VIX ETF/Futures/Options Discussion Thread

[babutime]

Quote from sle:

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)

What I was referring to was that in the calculation of the value of the VIX, I don't think there's any actual variance swap trading going on. It simply uses the prices of options on the SPX to theoretically replicate a variance swap. Am I wrong, sle? I'd love to be corrected- knowing more is always better... lol

I understand how a variance swap can be replicated (and yeah the index doesn't jump around much- my bad. I should've thought of that before opening my mouth... so that invalidates much of what I wrote earlier).

As for Taleb, I thought that paper was very interesting in terms of how people viewed standard deviation. He goes off into esoteric topics most often and is a bit of a turn off but I think he's had some very useful insights into the markets.

 

[sle]

Quote from babutime:
What I was referring to was that in the calculation of the value of the VIX, I don't think there's any actual variance swap trading going on.

Well, VIX index is just a mangled-up calculation of fair variance strike (not fair value) of a 30 calendar day variance swap. So not, no variance swaps have to trade in the market of the VIX index to be calculated. The fair value of VIX futures does have to do with where variance swaps are trading. However, the VIX futures are a pretty tricky instrument once you start thinking about the details.

 

[babutime]

Quote from sle:

The fair value of VIX futures does have to do with where variance swaps are trading. However, the VIX futures are a pretty tricky instrument once you start thinking about the details.

And those swaps would be the replicated swaps (continual hedging) correct? Unless there's actual swaps being traded... now that would be new to me...

 

[sle]

Quote from babutime:
And those swaps would be the replicated swaps (continual hedging) correct? Unless there's actual swaps being traded... now that would be new to me...

Variance swaps is a very liquid market, key maturities trade in size daily so you can always gauge if VIX futures are rich or cheap vs the variance swap market. In general, levels for were var swaps trade in the market are a touch above (right now about 50bps for Dec12) where the theoretical price would be implied by the strip.

 

[sellindexvol66]

Quote from babutime:

And those swaps would be the replicated swaps (continual hedging) correct? Unless there's actual swaps being traded... now that would be new to me...

so once you score the FV of a vix future; what can you do with that? lol

 

[trefoil]

Quote from sle:

Variance swaps is a very liquid market, key maturities trade in size daily so you can always gauge if VIX futures are rich or cheap vs the variance swap market. In general, levels for were var swaps trade in the market are a touch above (right now about 50bps for Dec12) where the theoretical price would be implied by the strip.

Are we talking about symbol VT or something else?

 

[babutime]

Quote from sellindexvol66:

so once you score the FV of a vix future; what can you do with that? lol

You can go long, you can go short, or you can let "sellindexvol66" tell us what to do with it.

I've never traded futures as a product or the VIX options specifically. Your name implies you trade volatility so I'm assuming you can reply to that?

[I don't know what the FV of a futures contract is]

 

[sle]

Quote from trefoil:
Are we talking about symbol VT or something else?

variance swaps trade OTC (in IDB or with institutional clients)

 

[trefoil]

Quote from sle:

variance swaps trade OTC (in IDB or with institutional clients)

Craps. I was afraid of that.

 

[sellindexvol66]

Quote from babutime:

You can go long, you can go short, or you can let "sellindexvol66" tell us what to do with it.

I've never traded futures as a product or the VIX options specifically. Your name implies you trade volatility so I'm assuming you can reply to that?

[I don't know what the FV of a futures contract is]

babubooeye, you are correct in what you can do. i contend most should not. i am also not interested in saying how i do it in any case.