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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 their is the price decay as others have mentioned.
 
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