Long vol through short ITM VIX puts

[Gambit]

I can't code above a basic level but this is easy to check. Optionvue offers historical data for at least 8 years. That way you can see what happened to naked vix puts over time.

 

[sle]

A +5p jump in /VX brings a 0.6 delta put down to 0.00 for M1.

Well, that's what happened in 2011 - the vol of vol increased so much on the back of a spike in the index that puts that should have become worthless barely changed in price. So if you are using that strategy to hedge something it's not going to work as well as the delta implies.

While I don't buy the 11 fixing as the low bound, given how flat the term structure this may work. Most probably you are going flat or going to lose 10-15c so the risk is low.

 

[guspenskiy13]

While I don't buy the 11 fixing as the low bound, given how flat the term structure this may work. Most probably you are going flat or going to lose 10-15c so the risk is low.

That's pretty much my point.

 

[sle]

That's pretty much my point.

High odds are that you will end up flat or lose a little on the trade - daycount adjusted we had pretty cheap vix levels in the recent past, so I think 11 to 12 is the expected settlement value. However, if there is a small vol spike (and it persists enough) you might make the premium.

So if you are doing it as an outright way to be long vol, sure, go for it. If you are doing it as a way to hedge your book, it's not a great way to do so.

 

[Gambit]

High odds are that you will end up flat or lose a little on the trade - daycount adjusted we had pretty cheap vix levels in the recent past, so I think 11 to 12 is the expected settlement value. However, but if there is a small vol spike (and it persists enough) you might make the premium.

So if you are doing it as an outright way to be long vol, sure, go for it. If you are doing it as a way to hedge your book, it's not a greatest way to do so.

How long do most vol spikes persist? If they aren't of 2008 proportions, maybe a week at most IIRC. Maybe it is better to sell the weekly put... Based on what you're saying, the short put strategy requires a long-lived vol spike in order to profit.

 

[guspenskiy13]

High odds are that you will end up flat or lose a little on the trade

Would do certainly better, than the purchase of VX futures / OTM VIX calls / etc, on a constant basis over the past 4 years or so.

Based on what you're saying, the short put strategy requires a long-lived vol spike in order to profit.

I'd say execution is everything, and overall VIX settlement levels could provide a hint on the "sure" loss potential.
High price + High DTE on front month could give plenty of opportunities to cover @50% value, but this should be tested.

How big of a spike is needed? Largely depends on DTE. Right now, a couple points is plenty to move it down by >50% on the front.

P.S.
I've just looked at the title of this topic and realized the "ITM" part. My mistake, it's not so quite ITM - ATM at most.

 

[sle]

Would do certainly better, than the purchase of VX futures / OTM VIX calls / etc, on a constant basis over the past 4 years or so.

You are suggesting a trade that is statistically (real world expectation, not Black Scholes) a loser or at best break-even and has a maximum upside of the premium collected. Trades above are also statistical losers (higher probability of loss, of course) but the upside is unlimited, at least in theory.

Selling VIX puts to get long vol is equivalent to shorting equity delta by selling OTM calls on S&P - all of the same arguments pro and con can be made in a slightly different form.

The break even here looks attractive, I agree.
-- Maybe a better trade considering the term structure and expectation is to trade a 13/12 1x2 put spread?
-- Maybe buy a VXX put while selling a VIX put and collect the roll down explicitly?

 

[guspenskiy13]

Both ideas are great, thank you for your input!

-- Maybe a better trade considering the term structure and expectation is to trade a 13/12 1x2 put spread?

Some back-ratio could work, but it is dependent on many factors. I feel like 'legging-in' would make sense. Also, I could speculate, that the further months could present some better opportunities, for a longer time-frame.

As of short VIX put combo, I could imagine the simplest way to go - is to pair it with long call; not sure on the call strike, but I guess that would depend on the vol outlook.


I like VXX idea a lot - could you elaborate on it some more, if possible?

It could be viewed as a "mixed" VIX calendar spread, as you short the put in one month and long the put for the blend of M1/M2. I feel like the re-balancing 'feature' could make it pretty interesting; there are definitely multiple possibilities with this approach. My only concern is that these puts aren't necessarily cheap..

 

[guspenskiy13]

As April is almost flat with May (0.29 M2-M1);

 

[sle]

I like VXX idea a lot - could you elaborate on it some more, if possible?

It could be viewed as a "mixed" VIX calendar spread, as you short the put in one month and long the put for the blend of M1/M2. I feel like the re-balancing 'feature' could make it pretty interesting; there are definitely multiple possibilities with this approach. My only concern is that these puts aren't necessarily cheap..

VXX is a rolling index, every day it reallocates a little bit from the front contract to the second one. So, if the second contract is more expensive then the first one, even if the volatility stays constant, VXX locks-in a loss. So, if you think VIX is floored at some level and feel there is an edge to selling VIX puts, a put on VXX will still be collecting that rolldown. I have not looked at them so I don't know what the pricing looks like.

I feel like 'legging-in' would make sense.

The old bit of wisdom says "legging a spread is like spreading the legs", with the relevant consequences. In general, you want to leg in a trade if you believe that both legs have alpha (btw, this might be one of those cases).

Btw, the fact that you are posting this at 2 am on Saturday says tons about your social life