What's wrong with Iron Condors

Cache Landing · May 11, 2011

Quote from sle:

Short spot vix (the index itself, which is nothing but a fair variance swap), not futures (which are forward variance). My original suggested "test" was to use VIX index to figure out fair variance and test it against the realized variance in S&P.

Gotcha, you were just giving a theoretical use for VIX in back testing and not meaning to imply that shorting VIX is a direct substitution for a short Var Swap.

sle · May 11, 2011

Quote from Cache Landing:

Gotcha, you were just giving a theoretical use for VIX in back testing and not meaning to imply that shorting VIX is a direct substitution for a short Var Swap.

Yessir. Ok, my market is closed so I am gonna take a stab at opening a vol thread.

atticus · May 11, 2011

Quote from Cache Landing:

Gotcha, you were just giving a theoretical use for VIX in back testing and not meaning to imply that shorting VIX is a direct substitution for a short Var Swap.

It's not?

atticus · May 11, 2011

Quote from Cache Landing:

Not sure yet. I should probably spend a bit more time tweaking the inputs as I haven't been trading many options for a few years now. If I'm correct, these conditions would present about 12 times each year. Sometimes there might be a span of about two months with no trade.

Win:Loss should be about 8:1
Reward:Risk should be about 1:2
Algorithm was rather simple and could be automated

What I'm hung up on right now is whether it is better as a directional volatility trade, in which case the bear call vertical is most appropriate. OR is it better as a pure volatility trade, in which case a variance swap is much more useful and less convoluted.

The bear call vertical would allow for interim scalping opportunities as the favorable conditions occasionally persist for a couple weeks at a time, during which time the vertical would be fluctuating in value. These scalps are pure alpha and would be nice. Also, sometimes the UL would move hard in a favorable direction, which would allow early exit at close to max profit.

OTOH, the variance swap would decrease the need for any delta hedging and significantly reduce transaction costs. Although scalping would be significantly reduced and it would be more of a hold till expiry type trade. But the variance swap would would change the above r/r to look something more like;

W:L --- 2.5:1
Reward:Risk --- 1:1

Much to consider.

Why distinguish between a bear call and bear put spread? Why must one trade a call vertical? Any atm fly can achieve those results passively. Are you really trying to insinuate that there is some edge here?

If so, it didn't happen without more detail.

Cache Landing · May 11, 2011

Quote from atticus:

It's not?

Create a synthetic short VIX via Vix options.
Now take a short S&P variance swap.

Same r:r curve?

Cache Landing · May 11, 2011

Quote from atticus:

Why distinguish between a bear call and bear put spread? Why must one trade a call vertical? Any atm fly can achieve those results passively. Are you really trying to insinuate that there is some edge here?

If so, it didn't happen without more detail.

Preference for bear calls over bear puts comes with assignment issues. Has nothing to do with r:r profile.

Yes I believe there is an edge here, but I specifically haven't gone into greater detail.

atticus · May 11, 2011

Quote from Cache Landing:

Create a synthetic short VIX via Vix options.
Now take a short S&P variance swap.

Same r:r curve?

No, because the VIX options are marked to a forward var swap (futures). Just because it's a fwd swap doesn't make it less a var swap. Var swaps carry duration.

atticus · May 11, 2011

Quote from Cache Landing:

Preference for bear calls over bear puts comes with assignment issues. Has nothing to do with r:r profile.

Yes I believe there is an edge here, but I specifically haven't gone into greater detail.

SPX is Euro.

Right, understood. Trading verticals and gamma trading = edge. Sweet. So you're trading OTM short call verticals. And unless you're selling the 10-box over 10 it's not edge.

Cache Landing · May 11, 2011

Quote from atticus:

No, because the VIX options are marked to a forward var swap (futures). Just because it's a fwd swap doesn't make it less a var swap. Var swaps carry duration.

Exactly, but the point was that they are not traded the same. Vix always represents the forward price. For that reason, they will not serve the purposes of say a short vol 30-day variance swap.

Cache Landing · May 11, 2011

Quote from atticus:

SPX is Euro.

Right, understood. Trading verticals and gamma trading = edge. Sweet. So you're trading OTM short call verticals.

No, trading verticals randomly = no edge.

I'm suggesting certain conditions in which there might be a significant statistical edge in short vol on SPX.

This suggested the use of a var swap to profit from the conditions. Further analysis lead me to believe that there was more alpha to be had in adding a gamma scalp when possible. This made me lean more toward the bear vertical. SPX is euro but if left to expiry I still must deal with assignment issues, when the intent is to simply let all contracts expire. So bear call vertical is the preferred choice for those reasons.