Hard to tell now. I am sure it will be clear in hindsight.
Long vol through short ITM VIX puts
- Thread starter guspenskiy13
- Start date
Shorting VIX has been a hugely successful trade post-crisis, because of a general belief that real volatility will always be absorbed by the state, so there is no real risk associated with collecting premiums from selling short-term volatility. A lack of willingness to sell vega longer term on the curve - has kept the curve over-priced on a relative level.
As the time of the settlement approaches, an imbalance of shorts routinely hits the market (which got exacerbated since '11-'12 due to ETPs). Too many willing sellers of short-term volatility come up against not enough buyers in the adjacent contracts. As the shorts compete even more aggressively for a chance to stay in the business of selling volatility, downside pressure mounts on the next set of short-term futures.
Of course, the curve compression eventually becomes far too expensive for many shorts. They are then faced with the choice of either moving out further across the curve (and flattening the short-term curve in the process) or with pulling out of the market completely. In the latter case, that means closing the short at settlement, something which puts upward pressure on spot/next contract.
The current, short-term/low-VIX environment, is associated with selling of as much of short-term VIX as possible, which would be (already is) followed by the over-selling of mid-term VIX, and eventually - by the full scale selling of volatility across the entire duration spectrum. The flatter the short-term curve becomes, the larger the incentive to pull out of the trade entirely or to sell volatility further up the curve, where a positive roll yield might still be achieved.
The rise of VIX ETP products and the 'btfd' mentality, which has worked tremendously over the past...idk how many years...has led to a generation of 'vol-tourists'. They focus on buying 10-15% dips in inverse ETPs and selling the UVXY calls. They are clearly unfamiliar with the self-enforcing type of convexity, associated with these products: the more the VIX rises, the more shorts must cover, the more levered ETNs must buy to re-balance, the more volume we get, the more we interpret panic, the more mispriced the curve gets, the more shorts come in (which didn't get squeezed yet, thanks to btfd).
The VIX complex doesn't exist in a vacuum either. Not sure, if the VXX prospectus was updated since its inception, but back in 2010 "...they didn't expect to affect the SPX IV...":
"We or one or more of our affiliates may hedge our obligations under any series of ETNs by purchasing or selling equity securities underlying the S&P 500 Index or listed or over-the-counter options, futures, swaps or other derivative financial instruments; the S&P 500 Index (including the put and call options used to calculate the level of the VIX Index) and the equity securities underlying the S&P 500 Index, and we may adjust these hedges by, among other things, purchasing or selling any of the foregoing.
Although they are not expected to, any of these hedging activities may adversely affect the market price of those items and, therefore, the market value of the ETNs."
As the time of the settlement approaches, an imbalance of shorts routinely hits the market (which got exacerbated since '11-'12 due to ETPs). Too many willing sellers of short-term volatility come up against not enough buyers in the adjacent contracts. As the shorts compete even more aggressively for a chance to stay in the business of selling volatility, downside pressure mounts on the next set of short-term futures.
Of course, the curve compression eventually becomes far too expensive for many shorts. They are then faced with the choice of either moving out further across the curve (and flattening the short-term curve in the process) or with pulling out of the market completely. In the latter case, that means closing the short at settlement, something which puts upward pressure on spot/next contract.
The current, short-term/low-VIX environment, is associated with selling of as much of short-term VIX as possible, which would be (already is) followed by the over-selling of mid-term VIX, and eventually - by the full scale selling of volatility across the entire duration spectrum. The flatter the short-term curve becomes, the larger the incentive to pull out of the trade entirely or to sell volatility further up the curve, where a positive roll yield might still be achieved.
The rise of VIX ETP products and the 'btfd' mentality, which has worked tremendously over the past...idk how many years...has led to a generation of 'vol-tourists'. They focus on buying 10-15% dips in inverse ETPs and selling the UVXY calls. They are clearly unfamiliar with the self-enforcing type of convexity, associated with these products: the more the VIX rises, the more shorts must cover, the more levered ETNs must buy to re-balance, the more volume we get, the more we interpret panic, the more mispriced the curve gets, the more shorts come in (which didn't get squeezed yet, thanks to btfd).
The VIX complex doesn't exist in a vacuum either. Not sure, if the VXX prospectus was updated since its inception, but back in 2010 "...they didn't expect to affect the SPX IV...":
"We or one or more of our affiliates may hedge our obligations under any series of ETNs by purchasing or selling equity securities underlying the S&P 500 Index or listed or over-the-counter options, futures, swaps or other derivative financial instruments; the S&P 500 Index (including the put and call options used to calculate the level of the VIX Index) and the equity securities underlying the S&P 500 Index, and we may adjust these hedges by, among other things, purchasing or selling any of the foregoing.
Although they are not expected to, any of these hedging activities may adversely affect the market price of those items and, therefore, the market value of the ETNs."
I've hear there is an arb VX/VSTOXX trade right now, which puts additional buying pressure on the front.
Anyways, here is the small graphic for the synthetic /VX prices, which are based on trading days left. I've pulled it in the morning, so it didn't include today's spike into EOD.
First, I look at the M1-M5 prices and compare them to 5th pct/median prices based on the same # of trading days left...
Then, I've looked at the 5th pct historical M1-M5 prices and their performance until expiry (Settlement - Today's DTE Price) and (High - Today's DTE Price):
I must say, that August (M5) had an absolute low of 16.2 at the current DTE. It was priced as low as 15.1 today.
Overall, the historical performance of current prices shows a substantial increase in vol over the next 18 to 30 trading days; as well as elevated levels beyond the 30 day point. Let's see, how it plays out.
Anyways, here is the small graphic for the synthetic /VX prices, which are based on trading days left. I've pulled it in the morning, so it didn't include today's spike into EOD.
First, I look at the M1-M5 prices and compare them to 5th pct/median prices based on the same # of trading days left...
Then, I've looked at the 5th pct historical M1-M5 prices and their performance until expiry (Settlement - Today's DTE Price) and (High - Today's DTE Price):
I must say, that August (M5) had an absolute low of 16.2 at the current DTE. It was priced as low as 15.1 today.
Overall, the historical performance of current prices shows a substantial increase in vol over the next 18 to 30 trading days; as well as elevated levels beyond the 30 day point. Let's see, how it plays out.
Considering the relative volumes in the two contracts, it's safe to assume that it's a drop in a bucket.
The analysis above, is that interpolated futures? Do you do day count correction first?
Flat, cheap curve is the main reason without a question.
I'm sorry, what do you mean by 'day count correction'?
I use historical data for each /VX contract from 120 trading days until settlement. I think, that it gives a much clearer picture (for expensiveness/cheapness) for each contract, rather than simply using M1/M2/etc. Price values of monthly contracts get distorted by their "time-position" relative to the roll - M2 @13 before roll and M2 @13 20 days prior to roll - are two very different situations.
bought some /VX May. I've considered doing some bear spread on SVXY for the opex 2 months from now, especially if we get the vol fader into vixpiration and it gets close to ATH. The overall cost of M2 for VIX ETPs is extremely low, not much safety room for inverse after the roll.
By the way - does anyone have any experience with weekly VX? I like to look at less liquid/popular instruments for better potential, but never looked into them.
By the way - does anyone have any experience with weekly VX? I like to look at less liquid/popular instruments for better potential, but never looked into them.
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Think about it...M8 goes as much down as M1, with 220+ days to go...who cares about the front - seems like shorting the back is the way to go 
03/20 to 03/23:
VIX +1.78
Apr +1.1
Nov +0.34
03/23 to 04/05 (intra-day):
VIX -2.22
Apr -1.43
Nov -1.39
03/20 to 04/05 Apr vs Nov:
Apr 14.14 - 13.1 = -1.04
Nov 17.6 - 16.55 = -0.95
Nice!
03/20 to 03/23:
VIX +1.78
Apr +1.1
Nov +0.34
03/23 to 04/05 (intra-day):
VIX -2.22
Apr -1.43
Nov -1.39
03/20 to 04/05 Apr vs Nov:
Apr 14.14 - 13.1 = -1.04
Nov 17.6 - 16.55 = -0.95
Nice!
VIX not too impressive, clear IV bid up as SPY -0.11% and VXX +3.52%. Typically presents a shorting opportunity, especially if it's more news related. Shorting M1 vs M2 @0.4 could have been a decent trade, with 0.6 'leash' for stop.
As I've previously mentioned a 'historically probable' vol increase over the next 3-4 week - everything seems to align nicely. The missing RV is the only problem; maybe earnings will help.
4/18 Apr expiration
4/21 OpEx (SPY/SPX OI very nice range; 235-237 seems like a pin)
Meanwhile,
total OI vs non-commercial short vs commercial short.
(some idiots like to rely on vix/vx data from 2004 or even earlier):
In pct:
As I've previously mentioned a 'historically probable' vol increase over the next 3-4 week - everything seems to align nicely. The missing RV is the only problem; maybe earnings will help.
4/18 Apr expiration
4/21 OpEx (SPY/SPX OI very nice range; 235-237 seems like a pin)
Meanwhile,
total OI vs non-commercial short vs commercial short.
(some idiots like to rely on vix/vx data from 2004 or even earlier):
In pct: