preferable to trying to figure out what the price is going to do.

There are a lot of ways to trade vol, but the classic strategies would be things like straddles, strangles, and their versions with wings for protection (flys and condors, both long and short.)
 
klattermusen said:
I know. It's basic but the people I would ask would immediately know I was faking to get into their golf club. So.....

They keep saying "short the vol". I googled it. I don't understand it. It's volatility...like in gamma? delta?

Does it mean short the vix? Specifically what stock...UVXY?

I'm coming to you from a background in retail - not institutional trading. It's obviously got to do with options but I'm hoping for some help.


Thank you

KM
More...


That’s what I used to do before I’ve lost my shirt :)

In simple terms, yes, selling/shorting UVXY.
Seth Golden became famous for that: https://twitter.com/sethcl?s=21

This is also somewhat equivalent to naked selling/shorting SPY puts, if you trade options.
 
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