What are the purest IV plays possible? Looking to eliminate as much delta, and theta as possible and focus on whether or not IV falls or rises as the primary source of P/L.
Thoughts?
Thoughts?
Pure IV Play
- Thread starter frostengine
- Start date
Robert Morse
Sponsor
My thoughts are that your question is too general to help. You need to first find a situation where you feel implied vol will make a substantial move, then look for the best way to capitalize on your expectations based on the instruments that are available.
Check out this book "Volatility Edge in Options Trading" by Jeff Augen. If you check around the internet, I think its free. Can't remember the specific chapter, but he lays out how to play IV before ER.
I tried out his formula, with little to no success
. But everyone trades to their own beat, so might be worth a look.Good luck!
Forward starting variance swaps are pure plays on the implied vol. Well, almost pure due to the vega convexity.
Various volatility index futures are the answer to this question. They are all forward starting, linear with respect to vol and easy to trade.
OP - in case it's not obvious, instruments like the VIX futures are pure plays on IV: http://www.cboe.com/micro/vix/vixfuturesprices.aspx
edit: fixed quote.
The problem with VIX futures, VXX and others is the decay aspect. Vix futures are always priced higher than spot, and therefore will decay over time. What I am trying to construct is a trade that is more of a pure IV play on say S&P options... the goal would be if IV increases you make money, if IV decreases you make money.. by removing as many aspects of decay as possible..
Something like a ratio double diagonal for example would minimize or potentially make theta positive... can be structured fairly delta neutral (at least initially)... IV rises makes money, IV decreases losses money..
Trying to find similar setups. I want to avoid relying on realized volatility, and focus more on IV.
Something like a ratio double diagonal for example would minimize or potentially make theta positive... can be structured fairly delta neutral (at least initially)... IV rises makes money, IV decreases losses money..
Trying to find similar setups. I want to avoid relying on realized volatility, and focus more on IV.
pretty much the natural state of the world has an upward sloping term structure (ie there is premium embedded in the term structure that will decay away). in the vix it's pronounced because of the construct of the product. but SPX listed vol has it too and thus all SPX related volatility products will have it.
Forward on a statistically mean-reverting product would usually include some term premium that biases it towards the historical mean. E.g when oil is cheap, it's in contango and when it's rich it's backwardated. The VIX futures are not any different and since they are consistent with the implied vol surface, your decay per unit of risk will be similar no matter what product or combination you trade.