Pure volatility play
- Thread starter Vixpills
- Start date
thats exactly what I'd like to discuss. Given the high premium on the vix futures resulting from the vix low level. Isn't there a strategy taking advantage of those high premiums. i.e. short second month/long front month, but which requires hedging against a sharp vix move up ( spot move). That hedge could be create through a combination of spx options in order to simulate at low cost the vix ( not perfectly though).
What about waiting that two diffrent expiration get close, almost identical value and then short the nearest expiration and be long the further out expiration.
example : On monday may 10, 2004 the august and november where almost identical ( 0,9 difference )
So as soon as the vix falls the spread widens.
The risk is to upside. What can be done to hedge ?
An option position like vixpills mentionned could good, but it works both ways. If your spreading you are looking for the vix to fall and if it falls then the synthetic option position will lose value to.
Good point about the margins Damir00 , by spreading you get a lot more leverage.
How can we just buy the vix and sit on it until pops up without paying the premium every time we rollover. ?
Just being long the november doesn't cut it because it doesn't move enough
example : On monday may 10, 2004 the august and november where almost identical ( 0,9 difference )
So as soon as the vix falls the spread widens.
The risk is to upside. What can be done to hedge ?
An option position like vixpills mentionned could good, but it works both ways. If your spreading you are looking for the vix to fall and if it falls then the synthetic option position will lose value to.
Good point about the margins Damir00 , by spreading you get a lot more leverage.
How can we just buy the vix and sit on it until pops up without paying the premium every time we rollover. ?
Just being long the november doesn't cut it because it doesn't move enough
Hello:
I am not really interested in a long discussion, on this subject. In my opinion, and based on the descriptions I hear, your strategies don't seem to have much edge. If you want to get a significant edge with Vega exposure (depending on how you hedge), you might want to look at convertible arb strategies. There are a number of them (convertibles, warrants, preferreds, etc) that offer good potential exposure to vega, good leverage and relatvely low corellation with the total equity market. Now that I am typing this in, I can imagine that there are going to be a lot of posts asking for info. My reply is buy "Convertible Arbitrage" by Nick Calamos. Read, Think. Come back and post. Best Regards, Steve46
I am not really interested in a long discussion, on this subject. In my opinion, and based on the descriptions I hear, your strategies don't seem to have much edge. If you want to get a significant edge with Vega exposure (depending on how you hedge), you might want to look at convertible arb strategies. There are a number of them (convertibles, warrants, preferreds, etc) that offer good potential exposure to vega, good leverage and relatvely low corellation with the total equity market. Now that I am typing this in, I can imagine that there are going to be a lot of posts asking for info. My reply is buy "Convertible Arbitrage" by Nick Calamos. Read, Think. Come back and post. Best Regards, Steve46
vixpills...you could cerainly hedge such a spread with SPX or ES options and the natural reaction would be to look at OTM puts or even consider selling naked OTM calls if your were say short AUG and long the NOV VIX contract.
disclaimer...I am in no way recommending that people go out and sell "naked" calls!
disclaimer...I am in no way recommending that people go out and sell "naked" calls!
vixpills...unfortunately, I do not have a solid calculation to translate the vega exposure of a spread in VIX futures in a way that would match the vega exposure of the options position. I keep thinking the calculation has to be like a $delta calculation one would use when doing intermarket spreads but I have not figured it out yet.
I browsed the web on conv arb strategies. Quite an interesting and vast subject.
I found that strategy:
Convertible arbitrage is undertaken through establishing a short position in the stock that the bond can be converted into. This practice, known as delta hedging, consists of dividing the price of the convertible by the stock price conversion premium and then multiplying by the option delta. Suppose a convert's price is $1000 and the company's current stock price is $50 with a 50% conversion premium, so the value of the stock price conversion premium is $75. Option delta is the movement in the price of the option for every 1% increase in the stock, suppose an option on this stock has a delta of 0.65. The amount of shares to short, hedge ratio, is then: ($1000/$75)*0.65=8.6667. During small price movements in the stock this short position will act as an effective hedge against a decrease in the price of the bond, since part of the price component of a convertible is conversion value. This helps create a market neutral position with returns solely dependent upon the coupon the bond is paying. During volatile markets this hedge breaks down and a large decrease in the price of the stock will result in a profit because the short position becomes more profitable then the losses from holding the bond. Conversely a large increase in the price of the stock results in a profit because the rise in the price of the convertible bond is greater then the loss from the short position. The central component of convertible arbitrage is the current income derived from a position. That is, the income if the price of the stock remains more or less constant. If the coupon on company X's bonds is 7%, their current price $50, and in turn their current yield just under 14%, say 13.5%. Then the current income in establishing a convertible arb. position would be 13.5% + the interest recieved on the proceeds received from the short sale of company X's stock.
Now that is assuming the IV of the embedded option stays put. Isn't it. The vega of such a position can be quite high (ttm can be far away). so the real risk here are IV movements, as well it can be used to one advantage. If for example one creates the position when the IV is low and waits until it increases ( theta must be low since of TTM far away). I'm just starting to explore this subject. pointers would be more than welcome.
thanks
I found that strategy:
Convertible arbitrage is undertaken through establishing a short position in the stock that the bond can be converted into. This practice, known as delta hedging, consists of dividing the price of the convertible by the stock price conversion premium and then multiplying by the option delta. Suppose a convert's price is $1000 and the company's current stock price is $50 with a 50% conversion premium, so the value of the stock price conversion premium is $75. Option delta is the movement in the price of the option for every 1% increase in the stock, suppose an option on this stock has a delta of 0.65. The amount of shares to short, hedge ratio, is then: ($1000/$75)*0.65=8.6667. During small price movements in the stock this short position will act as an effective hedge against a decrease in the price of the bond, since part of the price component of a convertible is conversion value. This helps create a market neutral position with returns solely dependent upon the coupon the bond is paying. During volatile markets this hedge breaks down and a large decrease in the price of the stock will result in a profit because the short position becomes more profitable then the losses from holding the bond. Conversely a large increase in the price of the stock results in a profit because the rise in the price of the convertible bond is greater then the loss from the short position. The central component of convertible arbitrage is the current income derived from a position. That is, the income if the price of the stock remains more or less constant. If the coupon on company X's bonds is 7%, their current price $50, and in turn their current yield just under 14%, say 13.5%. Then the current income in establishing a convertible arb. position would be 13.5% + the interest recieved on the proceeds received from the short sale of company X's stock.
Now that is assuming the IV of the embedded option stays put. Isn't it. The vega of such a position can be quite high (ttm can be far away). so the real risk here are IV movements, as well it can be used to one advantage. If for example one creates the position when the IV is low and waits until it increases ( theta must be low since of TTM far away). I'm just starting to explore this subject. pointers would be more than welcome.
thanks