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U.S. Election Priced as Worst Event Risk in VIX Futures History

37 points by xoxoy 6y ago

smabie 6y ago
The IV of options is almost always too high (by too high I mean option prices are too high compared to mathematical fair value) and selling couple month out Vix futures is probably a great way to make some money right now. Moreover, the IV often fails to take into account upside volatility, effectively reducing the vix to an index that is inversely correlated to market returns. I doubt the market will fall regardless of who gets elected, so the obvious trade would be to sell Vix futures and profit off of the carry. If you get scared, simply offset your position before the election and net a smallish profit (probably). That being said, options IV is mostly a function of supply and demand, so it's totally possible that you could get crushed without any realized volatility at all.
- xoxoy 6y ago
  VIX has been positively correlated with the market rise lately, even more so for Nasdaq eg tech, so it’s not true that it’s inversely related to market returns right now.
- otherjason 6y ago
  In broad strokes, this is similar to the strategy implemented by SVXY, an inverse volatility ETF. It is continuously short contracts of the front month and second month of VIX futures, weighted accordingly to give a 30-day effective maturity. The idea is that the VIX term structure is usually in contango (the market expects that volatility in the future will be higher, so you can short the longer-term contracts and buy them back closer to expiration). The fund was structured such that it attempted to give -1.0x the return of a VIX short-term futures index on any given day. That way, as long as the term structure stays in contango and there isn't a bulk increase in volatility across the curve, you will profit. From early 2016 to early 2018, this strategy was extremely effective, returning over 700% from February 2016 to January 2018. Then "Volmageddon" happened[1] and the fund lost over 90% in one day. Several other similarly-structured inverse volatility funds closed after that day; from what I can tell, SVXY is the only one left, and ProShares later changed the target return factor of the fund to 0.5x to reduce the probability of a similar event in the future. In more turbulent environments, where volatility is either in backwardation (the front month volatility is higher than later months, often during some kind of market shock), or if the whole volatility term curve just shifts upward (an overall increase in volatility across all expirations), this strategy will lose money. And, as always when trading futures, it can lose lots of money very quickly if you aren't careful.
  - smabie 6y ago
    SVXY just sells short term vix futures, so it won't capture this particular effect. There was a mid-term short vol ETN called ZIV, but Credit Suisse recently discontinued it for whatever reason.

37 points by xoxoy 6y ago

The IV of options is almost always too high (by too high I mean option prices are too high compared to mathematical fair value) and selling couple month out Vix futures is probably a great way to make some money right now. Moreover, the IV often fails to take into account upside volatility, effectively reducing the vix to an index that is inversely correlated to market returns. I doubt the market will fall regardless of who gets elected, so the obvious trade would be to sell Vix futures and profit off of the carry. If you get scared, simply offset your position before the election and net a smallish profit (probably). That being said, options IV is mostly a function of supply and demand, so it's totally possible that you could get crushed without any realized volatility at all.

xoxoy 6y ago
VIX has been positively correlated with the market rise lately, even more so for Nasdaq eg tech, so it’s not true that it’s inversely related to market returns right now.
otherjason 6y ago
In broad strokes, this is similar to the strategy implemented by SVXY, an inverse volatility ETF. It is continuously short contracts of the front month and second month of VIX futures, weighted accordingly to give a 30-day effective maturity. The idea is that the VIX term structure is usually in contango (the market expects that volatility in the future will be higher, so you can short the longer-term contracts and buy them back closer to expiration). The fund was structured such that it attempted to give -1.0x the return of a VIX short-term futures index on any given day. That way, as long as the term structure stays in contango and there isn't a bulk increase in volatility across the curve, you will profit. From early 2016 to early 2018, this strategy was extremely effective, returning over 700% from February 2016 to January 2018. Then "Volmageddon" happened[1] and the fund lost over 90% in one day. Several other similarly-structured inverse volatility funds closed after that day; from what I can tell, SVXY is the only one left, and ProShares later changed the target return factor of the fund to 0.5x to reduce the probability of a similar event in the future. In more turbulent environments, where volatility is either in backwardation (the front month volatility is higher than later months, often during some kind of market shock), or if the whole volatility term curve just shifts upward (an overall increase in volatility across all expirations), this strategy will lose money. And, as always when trading futures, it can lose lots of money very quickly if you aren't careful.
- smabie 6y ago
  SVXY just sells short term vix futures, so it won't capture this particular effect. There was a mid-term short vol ETN called ZIV, but Credit Suisse recently discontinued it for whatever reason.