I'm sure. They probably go to bed saying to themselves, "I would have made money if Greece defaulted. What are those politicians doing?" but I also have learned that don't push your luck too much on the short vol. Eventually you will get burned. Hope the stove isn't at 500 degrees then.
VIX ETF/Futures/Options Discussion Thread
- Thread starter mahras2
- Start date
I'm sure. They probably go to bed saying to themselves, "I would have made money if Greece defaulted. What are those politicians doing?" but I also have learned that don't push your luck too much on the short vol. Eventually you will get burned. Hope the stove isn't at 500 degrees then.
cache per your 3/19 post i hope you covered..since monday that switch has run to 220/230!!! helluva week so far for vol sellers.
I like the Apr/May switch at 3. Buy Apr, Sell May.
If nothing happens you breakevenish (maybe make or lose 1/2 point) and if there is a selloff, the spread will be < 3 and possibly inverted.
...speaking of which, John Dizard's weekend column in the FT was all about the Vix, and had this to say:
Two things jump out of this:
1 - I started up a new - still small - position in May last week, and on Friday I experienced, on a tiny scale, what Dizard may have been talking about as to how on big down days you have to keep adding on. I went negative on vega in the first half of the day because the SPY put spreads were all well in the money. Figured I needed to add a little to put it back to positive. So I added one 137/131 @1.45, financed with a 19/23 Vix May call spread that I sold for 1.43. SPY was approaching 138 when this executed, and of course ended very close to 137. This made my vega slightly positive for the open tomorrow.
2 - "Forward start variance swaps": did a little research on this, and the first part is simple: forward start just means it starts at some point in the future with an underlying whose price is not yet known, of course, because of that future start. Variance swaps are swaps that pay off the diff between implied and realized vol. Now I don't recall seeing that either the options or the futures on Vix are based on variance swaps. The options I always understood to be options on the Vix futures, and the Vix futures I always thought were just futures on the Vix itself. Is Dizard right about this? And if so, does it matter? Do I really care?
I don't believe there's any "variance swap" involved as in a real swap where cash is exchanged when realized vs expected vol prices differ based on some notional amount.
What IS involved in calculating vix itself is the OTM calls and puts of options expiring in 30 days (which is usually a weighted average of two different expirations since only once in a while do you get an option expiring in 30 days..)
And he's right to a degree. You're not really buying volatility when you buy the VIX. The VIX attempts to isolate in its pricing only the volatility component as proposed by Derman in his quite long paper (I've always hated reading it). Continual hedged portfolios (keyword- portfolio. Hence the use of SPX) resemble a variance swap says Derman. But he makes assumptions:
The most important (and glaringly erroneous ) assumption is this:
I think we all know why that might not be a suitable assumption which leads to why VIX doesn't (completely) reflect volatility, which is why (to a larger degree) that author might be right.
I'd be willing to read more by others (and without a doubt far more experienced practitioners than I) on this...
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This is neat too. I always find it amusing to read...
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970480
I think you need to understand (in order of importance)
(a) what a variance swap is and how to replicate it (and yes, it works, the jump component on SPX is relatively small)
(b) what forward variance swap is and how it can be linearly replicated via spot-starting variance swaps
(c) what is the exact definition of the vix futures and why a vix futures contract is NOT a forward variance swap
Additional points are:
1. So far, my experience have been that majority of people who trade VIX products have no real clue what they are talking about
2. Anything that has the Talebs name on it has to be taken with a brick of salt (e.g the paper you have linked up)
i certainly hope the part time vix traders re read your points. i will add from my experience that anyone who trades vix products who is not dedicated to it full time will get wacked, and if they do not get blown out right away wins would be pure luck imo. this stuff is complicated, most guys would be better off trading traditional stuff.
Many thanks. I'm putting someone on this whole thing, both reading up on it and executing various strategies on paper to see how it all plays out, while I diddle around in small lots doing stuff for real for comparison purposes. Don't know if we'll go all out once we're done, but I figure the research into how this all works will help in other areas, so it'll still be time well spent.