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So, since index volatiliy is trading richly...
- Thread starter TskTsk
- Start date
Quote from TskTsk:
can't you just sell the straddle on say ES future options and then delta hedge it? Or am I missing something?
Sure you can, but it's not free money. There are lots of ways to get short premium and delta neutral, and they all carry the same risks. You're short vega for one - you may think index volatility is rich now but it can get a lot richer. Take a look at a long-term VIX chart. And you're short gamma, so every time the underlying moves your delta moves against you and you lose money there too.
Well, those risks go the other way as well. If you're long vola, VIX may go down, and you face theta risk instead of gamma. Historically speaking, realized vola has been below implied, so I'm thinking short has a better edge than long....but this is open to debate. ES options also a ~24hr market so no jump risks, and it has the most liquid underlyer in the world, the ES futures..
In the long run Realized Vol is lower than Implied vol. But in the short run this isn't always the case. Also when vols are high it's less likely that realized will be lower than implied.
That being said, I agree with you that SPX vol is too rich right now.
That being said, I agree with you that SPX vol is too rich right now.
Quote from TskTsk:
can't you just sell the straddle on say ES future options and then delta hedge it? Or am I missing something?
what maturity are we talking here?
are you going to be selling jun vol @ 22ish and hope greece doesn't blow up by then, because you know if we realize a 4% move between now and june expiry it will take a lot for you to make up your delta hedged position when ES gaps 4% while you're sleeping and the short gamma and vega blow up in your face.
Quote from Jgills:
what maturity are we talking here?
are you going to be selling jun vol @ 22ish and hope greece doesn't blow up by then, because you know if we realize a 4% move between now and june expiry it will take a lot for you to make up your delta hedged position when ES gaps 4% while you're sleeping and the short gamma and vega blow up in your face.
If the market goes down 4% overnight I'm not the only one whos going to be losing money. Plus as I've already said, ES has no jump risks as it's trading ~24hr.
Quote from TskTsk:
newwurldmn, I agree. short spikes may happen here and there. You mention high vols means less likelihood of realized below implied. Care to expand on this? Are there any papers on this?
I read a bank research paper 2 years ago which I no longer have. But generally as vols go up, realized goes up faster than implieds. There is expectation that there will be more calm in the future. Often the best time to buy vol is when vol is high. Of course, you can lose a ton on it if it collapses.
The best time to sell vol is when vol is low. Because there is expecation that something bad will happen in the future.
Quote from TskTsk:
If the market goes down 4% overnight I'm not the only one whos going to be losing money. Plus as I've already said, ES has no jump risks as it's trading ~24hr.
i'm not saying you're the only one losing money, i didn't know your p&l was calculated on a relative basis.
ok- es has no jump risk and you're computer is programmed to be hedging your delta continuously with no transaction costs. wake me up when we're back in reality
Quote from newwurldmn:
I read a bank research paper 2 years ago which I no longer have. But generally as vols go up, realized goes up faster than implieds. There is expectation that there will be more calm in the future. Often the best time to buy vol is when vol is high. Of course, you can lose a ton on it if it collapses.
The best time to sell vol is when vol is low. Because there is expecation that something bad will happen in the future.
Interesting. I've always thought if realized was high, there would be more fear in the markets both amongst option buyers (leading to higher demand) and sellers (pricing their sales higher). Kind of like "fear breeds more fear".