Hey guys, I was wondering if any of you had knowledge on the Vix. I've read that it's based on S&P options, but I was hoping if you could tell me more about it. Around Brexit and Trump election, the Vix spiked but immediately fell afterwards. If you invested in an inverse medium term ETF, you would be up a lot of money now. It seems like S&P price movements downwards increases volatility, but S&P price movements upwards decrease volatility. I was under the impression that volatility was simply expected standard deviation, so it should have a similar effect regardless of if price moves up or down.
Thanks
PM me, if you want. I'll answer your questions. I trade VIX products at a bank.
Delta is volatility of S&P 500 and VIX options' vega is the volatility of volatility. So iff you're looking to trade short term options, delta would be a bigger concern than vega. So for VIX options, you should typically be more worried about the volatility of S&P 500, than the volatility of volatility.
VIX is trading the volatility of volatility. So pretty much, it's the rate of change of volatility through VIX options. VIX tends to be very flat during bull markets and spikes during bear markets.
This statement is misleading - it depends on what you are trying to accomplish. Very easy to hedge delta exposure.
And again, this solely depends on the duration of the trade and the reason why is because delta increases closer to 1 as maturity approaches. So as delta increases, it will move closer to the underlying in the linear fashion and with this, you will need to constantly rebalance more than you would like. If you think hedging short-term options is not going to drain your profit, you're wrong. Delta hedging is very costly and chances are you won't make enough to break even by trading the vol.
If you wanted to trade VIX delta trade a VIX future, those are more liquid and have lower spread and it's a purer way to trade vix delta than an option.
People trade vix options for the vol of vol, it's a convexity trade. Can think of it in terms of spx skew, var vs vol, vol of vol, however you like, they're all equivalent.
You're kidding me, right? The VIX index and the VIX future move differently as they track different baskets of options. The VIX index tracks a basket of options that averages one month to maturity every day, where as the VIX future tracks a basket of options that has one month left to maturity on the date when the future expires. Therefore, VIX futures would follow arbitrage-free pricing to that basket of options, not to the basket of options used to create the VIX index. Please don't feed bullshit and call me out.
Well than again, it does move closer in sync with index, as it nears expiration.
FYI... heres why retailers shouldn't trade vol with frequent hedging..
Let’s say on the options trade, you have spent $1,000 in premium for a 3 month structure to get $X amount of gamma.
Now, let’s also suppose that each trade you make costs you:
$5 per trade and nothing in bid ask spread (you trade mid market). This is actually a realistic assumption if you only submit market on close (MOC) orders. Now, there are 21 * 3 = 63 trading days over a 3 month period. This equates to 63 * $5 = $315 just in transaction costs to get a daily delta hedging program going for your $1,000 structure.
In other words, you just spent 31.5% of your original investment in the options structure to monetize the gamma. This type of cost structure is not viable if your “ideal” payout for your structure is, say, 300%, which too is an unrealistic assumption if you plan on making that every-time.
In reality, your will have to make at least $315 per every $1,000 premium paying strategy you put on just to keep the operation going. That is not likely to happen.
To avoid this quicksand of transaction costs, you are better advised to delta-hedge at a lower frequency. Even hedging at a weekly volatility will cut your transaction costs by 80% - i.e. - you will only pay just $63 hedging your $1,000 premium structure in the example above.
Now, of course, if you are lowering your hedging frequency, you will also have to re-calibrate all your strategies to use weekly observations accordingly.
So, the lesson here is:
Hedge less frequently, preferably at a weekly freqeuency Spend premium on structures that do not depend heavily on scalping gamma at daily frequency. If you must trade at a daily frequency, consider negotiating a lower fee structure with your broker, or go for a super discount brokerage like Interactive Brokers. Even this, however, will not change this analysis.
The delta of a vix option is based on the the forward which is reflected by the vix future. I agree that you can't trade VIX spot but there is no product that enables you to do so.
I traded VIX options on the MM desk of a large American BB.
Be wary of ETF's involving the VIX.
Trading the VIX (Originally Posted: 11/02/2012)
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
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
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
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).
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.
"Vix and More" is a blog pretty much dedicated to the VIX. You'll learn a lot going through their archives.
$TVIX ftw
Trading VIX options (Originally Posted: 04/27/2011)
Just curious, I was looking at the VIX and it's an all time low (lowest in 34 months to be exact). Any sense in maybe buying some really long dated out of the money call options on it?
im no options expert but it probably matters less where VIX is at, than the implied vol on VIX through option premiums. also, the market looks thin after Aug11 expiry...not sure what you mean by "long dated" though.
do you have any fundamental views on VIX?
Not really. I was just looking at the VIX in relation to all the massive events that should have shook up the market - like the Japan EQ, US Debt downgrade, Budget etc. And I figured, despite that market indexes are surging (Dow,S&P etc.), but market volatility is low. I felt like that didn't make sense, and that the VIX was bound to shoot up in the long run. My hypothesis could have been entirely wrong.
The VIX did shoot up during those macro events (Japan earthquake, S&P's negative outlook on US debt, Egypt/Libya), but it came back down thereafter. All you need is another event akin to those and you will see the VIX rise.
I've been playing the VIX in the way you are proposing quite successfully!
I'd imagine the implied vol on the VIX is quite high and is rather skewed towards high-strikes, two reasons options on VIX as a punt with no real view might not be the best idea.
I see...I figured I'd bounce the idea around circles where people are actually involved with this and have the experience to give the idea a thumbs up, or just shoot it down. Obviously need to look into the spikes occurring with macro events too tho and perhaps trouble in Yemen might spell a rise. Thanks.
I'm giving you my unfamiliar guess, check it out to see if it rings true I don't know much about the equity vol world, just fx and rates, extrapolating about how I'd expect the surface to look.
Gotcha- I haven't really looked into the vol surface of the VIX. Not sure I would be able to derive a discernible pattern from it anyway. Thanks tho.
Before you trade VIX options you should know that the underlying for VIX options is the VIX futures contract. While right now the VIX is low , long-term VIX futures carry a delta (higher expectation because of VIX mean reversion) as well as vol of vol risk premium (no one is giving you free insurance in case vol goes up). So you may be buying long-term call, but prices for those will look as if VIX was at 25 instead of 15 (made-up numbers) Check out onlyvix blog for more info on VIX derivatives.
Got long some SEP VXX 20 Calls @ $4.70 last Thursday, pretty straightforward trade, although there are many other ways to do it (hedged). So far it's looking pretty good.
Question for you, does VXX rolldown affect the pricing of VXX puts? Had this debate with a few people, can't get a concrete answer.
VIX Options - Hedging or Trading Instrument (Originally Posted: 05/25/2010)
Any ideas how I can best use VIX options as a hedge in an option portfolio to offset my short vega positions (i.e. butterfly and an iron condor)?
Right now I have a fairly small income trading option portfolio ($20-30K) and am examining ways to use the VIX either as a hedging tool or perhaps as a trading instrument when IVs jump through the roof. Some had suggested to use VIX ETFs as a way to trade the VIX, but others had suggested they had actually received a lot of flak for inaccurately being able to track the VIX and that VIX futures was the best solution to take a position on the VIX. My question is has any one considered options on the VIX as a way to either hedge or place a bet on it? I know VIX options are a bit skewed in the sense that they price a reversion to a mean volatility level.
Any help would be appreciated.
It does not, in the same way that the positive drift of the SPX does not affect the pricing of SPX calls.
Bump...Any thoughts? I've used the search function and couldn't find an answer...
Trading the Vix (Originally Posted: 07/09/2012)
Anybody any experience trading the Vix in particular trading VSTX on the LSE? It tries to replicate the performance of the EURO STOXX 50® Investable Volatility Index. The overheads appear low enough and appears to be a useful strategy for hedging or as a trade itself. Any help appreciated. Regards Karl
Very volatile. I bought into VXX a few weeks ago and got crushed.
If you are going to trade the VIX i wouldn't encourage trading the ETFs because they inherently generate negative alpha in your portfolio unless you are going to be day trading them. Furthermore VIX ETFs experience a certain amount of decay every time the fund has to roll over it's futures contracts, and if the position is getting arb'd on rollover dates (most derivative based ETFs are) it just makes it worse. There is basically no way to profit off holding VIX ETFs in the long run, the only way to profit off of them is to day trade them. In fact if you read the prospectus for most VIX ETFs it will be clearly stated that holding these ETFs long term could cause your portfolio to lose a substantial amount of its value.
If you really want to use the VIX as a hedge buy actual VIX short term contracts but be careful as they are extremely volatile and are not necessarily vehicles meant for unsophisticated traders/investors.
Seconded. Look up TVIX and what happened with that. I would ONLY trade the VIX using options, but understand they are a different settlement than standard options. Only cash settlement and the way they trade is the implied future value of the vix at expiration, which is much different from other options. They also settle on wednesdays. I would understand the VIX inside and out, what it is, how it works and exactly why you are buying or selling volatility. Is it a hedge to the overall market? A single position? Frankly, if you are holding a position it is better to simply buy puts on your own position or even on the index than it is to buy the VIX. Grab a thesaurus and you'll find that the VIX and Gambling are synonyms.
I am aware of VXX and its disastrous performance but my query was regarding the VSTX on the LSE which appears a different animal. See two comparison charts i have uploaded title Trading the VIX Part II, Regards Karl
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