Spreading Vix and VXZ

S

stevenpaul

I am interested in your views on an idea: Selling straddles on VXZ to finance long straddles on VXX.

Currently, the December straddles on VXZ are trading at a midpoint of $5.12. VXX straddles of the same expiration are at $10.12. Selling VXZ straddles and using the money to buy VXX straddles sounds interesting to me because I feel like the risk is well hedged.

VXX tends to move at least twice as much as VXZ in either direction, and usually more. Its contango cost is generally more than double that of VXZ, and when it spikes, it goes up more than double VXZ. During the Covid spike of March, 2020, VXZ doubled while VXX went up 4-fold.

What are the risks of this spread and does it seem potentially profitable?
 
OptionsOptionsOptions said:
!!! NO NO NO !!!

Straddles are too expensive - pick a direction and go with Calls or Puts only.
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Straddles can be expensive. They can also be inexpensive and a good store of value. It all just depends on the volatility regime of the moment. I wouldn’t call straddles cheap right now as such, but the whole point of the strategy is that the long straddle is financed by the short straddle. The trader doesn’t put up any money. Now if VXX were disproportionately expensive relative to the VXZ, this strategy would not be a good deal. But that is not the case, at least not now.

As to the question of choosing a direction, I thought about doing this with puts alone, financing the purchase of VXX puts (which will most likely perform well due to the inevitable contango decay). But why not have exposure to a move up, which will come along eventually (and suddenly). These explosions in volatility come out of the middle of nowhere.
 
stevenpaul said:
I am interested in your views on an idea: Selling straddles on VXZ to finance long straddles on VXX.

Currently, the December straddles on VXZ are trading at a midpoint of $5.12. VXX straddles of the same expiration are at $10.12. Selling VXZ straddles and using the money to buy VXX straddles sounds interesting to me because I feel like the risk is well hedged.

VXX tends to move at least twice as much as VXZ in either direction, and usually more. Its contango cost is generally more than double that of VXZ, and when it spikes, it goes up more than double VXZ. During the Covid spike of March, 2020, VXZ doubled while VXX went up 4-fold.

What are the risks of this spread and does it seem potentially profitable?
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how did you get “ December straddles on VXZ are trading at a midpoint of $5.12”?

When you say straddle, what are the exact two option legs?
 
I set up the trade with the NBBO as listed on Interactive brokers at the time of the original post. 5.12 was the exact midpoint between the bid and offer, which I have found usually gets hit sometime during the trading session. The midpoint of VXX spreads gets picked off almost instantaneously on most days, such is its liquidity.

As to strikes, I was using the closest strikes to the current market value of the underlying, 26 at the time. Both put and call at 26.
 
stevenpaul said:
I set up the trade with the NBBO as listed on Interactive brokers at the time of the original post. 5.12 was the exact midpoint between the bid and offer, which I have found usually gets hit sometime during the trading session. The midpoint of VXX spreads gets picked off almost instantaneously on most days, such is its liquidity.

As to strikes, I was using the closest strikes to the current market value of the underlying, 26 at the time. Both put and call at 26.
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Haven't checked actual prices, but ATM is usually higher than the current underlying price as options are priced on forwards, not spot.
Go for the strikes that have 50 deltas
 
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