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Trading the VIX
 

Firefox's picture
HF
(Orangutan, 274
 
Points)
 on 11/2/12 at 2:04pm

Does anyone know of any good books, websites or other sources of information on how instruments that track the VIX are structured and how to trade them?

Thanks a lot

Tags:
gammaovertheta's picture

Not sure about books, but

ST
 
Points)
 on 11/2/12 at 4:10pm

Not sure about books, but many of the ETFs available for retail investors are pretty dangerous. They rely on a variety of vix futures to track the vix, and therefore generally suffer serious time decay. The ETFs also occasionally undergo overnight gaps that are attributed to the futures rolling. They also aren't very efficient at tracking the VIX itself - they're composed of baskets of futures along different points in the term structure. Whether they're in the front end or farther out in the structure depends on which ETF you're using. You can take these warnings and multiply them if you're considering leveraged ETFs that claim to track the VIX.

Institutional players who want to trade the VIX tend to do so with variance swaps and vol swaps instead of ETFs for many reasons, including those listed above. They also do so through trading S&P500 vol in nearby options, as the VIX is meant to be an indication of the S&P's implied vol derived from the first and second months' index options. The options strategy is probably the best bet for a retail investor, though delta-hedging will be very expensive. Overall there is no cheap or efficient way to trade vol on the S&P (and this is what the VIX is intended to measure) for retail investors.

CaR's picture

gammaovertheta: Not sure

O
(Gorilla, 645
 
Points)
 on 11/2/12 at 4:15pm
gammaovertheta:

Not sure about books, but many of the ETFs available for retail investors are pretty dangerous. They rely on a variety of vix futures to track the vix, and therefore generally suffer serious time decay. The ETFs also occasionally undergo overnight gaps that are attributed to the futures rolling. They also aren't very efficient at tracking the VIX itself - they're composed of baskets of futures along different points in the term structure. Whether they're in the front end or farther out in the structure depends on which ETF you're using. You can take these warnings and multiply them if you're considering leveraged ETFs that claim to track the VIX.

Institutional players who want to trade the VIX tend to do so with variance swaps and vol swaps instead of ETFs for many reasons, including those listed above. They also do so through trading S&P500 vol in nearby options, as the VIX is meant to be an indication of the S&P's implied vol derived from the first and second months' index options. The options strategy is probably the best bet for a retail investor, though delta-hedging will be very expensive. Overall there is no cheap or efficient way to trade vol on the S&P (and this is what the VIX is intended to measure) for retail investors.

Awesome answer

I tell you, we are here on Earth to fart around, and don't let anybody tell you different.
Kurt Vonnegut

Revsly's picture

gammaovertheta pretty much

ST
(King Kong, 1,722
 
Points)
 on 11/2/12 at 4:41pm

gammaovertheta pretty much nailed it. The only thing I'd add is if you want a pure play on the VIX (and are not an institutional player) then trade the VIX Futures (obviously keeping in mind this is effectively forward variance).

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

Firefox's picture

gammaovertheta: Not sure

HF
(Orangutan, 274
 
Points)
 on 11/2/12 at 10:18pm
gammaovertheta:

Not sure about books, but many of the ETFs available for retail investors are pretty dangerous. They rely on a variety of vix futures to track the vix, and therefore generally suffer serious time decay. The ETFs also occasionally undergo overnight gaps that are attributed to the futures rolling. They also aren't very efficient at tracking the VIX itself - they're composed of baskets of futures along different points in the term structure. Whether they're in the front end or farther out in the structure depends on which ETF you're using. You can take these warnings and multiply them if you're considering leveraged ETFs that claim to track the VIX.

Institutional players who want to trade the VIX tend to do so with variance swaps and vol swaps instead of ETFs for many reasons, including those listed above. They also do so through trading S&P500 vol in nearby options, as the VIX is meant to be an indication of the S&P's implied vol derived from the first and second months' index options. The options strategy is probably the best bet for a retail investor, though delta-hedging will be very expensive. Overall there is no cheap or efficient way to trade vol on the S&P (and this is what the VIX is intended to measure) for retail investors.

Great response, that's plenty of extra stuff for me to look into. May I ask what trading desk you work on?
BTW, I'm not crazy enough to trade the VIX with real money; it's just for a simulation purposes.

And thanks to the others as well

msmandoo's picture

VIX ETFs gain exposure to the

 
Points)
 on 11/3/12 at 1:37am

VIX ETFs gain exposure to the VIX by constantly rolling over VIX futures according to their maturity profile, which means buying a VIX ETF is just as much a bet on the shape of the forward curve as a bet on overall market volatility. The negative carry is too large esp. these days due to central bank intervention crushing realized vols So what are you really want is a 2008-type global meltdown, where vols see massive spikes and forward curve is backwardated. Of course, this is quite rare, so you need to consider how much carry you are willing to pay to gain exposure to this.

If you're into more technical stuff, keep in mind that as as Revsly said VIX is essentially forward variance, which can be replicated by trading a portfolio of options with weights inversely proportional to strike. This means that buying a VIX ETF can be thought as betting on the term structure of skew to be inverted, which in my experience is quite rare.

zacharydavid's picture

Pancakes: Does anyone know of

PT
(Baboon, 132
 
Points)
 on 11/4/12 at 5:19pm
Pancakes:

Does anyone know of any good books, websites or other sources of information on how instruments that track the VIX are structured and how to trade them?

Thanks a lot

"Vix and More" is a blog pretty much dedicated to the VIX. You'll learn a lot going through their archives.

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