VIX ETF/Futures/Options Discussion Thread

Quote from scriabinop23:

Missed the party...

The S&P opts are at 14.7% vol for May 2012. The VIX Apr (which is priced off the May S&P options) is priced at 20% right now.

Recommended methods of getting exposure to long vol without the time decay on May 2012 and maintain a clean hedge to the short VIX apr ? (must do it through S&P future options and some combo of delta hedging and dynamic option portfolio to capture the premium I imagine... is there a good easy lazy way? I see the vix opts are at parity with the futures, so no trade there.) Any link to a reference paper would be great...
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Found a Derman paper that suggested long vertical calls spreads in combo with some short butterflies, but caveat was I am only covered in a certain region. I want a good approximation to be covered in case we moved outside the price region. (some maybe multiple simultaneous such spread combos)

Some working examples would be great. (atticus-- where are you?)
 
Quote from scriabinop23:

Found a Derman paper that suggested long vertical calls spreads in combo with some short butterflies, but caveat was I am only covered in a certain region. I want a good approximation to be covered in case we moved outside the price region. (some maybe multiple simultaneous such spread combos)

Some working examples would be great. (atticus-- where are you?)
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Specifics? Hedging upside call short in VIX? Short flies OTM will be prohibitive R/R in my opinion. You can't afford to embed a bunch of flies (condors when overlapped) as you'll be seeing 5/3 risk as an example.

Are we still talking about the short VIX call // long SPY puts? In any event, yeah, I think it's a bit late to get in unless it's small. FWIW, I am long the APR/MAY futures calendar and long a fly in APR that is neutral to 18.00.
 
Quote from atticus:

Specifics? Hedging upside call short in VIX? Short flies OTM will be prohibitive R/R in my opinion. You can't afford to embed a bunch of flies (condors when overlapped) as you'll be seeing 5/3 risk as an example.

Are we still talking about the short VIX call // long SPY puts? In any event, yeah, I think it's a bit late to get in unless it's small. FWIW, I am long the APR/MAY futures calendar and long a fly in APR that is neutral to 18.00.
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The trade I meant is short VIX futures (Apr for example), long ES options (in a combo I've yet to figure out) to bet on vol converging at expiry. Need as close to a pure long vega exposure through the ES options as possible. Is only way to do it by going long vol as shown in page 8 here, then delta hedge to earn back the decay that happens for the holding period (which takes care of the need for zero theta?):

http://www.ederman.com/new/docs/gs-volatility_swaps.pdf

It doesn't seem riskless, because lets say t=0 = now, and t=1 = expiry, there could easily be less realized vol (captured via delta hedging) than was priced into the ES options I used to replicate pure long vol.

Please guide to the correct solution...
 
Quote from atticus:

Are we still talking about the short VIX call // long SPY puts? In any event, yeah, I think it's a bit late to get in unless it's small. FWIW, I am long the APR/MAY futures calendar and long a fly in APR that is neutral to 18.00.
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Yes. I think this is the same. The long SPY puts and maybe some long calls to capture vol if it for some odd reason upside vol acceleration occurred in the index (although it doesn't seem like that is the environment we are in - but for example, is happening in AAPL now). Can you let me know the strikes so I can model this... Want to see.
 
Quote from scriabinop23:

The trade I meant is short VIX futures (Apr for example), long ES options (in a combo I've yet to figure out) to bet on vol converging at expiry. Need as close to a pure long vega exposure through the ES options as possible. Is only way to do it by going long vol as shown in page 8 here, then delta hedge to earn back the vol (which takes care of the need for zero theta?):

http://www.ederman.com/new/docs/gs-volatility_swaps.pdf

It doesn't seem riskless, because lets say t=0 = now, and t=1 = expiry, there could easily be less realized vol (captured via delta hedging) than was priced into the spot options, but if some forward event in t=2 (the actual expiry of the ES option underlying) is propping vol up, I've losted a bit on theta, and still don't get convergence...

Thoughts?
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I'm traveling and my connection is poor. I'll read the paper shortly.

The cleanest trade is an 1:1 long APR/MAY futures calendar. I bot it at 2.35, so again it's a bit late to the party. Best practice and it's $600-$700 per contract in haircut. I expect it to hit 4.00 by 4/2/12.

You're short vol and vol of vol in APR. You can't isolate the term-structure in APR by going long a fly (swap approximation) and retain any edge. You could buy the VT futures but they're 90-wide.

I'll be back in a bit.
 
Quote from scriabinop23:

The trade I meant is short VIX futures (Apr for example), long ES options (in a combo I've yet to figure out) to bet on vol converging at expiry. Need as close to a pure long vega exposure through the ES options as possible. Is only way to do it by going long vol as shown in page 8 here, then delta hedge to earn back the decay that happens for the holding period (which takes care of the need for zero theta?):

http://www.ederman.com/new/docs/gs-volatility_swaps.pdf

It doesn't seem riskless, because lets say t=0 = now, and t=1 = expiry, there could easily be less realized vol (captured via delta hedging) than was priced into the ES options I used to replicate pure long vol.

Please guide to the correct solution...
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Unfortunately I don't think there is solution around the realized vs implied component.

You could sell VIX april, buy may listed in some kind of variance type strip and then sell april listed in some kind of variance type strip to flatten the gamma exposure. I will be shocked if you are able to make money after all the bid offer you will pay and basis risk you eliminate but you will have a more complete hedge.
 
Quote from sle:
(4) My preference in VIX is to play risk-neutral spreads (actually, in general I preferr beta-neutral trades, I am a p**** like that). I've found that the best way to find these weights is simple linear regression, even though Barcap research people swear by PCA weights.
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Hi, sle.

I found the quoted suggestment very interesting.

Would you mind explaining it more deeply?

1. What do you mean with «beta-neutral»?
2. What's the endogenous and what's the exogenous variables in you OLS linear regression model?

According to what I understood, I suppose you sell the short term futures and buy the long term one in a proportion dictated by the OLS weights; is it correct?

Thank you so much :)

Then I would attach the Barclays' paper: what do you think about calibrating the short-long weights according to VXV/VIX ratio, as shown on page 26?
 
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