Ok, I know the general rule of thumb is to short in VIX contango and get out in backwardation if you are a shorting this particular ETF. But looking at the charts the biggest gains are after spikes, when the VIX is in backwardation, even with the daily negative contango headwind. In fact, adding to a position in backwardation after a sharp spike, seems quite logical -- like buying low after a crash in stocks. What am I missing? Thanks in advance.
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UVXY backwardation question for short vol traders
- Thread starter Kirribilli
- Start date
Ok, I know the general rule of thumb is to short in VIX contango and get out in backwardation if you are a shorting this particular ETF. But looking at the charts the biggest gains are after spikes, when the VIX is in backwardation, even with the daily negative contango headwind. In fact, adding to a position in backwardation after a sharp spike, seems quite logical -- like buying low after a crash in stocks. What am I missing? Thanks in advance.
You are missing a black swan event like a flash crash or Black Monday.
Try modeling a day with a move of 25% drop, imagine what your VIX futures will look like. They are much more volatile than stocks. Market can stay irrational longer than you can stay solvent.
If I am long a put Leap, I decline to 0 in a black swan. Consider the price of the option, that's why many people, I hear use the Leap strategy instead of shorting the ETF, although you can I image hedge that with long calls.
Sorry, I just replied to the wrong UVXY post. What I meant to say was I hedge with OTM long calls on my short ETFs, hits the bottom line but avoids a massive drawdown.
Btw, not shorting the VIX futures, as its harder to get a precise hedge. Using short UVXY and sometimes VXX,
Sorry, I just replied to the wrong UVXY post. What I meant to say was I hedge with OTM long calls on my short ETFs, hits the bottom line but avoids a massive drawdown.
Is it a constant hedge? How are the spreads on these options? These will definitely eat into your performance.
Another factor to consider is when the market enters into backwardation for long period of time. This has been rare in the past but imagine a long protracted financial crisis. You don't want to square your position because you are betting on mean reversion but backwardation will bleed you. It's important to consider all this when designing a robust backtest for this strategy. Not saying it can't work but it's easy to just fit to recent periods and walk away with sharpe + 1
Ok, I know the general rule of thumb is to short in VIX contango and get out in backwardation if you are a shorting this particular ETF. But looking at the charts the biggest gains are after spikes, when the VIX is in backwardation, even with the daily negative contango headwind. In fact, adding to a position in backwardation after a sharp spike, seems quite logical -- like buying low after a crash in stocks. What am I missing? Thanks in advance.
You are not missing anything. Short VIX when it's in contango and long VIX when it's in backwardation and hedge when necessary.
Long put leaps is just preventing time decay but it's way too expensive.