Volatility Products Strategies & Trades (VIX, VXX, XIV etc.)

[Mikael 31]

VIX Strategies:

Trades below work better if VIX is higher (more value left in them on expiration day)

Sell Naked Straddle on expiration Day (extremely high risk)
- Sell the ATM straddle (closest strike to EoD price) on expiration Tuesday.
- Unlimited loss beyond BE like any short straddle
- 100% gain of credit received if VIX settles within Put Strike - credit received / Call Strike + credit received

Sell Naked Puts on expiration Day (very high risk)
- Sell 1 strike OTM puts on expiration Tuesday.
- VIX tends to spike up, not down. Theoretically it's less risky to sell naked puts on the VIX than other underlyings.
- You have unlimited loss if VIX settles below your short strike - credit received
- 100% gain of credit received if VIX settles above your short strike - credit received

Buy Butterfly on expiration Day (high risk)
- Buy a butterfly and hold it through expiration
- Max profit if settles at short strike point
- Some profit if settles within profit zone
- 100% loss on debit if settles beyond profit zone

http://vixandmore.blogspot.ca/2009/02/vix-butterfly-play.html

Long Iron Condor on or close to expiration Day (high risk)
- Same thing as butterfly but wider profit zone. can buy it on the Monday or Tuesday.
- Hold until expiration
- 100% gain on credit if settles within profit zone
- Max loss if settles beyond profit zone

Here is my own data for settlement risk you might experience this year. These trades are highly speculative in nature and i don't recommend them. They are however quite fun and can be a good replacement for roulette or blackjack. I have data going back all the way to 2008 if anyone's interested i can share it.



VIX 16 Put Calendar

- Open 16 strike put calendar when VIX is low (for me it's when VIX < 15)
- Front month = 16 strike put closest to expiration
- Back month = 1 or 2 months out. I prefer 2 months because if VIX rises the back months will be affected less if it's further out.
- When the VIX is low, especially at extreme lows < 13, you can often open these for a credit. I have seen it from 0.00 debit to 1.25 credit depending on how long the VIX has been at extreme lows
- Wait for a spike that will eventually happen due to the mean reversion tendencies of the VIX, exit for profit.

Trade Mechanics - when you short the 16 put when VIX is low, it is statistically likely that VIX will rise. If it does, you profit on your short 16 put. It also benefits from time decay. When the VIX does eventually rise, your back months futures will not rise as much as the front months, so your gain from your short will be higher than your loss from the long.

Risk - VIX continues to stay low or drops even lower. Keep in mind VIX cannot go to 0.

Why 16? I'm not sure, but Kim and other smart people have figured out 16 is the lucky number to go with. If you dislike 16 you can go with 17,15.

Warning: do not do VIX call calendars when the VIX is low and do not do put calendars when the VIX is high, they do not work like normal calendars because the long leg of your calendar is based off the futures pricing, not a single underlying like regular calendars. you are trading off 2 distinct underlyings where the price are related but does not move in unison and you can lose ALOT of money. please be careful.

imagine this scenario: vix is at 30. you decide to put on a calender shorting october 30 put, long nov 30 put. 10 days later, VIX drops to 20. your short is based off october futures, which drop more than your nov long (based off nov futures). so your loss on your short position is more than the gains made on your long position since they are not based on a single underlying and the magnitude in price change is different.

VXX Strategies:

DITM Put - Take advantage of the roll decay when VIX term structure is in contango (which is about 70-75% of the time).

What to do? - Buy when a deep in the money put when VXX spikes.

How do i know its a spike? - Look at the VXX 6 months chart and compare current levels to higher levels OR watch the VIX when it goes over 20-25 (the mean of VIX historically is around 20, so when it spikes over 20 or goes below 20 it's statistically likely that it will eventually revert to the 20 level, key is eventually because no one knows how long the spike will last).

How far do I go out? - Personally i would go out at least 90 days to reduce theta decay, but this is up to you and should depend on potentially how long you want to have your capital tied up.

What strike do I pick? - Deep in the money, so pick puts with deltas > -0.9

Risk? - Remember 100% of your risk is undertaken at order entry. Position sizing is your primary way to limit risk. Market crashes, extended market downswings, VIX continue to go up for a long time, you must either take loss or roll further out (which is the same as taking a loss and opening a new position).

Broken Wing Butterfly - Take advantage of the roll decay when VIX term structure is in contango (which is about 70-75% of the time).

What to do? - Put it on at anytime (DITM put you should wait for the spike) the VIX term structure is in contango.
Trade Mechanics -
Strike Selection -
DTE Selection -
Risk - Remember 100% of your risk is undertaken at order entry. Position sizing is your primary way to limit risk.

VXV/VIX Ratio Strategy:

Marco and some other members discussed this before. It comes from a Tony Cooper paper called "Easy Volatility Investing". You don't need to know everything about all the volatility ETNs and math behind it but if you are interested you can read the full paper here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255327, the trade and concept itself is very easy anyone can do it. But there is a few things you do need to know:

1. What is contango/backwardation for VIX term structure. If you google this there is tons of resources, study it a bit so you understand. (www.vixcentral.com will show you the VIX term structure right now)
2. VXV is the 3 months version of the VIX
2. VXX - Goes down when VIX term structure is contango because it is designed to sell near term futures contracts and buy back month futures contracts. This is called roll decay.
3. VXX - Goes up when VIX term structure is backwardation for the same reason as above
4. XIV - Suppose to mimic the inverse of VXX gains or loss. so 1% decay in VXX = 1% gain in XIV and vice versa.

So in summary:

When VIX is in contango: VXX down, XIV up.
When VIX is in backwardation: VXX up, XIV down.

So how do we trade this?

Well the logical thing is to figure out what term structure the VIX futures is in right? So just go to vixcentral.com and check it out. it will take you less than 5 seconds everyday. But it's not so simple, ideally you want to be LONG VXX when the backwardation is strong, and long the XIV when the contango is strong. but how strong and at what point do i switch the ETNs?

Basically you should ask yourself, how can i be more precise and methodical? Tony Cooper and others have identified some specific ratios to optimise this kind of trade. So through some backtests and calculations various people have come up with a magical ratio that should in theory optimise your P/L.

So you want to know the magical ratio? Turns out, the magical ratio to determine when to switch the ETNs is 0.917 with a 10 day SMA

The idea is very simple:

You take the VXV / VIX ratio.

IF VXV/VIX is > 1 this means the term structure is in CONTANGO. Why? It's very simple, VXV is the 3 months version of VIX so if you the 3 months of the VIX over VIX itself and the value is higher than 1 that is telling you VIX spot is lower than 3 months version of itself, so the future is more expensive than spot. so obviously that means the structure is in contango right?

IF VXV/VIX is < 1, this means the structure is in BACKWARDATION. Do i really need to explain this again?

If you want to optimise your P/L you can use 0.917 instead of 1 (and take the 10 day moving average of the ratio chart). The downside is you have to do more trades.


Long XIV shares (no options) if ratio is above 0.917 OR if you have a DITM PUT in VXX keep holding it

Long VXX shares (or call options) (or short VXX puts) if ratio is below 0.917 OR if you have a DITM PUT in VXX you need to unwind now

Another bonus of this strategy is now you can trade volatility in your retirement accounts. In Canada and US at least... sorry don't know about European stuff.


Additional Resources

check VIX term structure at a glance: www.vixcentral.com

Has a good overview about all VIX based ETN's / ETF's http://etfdb.com/etf...ory/volatility/

good blog about vol products: http://www.volatilityanalytics.com

another good blog about vol products: http://sixfigureinvesting.com

great website on trading vol products: http://www.tradingvolatility.net/

apparently you can manipulate vix settlement price: http://onlyvix.blogspot.ca/2011/10/how-to-manipulate-vix-settlement-price.html

broken wing butterflies: http://www.probabilityofsuccesstrading.com/?page_id=841

what is high IV: http://vixandmore.blogspot.ca/2008/04/what-is-high-implied-volatility.html

vix can spike alot without market dropping much in value: http://vixandmore.blogspot.ca/2013/02/all-time-vix-spike-11-and-treasure.html


And one of the best volatility sources: www.sixfigureinvesting.com

Covering:

Volatility—Historical / Backtest Data

• The VIX index from 1986
• XVZ Backtest to 2004
• VIX Volatility Futures Data from 2004
• Volatility Rolling Indexes from 2004
• ZIV Backtest to 2006
• VQT Backtest to 2004
• When a Hurricane Messes with a Volatility Index
• How Meaningful are the VIX’s Percentage moves?

Volatility—Long

• Investing in the VIX—CVOL & TVIX are Close
• How to go long on the VIX / VXX

Volatility—Short

• Going short on VIX
• Going short on VXX
• Inverse Volatility—the Winner is XIV
• Is XIV Behaving Correctly?
• IVOP and XIV Termination Events
• Taming Inverse Volatility with VIX/VXV

Volatility—Term Structure

• The Cost of Contango—it’s not the daily roll
• SPX 1 to 3 month term structure at historic highs
• VIX Mid-term Futures contango at historic highs
• Live VIX term structure chart with VIN, VIF, VXV

Volatility—Underperforming/ Dead ETNs

 

• What’s Wrong with XVIX—A Matter of Contango
• XXV—The First ETN with Nowhere to go
• TVIX—Not Recommended

Volatility ETNs—Under the Hood

• C-Tracks’ CVOL
• Barclays’ VQT
• Barclays’ XVZ

Edited January 18, 2014 by Mikael

[lc_match-aka-Bill 2]

Mikael, that looks like it's good for an adrenaline rush.  And actually probably not too bad a play if you had a read on futures.  It would be over quickly and worth a few pennies one way or another.  If you had a pile of cash and nothing to do on Tuesday and Wednesday.... Nah.  I mean, wasn't that Augen's big deal on Yahoo and pinning?  Go short a straddle at expiration to take care of the afternoon IV collapse and pinning.  It's not a trade in my future, though.

 

I have been very pleased to find 3 workable strategies at SO.  VXX  (VXX long put DITM and far out) was a logical extension to my own 'buy VXX puts on a spike' strategy.  The farther in the money and out in time just decreases the excitement and increases probability of a profit.

 

The VIX 16 put calendar and 17 call calendar are proven performers.  (I'm currently holding a bunch of the 16 put calendars from August--they're still profitable but waiting for the infamous spike 'everyone' is predicting.) 

 

I am trying to resist over-trading in the volatility area.  It has cost me; that is, the desire to "do something."  Sometimes nothing is the best thing to do.

 

These 3 strategies are unlike some of Scott Murray's trades (Volatility Analytics, as mentioned by Saud).  Although I like Murray's stuff, many of his trades are attempts to get lottery tickets.  I am unlucky.  I never win.  The VIX butterfly is a bit like that.

 

I like these 3 SO (so far) strategies because they make use of quantifiable attributes of VXX and VIX.  The trades are triggered by events (price levels) which virtually guarantee  their profitability (or at least limit risk to a very, very small amount).  They are, in fact, the opposite of lottery tickets.

[Saud 5]

Those look like solid strategies, and indeed, we cannot rely on luck with dodgy trades. I am intrigued by the UVXY/VXX calendar possibilities though. I've got a few contracts just to see what happens with it. This is the ideal setup for it anyway so let's see where it goes.

 

I do like the VXX Broken Wing Butterfly idea as mentioned in the former thread. that would be perfect to have on all the time if you could hedge a little against a very rapid fall, wouldn't it?

[lc_match-aka-Bill 2]

Did a couple of 'what ifs' on the VXX BWB.  On weeklies it looked like commission and slippage would kill it...it's only a $14 stock.  It seems to me (and I'd like to hear your opinion) that it needs to also be a longer-term play, say at least 2 or 3 expirations out.  Yes?  Then the other question I have is: is there a better or worse time to put it on?  On a spike?  On a drop?  No matter?

 

The Seeking Alpha article from last year had VXX at 30 (ah, those were the days!), and they rolled a couple times.  Never was a conclusion as to whether or not they made money.

[dbh21 62]

 

The Seeking Alpha article from last year had VXX at 30 (ah, those were the days!), and they rolled a couple times.  Never was a conclusion as to whether or not they made money.

The VXX is a product designed to go to zero over time (as are several other VIX derivatives). I think this is because they have to roll over the futures at a loss. They can prop up the spot price by reverse splits - but market value wise - its going to zero. Crazy designed product. But apparently good for very short term trades

[Micahjw 3]

Having to refresh up on BWB's, so thanks for that. :-) This site had some interesting videos on BWBs and adjustments, etc.

http://www.probabilityofsuccesstrading.com/?page_id=841

[Mikael 31]

i'll edit that first thread into real strategies tonight lol please don't do that crazy trade i posted. 

[Saud 5]

My thinking is that this might be the ideal time for that BWB, given that we've got the VIX fly that is slowly going to go under if VIX continues range-bound as it has been lately. We'd benefit nicely from any small drift downward (which would help offset any losses from the other fly if that doesn't work out), and possibly have a small credit if it does move higher. There's still so much uncertainty out there I just don't see a big gap of 3-4 strikes down say, overnight, as very likely in the next few weeks. We're all pretty actively managing our portfolios so there should be ample opportunity to roll down or out if it started to move away from our profit zone. In any case we'd want to be out before the FOMC.

[PaulCao 51]

Hi, 

 

I'm thinking about doing a Sept 2 13.5/14.5/15 VXX BWB, 

 

 

The down-side is if VXX erodes more than 6% in 15 days which is definitely possible. Might have to do more adjustment if VXX erodes more, 

 

Best,

PC

Edited August 26, 2013 by PaulCao

[Saud 5]

Hi Paul,

 

Why did you choose the second week? Maybe 14/15/15.5 now that VXX seems to have taken a jump upwards?

[Micahjw 3]

So I was looking at them the other way - with the VXX having to spike to lose money, but I guess I see why you would reverse it with the protection to the up side in case of spikes. Are you assuming there is less chance of the market moving up quickly and VXX going down a lot?

[PaulCao 51]

Hi Micahjw, 

 

The reason I chose the protection on the up side is because VXX has a tendency to spike up and slowly erode. This may not be true when VXX has spiked up a lot (e.g., Fed announcement in June/July about stepping off QE), it could also crash very quickly. 

 

But right now, my thesis is there is a floor on VIX at around 12-13 with VIX spot currently at 14.74. So it might spike up on any news but it can't go down as much. 

 

So I want to remain in the profit zone when VIX does spike like it just did from when I uploaded the P&L diagram from 14.80 to 15.29; but also leave plenty of room, have the current price at the other end of the tent of the BWB for VXX to decay; with the thinking that if VXX decays slowly, I always have room to adjust but I can't adjust if VXX gaps up 5% on close or open, 

 

Saud: I chose the 2nd week as it was closest week where that BWB can be profitable. You can play around with the simulated ToS trading tool or whatever analytics tool you use to see if there's a better alternative now that the price just spiked, 

 

Best,

PC

[Mikael 31]

If you guys have any more links please posted it, i'll slowly move it to the first post. 

[Mikael 31]

Hi Micahjw, 

 

The reason I chose the protection on the up side is because VXX has a tendency to spike up and slowly erode. This may not be true when VXX has spiked up a lot (e.g., Fed announcement in June/July about stepping off QE), it could also crash very quickly. 

 

But right now, my thesis is there is a floor on VIX at around 12-13 with VIX spot currently at 14.74. So it might spike up on any news but it can't go down as much. 

 

So I want to remain in the profit zone when VIX does spike like it just did from when I uploaded the P&L diagram from 14.80 to 15.29; but also leave plenty of room, have the current price at the other end of the tent of the BWB for VXX to decay; with the thinking that if VXX decays slowly, I always have room to adjust but I can't adjust if VXX gaps up 5% on close or open, 

 

Saud: I chose the 2nd week as it was closest week where that BWB can be profitable. You can play around with the simulated ToS trading tool or whatever analytics tool you use to see if there's a better alternative now that the price just spiked, 

 

Best,

PC

 

Paul, you are doing it with calls because it's more expensive correct? (less commissions) 

[PaulCao 51]

Hi, 

 

I actually haven't tried with puts, Maybe you can come up with combo, it's just something I quickly pulled up at work. 

 

Best,

PC

[Mikael 31]

Mikael, that looks like it's good for an adrenaline rush. And actually probably not too bad a play if you had a read on futures. It would be over quickly and worth a few pennies one way or another. If you had a pile of cash and nothing to do on Tuesday and Wednesday.... Nah. I mean, wasn't that Augen's big deal on Yahoo and pinning? Go short a straddle at expiration to take care of the afternoon IV collapse and pinning. It's not a trade in my future, though.

I have been very pleased to find 3 workable strategies at SO. VXX (VXX long put DITM and far out) was a logical extension to my own 'buy VXX puts on a spike' strategy. The farther in the money and out in time just decreases the excitement and increases probability of a profit.

The VIX 16 put calendar and 17 call calendar are proven performers. (I'm currently holding a bunch of the 16 put calendars from August--they're still profitable but waiting for the infamous spike 'everyone' is predicting.)

I am trying to resist over-trading in the volatility area. It has cost me; that is, the desire to "do something." Sometimes nothing is the best thing to do.

These 3 strategies are unlike some of Scott Murray's trades (Volatility Analytics, as mentioned by Saud). Although I like Murray's stuff, many of his trades are attempts to get lottery tickets. I am unlucky. I never win. The VIX butterfly is a bit like that.

I like these 3 SO (so far) strategies because they make use of quantifiable attributes of VXX and VIX. The trades are triggered by events (price levels) which virtually guarantee their profitability (or at least limit risk to a very, very small amount). They are, in fact, the opposite of lottery tickets.

Be careful with calendars on the vix (see first post). The 16 p and 17 c are good ones for sure.

Those expiration trades is just gambling. Like I said instead of playing roulette or blackjack you can do one of those trades a month. Technically you have better odds than any game in Vegas since the event is random and you don't have a negative edge the odds of winning are also much greater than any lottery ticket you can purchase as well

Edited August 27, 2013 by Mikael

[Saud 5]

Thanks for all that Mikael!

 

I grabbed the VXX BWB 14/15/15.5 just before close yesterday, commissions are indeed a killer on that one.

[lc_match-aka-Bill 2]

Per Scott Murray at Volatility Analytics, I bought the 12 Sept call on VIX for 3.00 yesterday.  Sold it for 4.30 this morning.  I like the simple plays.

[PaulCao 51]

Hi, 

 

Good luck to everyone. I decided not to enter my original trade as I'll be away from keyboard, on vacation for a week. So I can't adjust but should be an interesting time for VXX as it's spiking, 

 

Let me know how your BWB goes Saud; with the spike this morning to 16, should have plenty of room to breathe, 

 

Best,

PC

[Mikael 31]

added VXV/VIX Ratio Strategy

[Micahjw 3]

Nice work - I was actually thinking of this site; http://www.tradingvolatility.net/

[Mikael 31]

thanks, i'll post that up in the link. 

[Mikael 31]

Thanks for all that Mikael!

 

I grabbed the VXX BWB 14/15/15.5 just before close yesterday, commissions are indeed a killer on that one.

 

isn't it kinda of risky with syria war possibly coming up and the fed meeting on sept 17? 

[Mikael 31]

Those look like solid strategies, and indeed, we cannot rely on luck with dodgy trades. I am intrigued by the UVXY/VXX calendar possibilities though. I've got a few contracts just to see what happens with it. This is the ideal setup for it anyway so let's see where it goes.

 

I do like the VXX Broken Wing Butterfly idea as mentioned in the former thread. that would be perfect to have on all the time if you could hedge a little against a very rapid fall, wouldn't it?

 

haven't looked into the calendars but on first glance isn't it risky to put calendars on products that are designed to

 

a) consistently decay

at a high risk of spiking upwards

c) especially doing a calendar on UVXY which is a 2X version of VXX?

 

the only viable way of doing a calendar is opening 1 or 2 strike OTM puts and hope it decays there slowly but what if it spikes?

 

just saying it's not that stable to do a calendar on IMO.  

[Marco 223]

Good post. Maybe add this to the link collection above.

http://etfdb.com/etfdb-category/volatility/

Has a good overview about all VIX based ETN's / ETF's

[Micahjw 3]

haven't looked into the calendars but on first glance isn't it risky to put calendars on products that are designed to

 

a) consistently decay

at a high risk of spiking upwards

c) especially doing a calendar on UVXY which is a 2X version of VXX?

 

the only viable way of doing a calendar is opening 1 or 2 strike OTM puts and hope it decays there slowly but what if it spikes?

 

just saying it's not that stable to do a calendar on IMO.  

 

What you are saying on calendars sure seems to make sense - the BWB seems to put more things in favor, less can go wrong, etc. On the comment of Syria, a spike isn't a bad thing with the BWB the way he set it up, what you don't want is a crash down, likely only possible by either some kind of "break" in the product (ala, TVIX) or a very fast move upward in the market which would hopefully give you at least some time to adjust. Or if long the market, perhaps offset some what. I think Mikael said it earlier, or someone, why not have the BWB on all the time with VXX, or one month out or so, every month. If the upside is a slight credit or breakeven you don't care about a spike in the short-term (most of the time it will just come back down in your range), if it starts to go down too fast, you can adjust downward most likely, and if it does its normal thing, you should be able to see a profit. It would also probably be better to set it just below current prices to play to the downside since that is the path of least resistance for the product. Thoughts?

[Saud 5]

isn't it kinda of risky with syria war possibly coming up and the fed meeting on sept 17? 

 

Maybe, but at the same time all this uncertainty makes it very unlikely that vol is going to drop too much in the short term so it seems like a good play. At any rate it's holding steady right where it should, ie about BE after comms. The UVXY calendar same thing even with the spike.

[Mikael 31]

marco i added your link. mica your link is already in the additional resources part (just the main link not all the separate links, post will be too long)

[Mikael 31]

Maybe, but at the same time all this uncertainty makes it very unlikely that vol is going to drop too much in the short term so it seems like a good play. At any rate it's holding steady right where it should, ie about BE after comms. The UVXY calendar same thing even with the spike.

 

i meant the UVXY calendar  not the BWB i made a mistake. that's fine because there's no risk to the upside. 

 

UVXY 38 put calendar is still fine with the spike? last i checked it was at 44 already :S

[PaulCao 51]

Maybe, but at the same time all this uncertainty makes it very unlikely that vol is going to drop too much in the short term so it seems like a good play. At any rate it's holding steady right where it should, ie about BE after comms. The UVXY calendar same thing even with the spike.

Hi, 

 

Usually VXX is inversely correlated with SPY/RUT etc. So we'll see if the market will continue to slide later this week or will recover from this initial drop. If it does recover, VXX should fall drastically; if not, then it should stay at its current level or higher. 

 

VIX is currently at 16. The last spike due to Fed's initial announcement about stepping off QE peaked at 20, so we'll see what happens. 

 

Best,

PC

[Mikael 31]

Thanks for all that Mikael!

 

I grabbed the VXX BWB 14/15/15.5 just before close yesterday, commissions are indeed a killer on that one.

 

i think the BWB will be a bit better in terms of commissions if VXX was higher. this sustained rally really sucks

[Saud 5]

i meant the UVXY calendar  not the BWB i made a mistake. that's fine because there's no risk to the upside. 

 

UVXY 38 put calendar is still fine with the spike? last i checked it was at 44 already :S

 

I got the 38 call though. Agree about the commissions, that's a real headwind, especially with any adjustments.

[Saud 5]

Hi, 

 

Usually VXX is inversely correlated with SPY/RUT etc. So we'll see if the market will continue to slide later this week or will recover from this initial drop. If it does recover, VXX should fall drastically; if not, then it should stay at its current level or higher. 

 

VIX is currently at 16. The last spike due to Fed's initial announcement about stepping off QE peaked at 20, so we'll see what happens. 

 

Best,

PC

 

yes I definitely want to clear out any short positions before waiting too long. This recent market drop may be a bit overdone though especially because of such low volume, we'll see over the next few days. At any rate these are very small positions I put on and any real spike will benefit our VIX fly.

[Mikael 31]

guys RVX is @ 21.82. it's a 6 months high. 

 

ICs or credit spreads looking tempting. but might wait until thursday to see if they actually starts bombing syria or not. could be an catalyst for higher vol. yay

Edited August 28, 2013 by Mikael

[Kim 7,943]

If VIX goes to 19-20, I will probably open VXX puts.

[Mikael 31]

yeah, hopefully it spikes sooner rather than later. don't really want to hold it through the september 17th FOMC meeting. 

[Marco 223]

yeah, hopefully it spikes sooner rather than later. don't really want to hold it through the september 17th FOMC meeting. 

if it spikes it might not come off though before the meeting, it might even rise into it. I reckon the market prices in a tapering in september with a reduction of QE from 85 to maybe 70 bn$/month now. Everything more than that will probably bring the market down but I think the FED will start slowly to reduce any overrecation. So depending on VIX level I will probably a little short vol going into the meeting speculation that the market reaction to the taper wont be as strong and even if equities drop a bit IV and VIX will go down after the meeting.

 

I consider short VIX (in whatever form) when VIX goes 20% above its 10d SMA. Haven't back tested that to the N'th degree but worked quite well for me in the recent past (would have cost you a lot in 2008 though ...) anyway when you short VIX it always best to limit your losses so do it via buying VIX or VXX puts or other long premium structures (calendars etc) so if the spike you are shorting is the beginning of the end of the world (like 2008) at least your loss is limited to your premium....

Edited August 28, 2013 by Marco

[Mikael 31]

if it spikes it might not come off though before the meeting, it might even rise into it. I reckon the market prices in a tapering in september with a reduction of QE from 85 to maybe 70 bn$/month now. Everything more than that will probably bring the market down but I think the FED will start slowly to reduce any overrecation. So depending on VIX level I will probably a little short vol going into the meeting speculation that the market reaction to the taper wont be as strong and even if equities drop a bit IV and VIX will go down after the meeting.

 

I consider short VIX (in whatever form) when VIX goes 20% above its 10d SMA. Haven't back tested that to the N'th degree but worked quite well for me in the recent past (would have cost you a lot in 2008 though ...) anyway when you short VIX it always best to limit your losses so do it via buying VIX or VXX puts or other long premium structures (calendars etc) so if the spike you are shorting is the beginning of the end of the world (like 2008) at least your loss is limited to your premium....

 

yeah that's true. might just keep on rising into the FOMC meeting. regardless i think there's gotta be a spike +- a few days around the 17th. so i'm kind of hesitant to short vol right now. but yes, good advice on using long ditm puts for shorting vol rather than selling calls or something where you might get destroyed in a blackswan event like 2008. 

[Marco 223]

yeah that's true. might just keep on rising into the FOMC meeting. regardless i think there's gotta be a spike +- a few days around the 17th. so i'm kind of hesitant to short vol right now. but yes, good advice on using long ditm puts for shorting vol rather than selling calls or something where you might get destroyed in a blackswan event like 2008. 

Billy Luby published a study on his VIX and more blog that shows the pattern of rising VIX into FOMC meetings and drop afterwards. Doesnt mean of course that they wont do anything drastic and the market panics and Vol spikes but I think people are afraid of this FOMC meeting so I would definately expect rising VIX into it and potetially collapse if the market deals with whatever the meeting brings in a more relaxed way than expected.

[Mikael 31]

I think i might just buy a 80 to 90 delta call on the VIX 4-5 days before the meeting. so that'd be the 12 or 13th of Sept. 

Edited September 3, 2013 by Mikael

[temper 1]

Nah.  I mean, wasn't that Augen's big deal on Yahoo and pinning?  Go short a straddle at expiration to take care of the afternoon IV collapse and pinning.  It's not a trade in my future, though.

 

Actually there was webinar  with Jeff Augen on OptionTribe. He mentioned short straddle strategy does not work any more, as market changed over tome.

In general he adviced to go short butterfly, because stock tend to be volatile at the expiry unnerving ppl with short straddles and often accept losses.

He mentioned short straddles used to work, but that's not the case now.

I have not researched that idea further though.

[Mikael 31]

Actually there was webinar  with Jeff Augen on OptionTribe. He mentioned short straddle strategy does not work any more, as market changed over tome.

In general he adviced to go short butterfly, because stock tend to be volatile at the expiry unnerving ppl with short straddles and often accept losses.

He mentioned short straddles used to work, but that's not the case now.

I have not researched that idea further though.

 

In general short straddles on expiration friday is a terrible idea. how do you know the pinning will not decouple and price spike?  you can easily be facing a huge loss with no time to adjust. 

 

however i think he mentioned in one of his books of using ratio trades to take advantage of the IV collapse from 1pm onwards. that makes more sense because it is at least buffered against a modest price spike upwards, and if you got a credit on the trade you have no downside risk. i did a few of these ratio trades on AAPL and GOOG on expiration fridays but they are quite unnerving because if the price does spike over your short calls you could be looking a pretty substantial loss. so you definitely  need to monitor the trade very closely and not put on too high of a ratio. i found 1:2 is a good trade-off instead of 1:3. being more delta neutral does help stabilise the p/l over time. problem is you really have to get into these ratio trades before 12. after 12 the IV drops alot and you'll have a hard time collecting enough premium for shorting a OTM call even if it's just 1 strike away. 

[Mikael 31]

also i would cap the naked calls with a 5 cent otm long call. so you end longing a DITM call, and short a call spread.

[temper 1]

The idea was more general: shorting volatility and betting on IV collapse is not the best idea as of now.

Anyway link to webinar if anyone interested.

http://www.smbtraining.com/blog/recording-noted-author-jeff-augen-introduces-the-weekly-short-butterfly-trade?inf_contact_key=a2bdef3b04cb7cb460300ac6e1a661a0b8df56eae0f29d4034061ffbeb62cc30

[Mikael 31]

Temper thats a great webinar. i actually have been doing something similar on expensive stocks that moves around alot for cheap gamma plays. Amzn, aapl, goog, tsla, pcln are good candidates.

Cheap stocks the commission is too expensive to do it.

[samerh 6]

I've been reasonably successful with it too, except that the commissions eat up too much of the profit. Lets say you do 10 spreads and "chip away at the market" for $0.3 profit Monday through Wednesday. That's $300 profit but at, say, $1 per contract in commissions, that's $80 per round trip trade in fees, which means commissions eat away 25%!

Mikael- what's your strategy been: intra-day profits or hold for the week (the problem with that is you win most of the time but 20% of the time you lose $7.00 a spread which wipes a lot of your profits). I've found opening the trade at 10am and aiming for $.25 on Mondays and $0.5 tues and Wed seems to work. You are only successful about 50% of the time but wins are bigger than losses.

Edited September 9, 2013 by samerh

[Mikael 31]

sam what stocks have you been doing it on? 

 

because the spacing between the wings are important depending on the stock. 

 

but yes you are right, commission drains the profits quite a bit.

 

you mean you have lost $7/spread on a $10 short fly? that's a bit hefty, you held until expiration right? otherwise there's no reason how you can lose the $7 if you got $3 credit. 

 

also you can take profits less often. commissions kills you if you take profits at 10% of credit everytime. i try to do it at 30% or 50% depending on what's coming up. 

Edited September 9, 2013 by Mikael

[samerh 6]

On AAPL - $10 spacing short fly. I never held for more than 2 days. In theory if you open on a Monday and held until 3:30 on a Friday you could gain $2.5 or lose close to $7.5 a spread. If you look at AAPL open, high, low and closing prices for the week (easily available) you have roughly an 80% chance of winning and 20% chance of losing. That gives you a $0.5 expected profit bit die to the large loss you would only play with a small amount of capital.

Alternatively you could aim for $0.3 a spread intra-day mon, tue and wed and have a roughly 1-1.5% average expected profit each day (roughly 4.5% profit per week) with an average win of $0.3 60% of the time and average loss of $0.2 40% of the time which would be nice except for the commissions. This is a less risky trade as the daily loss is much smaller (unless you put it on just before major IV collapse like day before earnings) and so you could allocate a lot more per trade as a result.

So I was wondering if you had an alternative strategy with better numbers?

[Mikael 31]

Sam if you recieve 2.5$ credit for the short fly, you cannot lose $7.5 unless you let it expire exactly at your middle strike (that is highly unlikely even if you let it expire). if you close it off before closing on friday you will never ever lose the full $7. ToS is telling me for a  500 strike aapl short fly expiring this friday, the loss on friday if appl stays at 500 exactly is about -1k for 10 spreads. 

[samerh 6]

I agree with that.

So my question is, given that you never really know what will happen, what do you aim for when you open the short fly, and what max loss do you accept?