Isn't this alpha very fleeting. Requires you to recognize and at least have a feel for the probabilities as to how market prices will evolve. It's different every time.
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VIX Futures Trading
- Thread starter Straitjacket
- Start date
Isn't this alpha very fleeting. Requires you to recognize and at least have a feel for the probabilities as to how market prices will evolve. It's different every time.
Price in absolute terms means very little when it comes to spreads. In the absence of some edge related to the calendar or shifts in the shape of the curve I would rather sell vol outright.
My advice would be to stay away from spreads until you find some term structure alpha and can recognize and pick off dislocations.
Thanks for the advice.
What do you consider an example of a dislocation in the term structure? Or if can ask the question another way, what should I compare the term structure against to begin building a model or understanding of the relationships between the different months?
Btw - don’t answer if you feel that your handing out info. I’m just trying to figure out where to do more work.
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- Last week (Friday), I took an amateur approach to trading volatility. I Bought 5 x Volatility (VIX) JUL/AUG calendar spread (-JUL + AUG) for 0.02$. My required margin is ~2.5K CAD on this trade.
- Right now, the position is acting the way I hoped as I’m happy with its reaction to the heightened volatility (was expecting the spread to invert as the term structure flattened more or went contango).
- I asses my maximum possible loss in a catastrophe (if I sell at the worst moment) as around ~ 10K if we instantaneously get a 2008 type crash tomorrow.
- I am aiming for a $500-1K profit on exit in 2-3 weeks.
I’m sitting on a 25 percent mark-to-market loss on the position as the spread has widened from 2c to -10c.
It’s weird to say I’m ok with the loss but this is how I expected it to react given the context. I will be holding through the loss for the next couple of weeks.
My exit will be a 50 percent loss or a sustained inversion of the curve for more than 3 weeks without reprieve.
It’s weird to say I’m ok with the loss but this is how I expected it to react given the context. I will be holding through the loss for the next couple of weeks.
My exit will be a 50 percent loss or a sustained inversion of the curve for more than 3 weeks without reprieve.
Sorry I never follow up on this journal.
I will actually close this journal as I decided to commit to trading another product.
What I learned was the following:
- I do not understand the VIX complex. It's hard to have any confidence in what I am doing if my knowledge is superficial.
- The march market dive was a hard lesson to learn. Not in so far as the financial loss (which was very small, 3-4K). Rather, the realisation of how bad it could have been if I was trading with size and/or margin.
I may come back to this in the future, but for now, I think that this is trading 3.0 and I am trading 1.0 (in terms of skill level).
I will actually close this journal as I decided to commit to trading another product.
What I learned was the following:
- I do not understand the VIX complex. It's hard to have any confidence in what I am doing if my knowledge is superficial.
- The march market dive was a hard lesson to learn. Not in so far as the financial loss (which was very small, 3-4K). Rather, the realisation of how bad it could have been if I was trading with size and/or margin.
I may come back to this in the future, but for now, I think that this is trading 3.0 and I am trading 1.0 (in terms of skill level).
In all fairness you were short vol into the biggest vol spike since the financial crisis. It's a good lesson to learn early on if you are gonna trade vol long term. I've been trading vol for 15 years and still take huge hits every time the vix explodes. It's simply the nature of being short premium.
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In all fairness you were short vol into the biggest vol spike since the financial crisis. It's a good lesson to learn early on if you are gonna trade vol long term. I've been trading vol for 15 years and still take huge hits every time the vix explodes. It's simply the nature of being short premium.
Thanks Rally.
I have been reflecting on your advice earlier in the thread... (IE, not to trade the switches unless there is a specific reasons/alpha). However, I don't understand the "flows" enough to make this call.
I think I will start by trying to price the VIX myself as a first step by replicating the calculation in excel from the SP options strip. Do you think this is a good starting point?
I think I will start by trying to price the VIX myself as a first step by replicating the calculation in excel from the SP options strip. Do you think this is a good starting point?
No. The spreads often move independently of the vix, particularly in the events of one sided order flow. You need some kind of a relative value model that will show potential dislocations in the curve itself. Your goal is to catch the mean reversion to some predetermined fair value and not blow yourself up waiting for it.
No. The spreads often move independently of the vix, particularly in the events of one sided order flow. You need some kind of a relative value model that will show potential dislocations in the curve itself. Your goal is to catch the mean reversion to some predetermined fair value and not blow yourself up waiting for it.
Thanks Rally. Probably saved me time in the weeds.
I think I follow, I'll do some digging.