Long Volatility v Short Volatility
Hi All,
I've been taking a look at tail risk hedge funds and from what I understand, the few tail risk hedge funds that exist are 'long volatility' which means they are purchasing long dated out of the money put options. This is because they're looking for a tail risk event where markets collapse and these put options increase in value.
Is this correct?
On the flipside, someone who is short volatility is looking to take the other side of the trade in the hope that these options will continue to decrease in value as they expect there to be less volatility in the markets?
I recently spoke to someone who said they don't want to be long volatility, instead they want to be short volatility at the moment. My question is why would anyone want to be short volatility at the moment? Doesn't this seem to be an extremely risk play at the moment?
Any input would be most appreciated.
I'm looking into buying volatility right now. The VIX is at historic lows right now. The three year low was hit a week and a half ago. With the elections coming up in the US and possible crises in Europe and Iran, it looks like a bad time to be short volatility.
So what is your plan if the calm continues for the next two years? Volatility is clustered and regime oriented. There is a strong argument to be made that we could simply be seeing a regime shift into a period of low volatility and the market is pricing things [approximately] correctly. Many people bought VIX 20... then 18... then 16.... are they are getting carried out. There is a lot more to it than simply looking at the historical chart and seeing it is near or on the minima and buying it.
It is quite a bit more complicated than that. Most strategies are not simply long or short, as they are very time sensitive, have gamma to them, have gamma/vol distributed through a variety of areas on the volatility surface, etc. You cannot expect to just buy vol swaps and make a reasonable return / have a reasonable hedge from a tail scenario. Many of the strategies actually came from locals in the option pits who needed to own tail/wing units to cheaply lower their margin, while still collecting premium, but it just so happened that the tails were also underpriced, so owning the units in the ratio panned out really well when tail events happen.
You also have to consider the timing of all of it. You can be right that there will be a movement, but if your timing is off, you will blow out. Plenty of people do, including Taleb himself.
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Thanks CA, but he needs to talk to shorttheworld. I'm just the friendly quant who could never do a trader's job.
(As a sophomore, I also thought trading was easy.)
STW wasn't really managing longer term vol based positions IIRC. They were trading mostly short term directional and vol plays in equities.
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