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Discussion Starter #21
Notice that even with the market dropping, the VIX really isn't moving these days, and TAIL isn't either.
 

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Notice that even with the market dropping, the VIX really isn't moving these days, and TAIL isn't either.
I was looking for a way to use options on the VIX so you wouldn't have to use a large % of your portfolio (20%) as a hedge.

I was thinking you could do this w OTM call options on the VIX at 6 months out but wait until the VIX falls back to its low volatility levels of 15 for a strike at 15. Looking at the VIX history in the low vol period it just stays around 15 so you would usually just break even on the options.

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It looks like the option prices are about 20% of strike so $3 for an option to buy the VIX at $15 , 6 months out.

When you have the surges you would do well. The VIX peaked at 82 on Mar 16 but from Mar 11 to April 2 it was above 50.

So if you had calls at $15, they would be worth ~ $35 ( $50 - $15) this is ballpark). So you would make ($35-$3)/ $3 or 1650% on your options. So if the market fell 40%, If you had 2.5% in these options you would be fully hedged. In the worst case though, if the VIX fell and the options were worthless you would lose 5% (2.5% for 6 months x 2) which would hurt overall gains on your portfolio.

So instead of a full hedge , maybe hedge 50%, So the worst losses would be 2.5 %. So a market loss of 40% would then only be 20%. I know this also would also not work as well if the VIX were above 15, ie at its level of 34 now.
 

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I was looking for a way to use options on the VIX so you wouldn't have to use a large % of your portfolio (20%) as a hedge.

I was thinking you could do this w OTM call options on the VIX at 6 months out but wait until the VIX falls back to its low volatility levels of 15 for a strike at 15. Looking at the VIX history in the low vol period it just stays around 15 so you would usually just break even on the options.

View attachment 20282
It looks like the option prices are about 20% of strike so $3 for an option to buy the VIX at $15 , 6 months out.

When you have the surges you would do well. The VIX peaked at 82 on Mar 16 but from Mar 11 to April 2 it was above 50.

So if you had calls at $15, they would be worth ~ $35 ( $50 - $15) this is ballpark). So you would make ($35-$3)/ $3 or 1650% on your options. So if the market fell 40%, If you had 2.5% in these options you would be fully hedged. In the worst case though, if the VIX fell and the options were worthless you would lose 5% (2.5% for 6 months x 2) which would hurt overall gains on your portfolio.

So instead of a full hedge , maybe hedge 50%, So the worst losses would be 2.5 %. So a market loss of 40% would then only be 20%. I know this also would also not work as well if the VIX were above 15, ie at its level of 34 now.
The VIX options are priced off the VIX futures. The futures that would expire 6 months away, generally do not move as much as futures expiring in the next month. So the options would not move as much either. Moreover, when the VIX is low, the futures are in contango, which means they trade at a premium. Putting together time decay, contango, and mutated response to spikes in volatility, I think it is difficult to make substantial gains using far-dated VIX options.

Some have advocated using front month VIX call options as a hedge. I don't know how that would have performed in the last decade when we had long stretches of low volatility.
 

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Discussion Starter #24
I understand what you're getting at @Jimmy but I really don't know anything about modeling these things so I can't be of any help. But if you already have experience in futures and options pricing & modeling maybe that could be a way to do it.

Personally, I don't want to dabble in the nitty gritty of futures and options pricing because there are so many professionals with so much superior knowledge & information out there, that I have no hope of "trading against them". They are going to eat my lunch.

I've already made those SPY and TAIL trades (inside one account where I pay no commissions) so I'm just going to experiment with it there and observe what happens. A nice swift market crash would be useful for my experiment.
 

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The VIX options are priced off the VIX futures. The futures that would expire 6 months away, generally do not move as much as futures expiring in the next month. So the options would not move as much either. Moreover, when the VIX is low, the futures are in contango, which means they trade at a premium. Putting together time decay, contango, and mutated response to spikes in volatility, I think it is difficult to make substantial gains using far-dated VIX options.

Some have advocated using front month VIX call options as a hedge. I don't know how that would have performed in the last decade when we had long stretches of low volatility.
Thanks. I am just a novice and know only the basics not the details and realities of actual trading so that is very informative. I was looking at 6 months so as not to be trading these monthly. Here is a good article but very complicated ST monthly strategy. Maybe some variation of this but a little wary about wading into an area where I have little familiarity

 

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I understand what you're getting at @Jimmy but I really don't know anything about modeling these things so I can't be of any help. But if you already have experience in futures and options pricing & modeling maybe that could be a way to do it.

Personally, I don't want to dabble in the nitty gritty of futures and options pricing because there are so many professionals with so much superior knowledge & information out there, that I have no hope of "trading against them". They are going to eat my lunch.

I've already made those SPY and TAIL trades (inside one account where I pay no commissions) so I'm just going to experiment with it there and observe what happens. A nice swift market crash would be useful for my experiment.
I am a novice too so I was just putting out ideas for discussion. Glad Topo pointed out the realities of actual trading w options. I would be really wary about trading options too. May look at TAIL as well.
 

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Here is a very important chart if you want to trade anything to do with VIX futures, options, etc.

 

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Discussion Starter #28
Here is a very important chart if you want to trade anything to do with VIX futures, options, etc.

There was someone on this board who kept a diary as he tried to trade this stuff for a while. Then there was that VIX blowup a couple years ago (when XIV disintegrated) and he hasn't been heard from since.
 

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Here is a very important chart if you want to trade anything to do with VIX futures, options, etc.

Thanks. Seems you have to look fairly short term or else there is the price decay as others have mentioned.
 

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Discussion Starter #30
I'm still feeling good about carrying this hedge.

Since starting the SPY+TAIL combination, SPY is up a little over 3% and TAIL is down about 1% which seems fine to me.

If the market rallies a lot in the next few months, then I would rebalance back towards TAIL, theoretically increasing the potency of the hedge.
 

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Discussion Starter #31
Checking up on my SPY + TAIL combination. Since starting this, SPY is up 3.5% and TAIL is basically unchanged at 0%. Note that while the pure equity position returned 3.5%, the blended return including the hedge is down to 2.7%. There is always a cost for protection especially when markets are calm.

The weights are still around 80/20 so no need to rebalance yet. Very curious to see how this plays out.

PS, if you're thinking of "turning on" risk mitigation, it might be good to do it now when markets are relatively calm, VIX is obviously pretty low. In other words, buy the insurance when it feels like no insurance is needed.
 

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Discussion Starter #32
Sadly I ended up closing this position because it was inside a foreign account that I liquidated today. However I still plan to track TAIL because I think this is an intriguing risk control vehicle, and I suspect that a SPY/TAIL mix with aggressive rebalancing would yield good results long term.

At the moment, I don't need the protection because I just reduced my overall S&P 500 exposure in any case (due to the liquidation of the account).

I think it's worth keeping an eye on whether TAIL could be a good addition to asset allocation, possibly even in portfolio design. It certainly proved its worth during the first COVID crash.
 

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Discussion Starter #33
Since I had to exit this position, but am still very curious about this kind of strategy, let me revise the original position... and I'll keep tracking the results in this thread. This is now hypothetical, and not real $.

Let's say that starting 2020-06-23 you went equal weights, like @Topo suggested in another thread. Let's call it
$1000 SPY, 50%
$1000 TAIL, 50%

At 2020-08-14 we'd be at
$1079 SPY, 52.4%
$979 TAIL, 47.6%

It hasn't moved enough to rebalance yet. Maybe rebalance once the weight is 5% off target?
 

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Discussion Starter #34
Fascinating that TAIL is not rising today as the market crashes! The VIX is pretty low. What a weird selloff.... VIX isn't elevated while stocks crash.
 

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Fascinating that TAIL is not rising today as the market crashes! The VIX is pretty low. What a weird selloff.... VIX isn't elevated while stocks crash.
The reason may be that VIX did not go to levels associated with SPX highs in the past. Before the March crash, when SPX was making all time highs, the VIX was below 15 and usually in the 12 range. This time, we were having all time highs, but the VIX was still in the 25 range, which was very unusual. Now SPX is crashing, but the VIX has moved up just a bit.

The effect on TAIL was that there was not a big draw-down with the SPX hitting highs. Now TAIL is not spiking when SPX is falling, because there is no significant volatility spike. I would expect it rising due to the deltas on the puts, but that has had a minor effect.
 
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