Trading the VIX?

[sinner]

LOL we have probably driven the poor OP to the corner!

so what do you reckon is the worst case that can happen to a futures spread? In other words what would be the widest a near/mid month spread could get either in contango or backwardation?

Funny 'cos we might see 'worst case' soon? Expectations of future vol blow out but "Bernanke put" continues to keep short term vol downtrend.

I like mazzas suggestion too, but then again can't remember a suggestion he made that I didn't like.

 

[tothemax6]

How does a volatility tracking fund work? How would it 'buy' volatility?

 

[craigj]

ok i started this thread and realise as a novice i am in over my head understanding all the futures/options talk.

i see the VIX chart and realise a few fundamentals

it rarely trades below 15 so that is a relatively safe stop loss point.

it moves with a large range each day


if you set buys at 16 17 and 18 and sells at 17 18 and 19 and reenter a buy after a sell level is reached the system could operate for a long period before a stop is hit (6 unit loss)


bonus is that buying at the low levels gives an opportunity for slippage to the upside when volatility returns to the market overnight.


OK now is some form of this system possible ?

 

[mazzatelli]

so what do you reckon is the worst case that can happen to a futures spread? In other words what would be the widest a near/mid month spread could get either in contango or backwardation?

The last time I looked at these was late '09. The largest divergence I'd seen b/t the spread and term structure was ~3 handles [20 days to expiry, front month].

Because distance b/t contract months and to cash, if you're long the futures calendar you could lose more than the debit, unlike stock option calendar spreads where all expiries settle to one Px.

 

[village idiot]

this is from some email spam that arrives daily from some crew called 'Terrys Tips'. There is a lot of bollocks in it although pertinent to this thread....

for a start VXX reps i think the front two futures months which, since april expires today, are may at 20.65 and june at 22.05 (figs from last night), so he wont be buying anything at 15.23
he might have written that the day before though i suppose.

Option Tip of the Week


What to Do About the VIX Crash:





As most of you know, VIX is the volatility measure based on option prices of the S&P 500 tracking stock, SPY. It has fallen all the way to 15.23, the lowest level we have seen in over four years.




VIX is the so-called "fear index," and historically has moved higher when there was uncertainty (or lower stock prices) in the market. Back in 2007, a VIX this low was probably appropriate. The stock market had been on a slightly-upward flattish direction for many months, and there was little unrest in our domestic economy or around the world.



But today, there seems to be uncertainty all over the place. Some people are talking about the possibility of a double dip recession, while others focus on escalating oil prices, high unemployment, repercussions from the Japanese disaster, and/or unrest all over the world.



So where has all the market fear gone? There are a huge number of uncertainties in the current economic world, both at home and abroad, and the market seems to be ignoring them.



Over the years, VIX has shown a strong inclination to revert to the mean, and the mean is about 20. I think it is inevitable that VIX will climb back up toward, or above, 20 in the near future.



A Time to Buy VXX?



This stock is highly correlated to VIX. It closed yesterday at $27.55, the lowest price it has ever recorded in its 2 1/4 years of existence. For a couple of months in the last year, VXX traded in the $100 - $130 range to give an indication of just how high it might go. Just a month ago, it popped up to $38 when the Mid-East crisis started (you may remember that I sold it short at that price, and bought it back in two weeks when it had fallen to about $30). Now I personally plan to buy VXX at the current level.



On one hand, I believe that it is highly unlikely to go much lower, and on the other, I expect that some unforeseen event will surely come along at some point to spook the market and send VIX and VXX sharply higher.



Another way to play VXX is to buy the stock and write a call against it, or at least against some of it. The May-11 30 call can be sold for $1.20 which would give you at least a 4% gain for one month if the stock closes below $30, or better than a 13% gain if it closes above $30, the call you sold is exercised, and you lose the stock. Either scenario does not seem so bad for a single month.



The key assumption here is that VXX is quite unlikely to trade any lower than it is right now. I believe that this is a reasonable assumption to make. While it might trade lower temporarily, history says that it won't stay down there for long.



If the month goes by and the call you sold expires worthless, presumably you could sell a June option for a similar amount, and set yourself up to enjoy a 4% gain every month that the stock does not get higher than $30. As a general rule, I do not like writing calls against stock I own, but this case is a little different because I believe the stock is unlikely to move much lower.



I plan to sell only half as many calls as I buy VXX, keeping some uncovered stock just in case it skyrockets to the $120+ level that it enjoyed as recently as April, May, June, and July a year ago.



VXX has been recognized as one of the best hedges against a falling market. Some analysts have stated that a $10,000 investment in VXX will protect a $100,000 market portfolio of stock (although my estimate is that it would take about a $25,000 investment to accomplish that).



In any event, I think it is a good buy right now, being at its lowest level in its entire existence.



Happy trading.

 

[mazzatelli]

ok i started this thread and realise as a novice i am in over my head understanding all the futures/options talk.

i see the VIX chart and realise a few fundamentals

it rarely trades below 15 so that is a relatively safe stop loss point.

it moves with a large range each day


if you set buys at 16 17 and 18 and sells at 17 18 and 19 and reenter a buy after a sell level is reached the system could operate for a long period before a stop is hit (6 unit loss)


bonus is that buying at the low levels gives an opportunity for slippage to the upside when volatility returns to the market overnight.


OK now is some form of this system possible ?

No
As discussed - cash does not track the futures.
The other issue is that the VIX itself is a volatility product, you can't avoid the non-linear risks.

If it were that easy to trade mean reversion characteristics of volatility, then it could be applied to all products using option spreads to isolate vol. Here is Google, then using the proposed idea, buy at 20% vol, sell at 35%? Not that simple

​

 

[village idiot]

thanks to this thread i had a number of open positions in VIX options and futures spreads. they rock by the way. all on IAB.

woke up this morning and my total margin appears to have doubled overnight resulting in some positions being liquidated, and interestingly they have chosen to liquidate all my vix futures spreads first. I have had similar positions running overnight for a while, so its not an 'overnight' thing.

the margin statement for yesterday isnt available yet so i cant see excatly what is causing it.

anybody able to shed any light on it? like is there a rule i dont know about maybe margin doubles on any weekend with a royal wedding in it or something?

signed
baffled of perth

and heres an article that may be of interest;
http://www.minyanville.com/business...48?camp=syndication&medium=portals&from=yahoo

 

[SuperGlue]

thanks to this thread i had a number of open positions in VIX options and futures spreads. they rock by the way. all on IAB.

woke up this morning and my total margin appears to have doubled overnight resulting in some positions being liquidated, and interestingly they have chosen to liquidate all my vix futures spreads first. I have had similar positions running overnight for a while, so its not an 'overnight' thing.

the margin statement for yesterday isnt available yet so i cant see excatly what is causing it.

anybody able to shed any light on it? like is there a rule i dont know about maybe margin doubles on any weekend with a royal wedding in it or something?

Very likely Expiration Date...............................................
Link to calendar:

http://www.cboe.com/AboutCBOE/xcal2011.pdf

 

[village idiot]

no, not expiration date.

margin report now available, it turns out it is because i was short 2 straddles in AMP, and the margin report on 29th april now has me short 20 straddles, with result margin has been multiplied by 10 for that position.

i suspect this may be to do with the changing over from 1000 to 100 shares per contract, due to happen starting may in alphabetical order. next monday is may, AMP is near the beginning of the alphabet. I suspect someone or some computer has changed the 'number of contracts' without simultaneously changing the margin per contract.

If i am right about this then presumably anybody with any short positions in asx stock options with IAB is going to have the same thing happen.

the ****s really going to hit the fan when they get to BHP...

 

[SuperGlue]

no, not expiration date.

margin report now available, it turns out it is because i was short 2 straddles in AMP, and the margin report on 29th april now has me short 20 straddles, with result margin has been multiplied by 10 for that position.

i suspect this may be to do with the changing over from 1000 to 100 shares per contract, due to happen starting may in alphabetical order. next monday is may, AMP is near the beginning of the alphabet. I suspect someone or some computer has changed the 'number of contracts' without simultaneously changing the margin per contract.

If i am right about this then presumably anybody with any short positions in asx stock options with IAB is going to have the same thing happen.

the ****s really going to hit the fan when they get to BHP...

Refer to Interactive Brokers Troubleshooting thread.
Someone had similar problem.

https://www.aussiestockforums.com/forums/showthread.php?t=8295&page=43

 

[notting]

Just wondering if this (VXX) thing is just a peace of junk invented (11/09/2011)after the GFC to lure people into thinking it would track the VIX. It does not resemble the VIX moves.
It has had a couple of big volume spikes recently and seems to be bottoming. Yet if it does not track the VIX and is supposed to resemble that to some degree. It's hard to understand what would make it go back up. All it has done is fall since conception.
Is it just peace of rubbish?


Or is there something fundamental that could actually make it move north at some point?
It just seems like an intraday hedge tool that is going to eat itself to .00001 over more meaningful time. Weird!

 

[village idiot]

It is well documented all over the interweb that VXX has a structural downward bias whenever the VIX/futures term structure is in contango, which it is most of the time and has been pretty well since VXX was invented, save for brief periods of terror.

Except in said periods of terror when vix spikes sharply, it is doomed to march ever downwards towards (nearly) zero at a rate approximately 10% per month, and in fact would already be nearly there were it not for periodic reverse splits. It only looks like it is bottoming because the chart is linear - put it on a log chart and it is a relentless straight line down.

Although the term structure is flattening out these days and may one day reach a point the structural bias doesn't exist briefly.

It is a piece of rubbish from a long or hedging point of view for sure.

 

[notting]

VXX should have a ticker of SMT. Sadomasochist.
Wonder if any provider out there would allow you to short it?
It seems odd that as soon as they realised the the structural flaws it was not liquidated or is self-cannibolism a socially accepted norm over there?

 

[>Apocalypto<]

there's VIX options available.

VXX should have a ticker of SMT. Sadomasochist.
Wonder if any provider out there would allow you to short it?
It seems odd that as soon as they realised the the structural flaws it was not liquidated or is self-cannibolism a socially accepted norm over there?

 

[village idiot]

there are also options on VXX, or you can short VXX directly (via IB)

but be aware shorting the stock has similar characteristics as other volatility selling strategies - most of the time you will win a modest amount, except when you don't when you can lose your shirt

I prefer to be 'short' it via VXX option spreads which have defined risk

 

[minwa]

Interesting thread..VIX now hitting trendline..

Will see if it mean reverts, shorted some calls

 

[minwa]

Trendline holding, shorted some more calls.

 

[sinner]

It is a piece of rubbish from a long or hedging point of view for sure.

Pretty harsh judgement there vi, just because you cant buy a SPY+VXX pair and hold forever for risk free profits, doesn't make it rubbish.

Numbers say it all...

 

[village idiot]

well to be fair the rubbish comment was a reference to notting's comment a few posts down , and it was qualified by saying 'from a long or hedging point of view' , intended to mean from a 'holding it long term to hedge your portfolio' to distinguish it from short term trading or hedging.

and from a 'holding it long term to hedge your portfolio' point of view it has been a disaster, it's value decimated by being consistently long vix futures usually at a price well above spot vix at any time. The numbers indeed say it all.

 

[minwa]

Shorting it when it hits resistance seems like a nice way to make money: