VIX Futures set to roll 3/26

Quote from adonos:

Hi, I have some questions that are probably pretty stupid but hopefully someone will answer for me. :)

1. I guess this is trading at a premium to the VIX index. Why should the forward month be trading at a premium to the index and why would the back months have a larger premium? Is there any reason why the premium would be the value that it is?

2. Are there any arbitrage oportunities with these futures? What would one buy or sell if the futures got too far away from the index value?
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No pure arbs here, not until the options are trading. You can trade the convergence to the cash index, but it involves going long spx index option premium. A texas hedge would involve selling otm calls and selling vix futures -- if the vix rallies you inavariably would be looking at a declining call premium.

Regarding the backwardation situation in the futures: it's a linear relationship to the gamma curve along the time series, due to the fact this is a proxy for trading option volty.

I'll be getting my feet wet in this contract today, we'll see.

riskarb
 
Sold 12 of these bad-boys at an average a bit above 203.40 for the May contract. I'm gonna trade my Texas Hedge right now!

riskarb
 
Quote from riskarb:

No pure arbs here, not until the options are trading. You can trade the convergence to the cash index, but it involves going long spx index option premium. A texas hedge would involve selling otm calls and selling vix futures -- if the vix rallies you inavariably would be looking at a declining call premium.

Regarding the backwardation situation in the futures: it's a linear relationship to the gamma curve along the time series, due to the fact this is a proxy for trading option volty.

I'll be getting my feet wet in this contract today, we'll see.

riskarb
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Arb, it seems the new contract can be used to hedge vega risk, and rather imperfectly at that. But would serve as a rather crude gamma hedge.
 
The VIX is calculated from the near two contracts months for the SPX options. It is possible to arbitrage the VIX futures versus the SPX options strips (all the various strike prices for a given expiration date) that will be used to calculate the VIX when that VIX future settles. It is possible, yes, but in practice probably only profitable for market maker types like Goldman Sachs.

While I'm not aware of any relationship between the forward VIX curve and the treasury yield curve, there is a high correlation between the spot VIX and credit spreads. (Credit spreads are the higher interest rates paid by, say, corporate bonds to compensate for default risk.)
 
Quote from Aaron:

The VIX is calculated from the near two contracts months for the SPX options. It is possible to arbitrage the VIX futures versus the SPX options strips (all the various strike prices for a given expiration date) that will be used to calculate the VIX when that VIX future settles. It is possible, yes, but in practice probably only profitable for market maker types like Goldman Sachs.

While I'm not aware of any relationship between the forward VIX curve and the treasury yield curve, there is a high correlation between the spot VIX and credit spreads. (Credit spreads are the higher interest rates paid by, say, corporate bonds to compensate for default risk.)
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Absolutely correct, but as you say, wholly impractical(SPX strips)

riskarb
 
Quote from Hello_Dollars:

Arb, it seems the new contract can be used to hedge vega risk, and rather imperfectly at that. But would serve as a rather crude gamma hedge.
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Right HD -- was responding to the large futs premium over cash, but you're correct. Gamma and vega position are same-sign and behave rather predictably, unless you're very close to expiration.

The best play seems to be the convergence-trade, but I'm sure most of my VIX trading will be from the long-side, hedging my volty and (soft)gamma in short index puts.

FWIW, I foresee the VIX futures trading at a significant premium to the index -- seen as an analog to the +skew seen in index puts. But it should cotract a bit here -- I'd gather a 200basis premium will be seen within weeks.

riskarb
 
Quote from riskarb:

Right HD -- was responding to the large futs premium over cash, but you're correct. Gamma and vega position are same-sign and behave rather predictably, unless you're very close to expiration.

The best play seems to be the convergence-trade, but I'm sure most of my VIX trading will be from the long-side, hedging my volty and (soft)gamma in short index puts.

FWIW, I foresee the VIX futures trading at a significant premium to the index -- seen as an analog to the +skew seen in index puts. But it should cotract a bit here -- I'd gather a 200basis premium will be seen within weeks.

riskarb
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Yea, that makes a lot of sense. I'll be interested to see how the play develops for you. Good luck with it (though after yesterday's ES call, unlike the rest of us, luck is obviously the last thing you need).
 
Quote from Aaron:

The VIX is calculated from the near two contracts months for the SPX options. It is possible to arbitrage the VIX futures versus the SPX options strips (all the various strike prices for a given expiration date) that will be used to calculate the VIX when that VIX future settles. It is possible, yes, but in practice probably only profitable for market maker types like Goldman Sachs.

While I'm not aware of any relationship between the forward VIX curve and the treasury yield curve, there is a high correlation between the spot VIX and credit spreads. (Credit spreads are the higher interest rates paid by, say, corporate bonds to compensate for default risk.)
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Why would it be that there is a relationship between the VIX curve and the yield curve? I dont understand that. How does the treasury yield curve predict forward volatility in the SPX?

If they ever make options on the VIX futures contract, you could make a VIX of the VIX!
 
Quote from riskarb:



Regarding the backwardation situation in the futures: it's a linear relationship to the gamma curve along the time series, due to the fact this is a proxy for trading option volty.

riskarb
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Typo: the backwardation reflects the term-structure of Implied Volty, not the gamma directly.

riskarb
 
Quote from Hello_Dollars:

Yea, that makes a lot of sense. I'll be interested to see how the play develops for you. Good luck with it (though after yesterday's ES call, unlike the rest of us, luck is obviously the last thing you need).
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Will do, I was going to sell some calls, but decided to swing the VBI solo as I am short some delta. I am short 12 of the May futs.

riskarb
 
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