riskarb's trading journal

[El OchoCinco]

I think the recent IV spike shows how on fast drops the VIX calls do provide a significant partial hedge. How effective they are depends on how much of the potential profit one is willing to invest. It has to be significant for the hedge to work ( in other words, 50 contracts is a blip, 1000 contracts is a ncie chunk).

One approach could be to purchase the ATM or OTM calls for 3 months out and have quarterly coverage, so to speak... Still a new product so hard to come up with fast rules.

Quote from IV_Trader:

OC , agree , spead of drop is important. That why I'm thinking of taking position for a shorter time period (7-10 days). Also , if one of his posts Risk pointed that house edge for initial position should be = one day of time decay.

Don't like double No Touch(too much of house edge), I'm directions clueless trader ( not sure if its a bad thing ) , rather stay with vols cycles , so No Touch with VIX hedge make sense for me.

 

[fader]

Quote from volatilitypimp:

It is being marketed to retail investors through Morgan Stanley distribution channels, and--although structured through options--it is designed to mirror credit-default swap portfolios.

sounds like the big boys got sick and tired of being burnt by Enrons, GMs and Uniteds (wasn't Sprint, which is on the list, already bankrupt once, and TimeWarner's AOL disaster could have ended much worse) - so they are having trouble laying off default risks onto the institutional side - ah, there's ma' and pa' to unload the stuff onto.. plus earn huge margins as customary with structured products.. - as if ma and pa are not already exposed to corporate defaults via their mutual and all - this smells of Bankers Trust taking their "sophistication" to the retail level.

 

[riskarb]

Quote from IV_Trader:

OC , agree , spead of drop is important. That why I'm thinking of taking position for a shorter time period (7-10 days). Also , if one of his posts Risk pointed that house edge for initial position should be = one day of time decay.

Don't like double No Touch(too much of house edge), I'm directions clueless trader ( not sure if its a bad thing ) , rather stay with vols cycles , so No Touch with VIX hedge make sense for me.

You shouldn't use VIX to hedge vega on the short duration play. The 7-10d don't carry any vegas.

 

[IV_Trader]

Quote from riskarb:

You shouldn't use VIX to hedge vega on the short duration play. The 7-10d don't carry any vegas.

not trying to hedge Vega , I am trying to capitalize on long VIX option's gains in case of rapid price drop in spot ( inverse correll)

 

[riskarb]

Quote from IV_Trader:

not trying to hedge Vega , I am trying to capitalize on long VIX option's gains in case of rapid price drop in spot ( inverse correll)

Right, but the no touch generates gammas very quickly on these short durations. A move to one sigma lower may not produce a change in VIX, but your no touch will be generating huge numbers.

 

[momoneythansens]

Perhaps I'm being dense but I can't see how this can be made to work as a reliable hedge for bull no touch barriers. Perhaps as pure speculation or as longer term portfolio insurance.

I need more convincing otherwise...

There's no way to compute or model vol correlation with a drop in the underlying IMO. If you know how, be sure to let me know

If vega hedge is intention, I would suggest it is better to go long vanilla vega with the added and more important benefit of also being long gamma too? I'm currently at a loss to see the benefit of being a further level removed from spot vols.

I'm aware that some people have realized success with VIX call options recently, but I'm not convinced that a sample size of 1 is large enough to warrant drawing any conclusions with respect to the general efficacy of this product.

Furthermore, conspiracy theorists would suggest that the recent market correction was designed purely to make sure that the VIX options product didn't disappear in to obscurity as another failed product LMAO.

The large % increase in VIX spot/forward in recent days could merely be a reflection of a fundamental shift in the market. Moving forward if/when things settle down, % changes might not be so marked in general. Time will surely tell

I'll be experimenting along with everyone else. I hope that liquidity improves further and even better, more strikes are listed.

MoMoney.

Quote from optioncoach:

I think the recent IV spike shows how on fast drops the VIX calls do provide a significant partial hedge. How effective they are depends on how much of the potential profit one is willing to invest. It has to be significant for the hedge to work ( in other words, 50 contracts is a blip, 1000 contracts is a ncie chunk).

One approach could be to purchase the ATM or OTM calls for 3 months out and have quarterly coverage, so to speak... Still a new product so hard to come up with fast rules.

 

[Crucis]

Quote from fader:

sounds like the big boys got sick and tired of being burnt by Enrons, GMs and Uniteds (wasn't Sprint, which is on the list, already bankrupt once...

I was surprised too, to see Sprint on the list. No, Sprint hasn't ever been bankrupt. They did have a near merger with MCI in 2000 that didn't go through. Sprint merged last year with Nextel and spun off Embarq last month. Embarq was created from Sprint's local division which is similar in size to Bell South.

Sprint Nextel retained the wireless divisions of Sprint and Nextel and Sprint's Long Distance and international ventures.

 

[El OchoCinco]

I think the suggestion would be to combine short ES and some VIX calls to hedge against sudden drops in the index and slow bleeds as well. I may not have a specific correlation between market drops anf VIX increases but they are negatively correlated on fast moves such as the last few weeks and on slow moves the ES shorts will hedge.

I know the barrier is gamma heavy and a slow move will require more ES shorts to hedge on the way down. However the few times the market drops quickly, the VIX hedge should work out as a nice cheap insurance policy for times like last week and like post-Katrina. I think you can spend a small amount of the potential profits and let it sit potentially. it is still a new product but it is providing some interesting partial hedges for quick volatile drops.

Quote from riskarb:

Right, but the no touch generates gammas very quickly on these short durations. A move to one sigma lower may not produce a change in VIX, but your no touch will be generating huge numbers.

 

[fader]

Quote from Crucis:

I was surprised too, to see Sprint on the list. No, Sprint hasn't ever been bankrupt. They did have a near merger with MCI in 2000 that didn't go through. Sprint merged last year with Nextel and spun off Embarq last month. Embarq was created from Sprint's local division which is similar in size to Bell South.

Sprint Nextel retained the wireless divisions of Sprint and Nextel and Sprint's Long Distance and international ventures.

ok, thanks for correcting, i wasn't sure - i just think that leveraged put selling is one of the riskiest areas of trading; it's the realm of highly sophisticated and well-capitalized institutions - now when these smart guys want to buy puts from you, you have wonder why they are so eager to share a piece of their lucrative business with you; surely it's not because they are feeling ultra charitable - instead of helping them to unload risk for their high fee paying clients, i'd look at buying LEAP puts on some of the dogs from their list; it looks like there's gonna be some skeletons coming out the closet in the next few years.

p.s. in fact, the fact that Sprint hasn't been bankrupt probably makes it a more likely candidate to become one, surely they haven't included GM on that list.

 

[fader]

Quote from optioncoach:

I may not have a specific correlation between market drops anf VIX increases but they are negatively correlated on fast moves such as the last few weeks and on slow moves the ES shorts will hedge.

i think i have seen either an academic paper or actual trading record detailing the relationship between VIX fluctuations and S&P fluctuations - i can't think of where i saw it, i may have it somewhere in my archived files - clearly it's a non-linear and non-stationary relationship; the added complexity with VIX options is that you'd have to study not VIX vs S&P but the forward volatility curve for (VIX option expiration + 30) days vs S&P fluctuations - given limited historical data, it might be difficult to derive a comfortably reliable relationship.