Tag Archive | "vix futures"

The Gamma Problem for Straddles, Or Why VIX Futures Are Necessary

Monday, November 11, 2013

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One of the frustrating things about buying straddles is that the more correct you are, and the more quickly you are proven correct, the more quickly your position loses the ability to profit from volatility. A straddle opened as a bet on volatility quickly becomes a simple long/short bet on the underlying asset: straddles run out of gamma too quickly. A straddle is a position comprised of one call and one put on the same underlying asset with the same…

When short gamma trading is your only hope

Tuesday, April 23, 2013


From early March through last Friday, there were really only a few ways to make any profits in the S&P 500, and looking at which strategies have been working gives us a good sense for the character of this market. First, let’s take a look at price action over this period. SPX went basically nowhere: Fig. 1. S&P 500 Index, March 6 – April 18. Source: CBOE Now, trading strategies can be classified according to the source of their risks/returns, meaning…

The VIX short squeeze that wasn’t

Sunday, March 3, 2013


Since early 2012, hedge funds and other traders have been short S&P 500 volatility via VIX futures in sizes not seen before. A story from IFR was syndicated across Reuters last week with a rather provocative lede: Hedge funds have levered up their short plays on VIX futures to such extreme levels that the market is poised for a significant short squeeze. For context, here is the positioning in VIX futures by non-commercial traders since the product was listed…

What Should You Look at After a VIX Spike?

Monday, February 25, 2013

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Monday’s 1.9% decline in equities sparked the largest jump in the VIX since… There’s certainly some value in knowing the end of that sentence, but unless you’re avoiding all financial media, you’ve probably already read a few variations of that story. Here are some additional ways of measuring changes in implied volatility. We use some of these estimates to inform market timing strategies. First, here is the VIX shown as a percentage of trailing S&P 500 1-month historical volatility. Sometimes…

The VIX term structure has farther to fall

Tuesday, February 12, 2013

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As tail risks have fallen aside and markets have normalized over the last several years, most of the strange market phenomena from the financial crisis have reversed themselves. Housing prices have firmed up as supply tightens, lending standards have relaxed, and correlations among dissimilar assets have fallen back toward historical norms. One aspect of the market that has not yet normalized is the relationship between short- and longer-dated option premiums. Near term option implied volatility has fallen to levels in…

VIX Portfolio Hedging (VXH) Strategy 2012 Performance Review

Friday, February 1, 2013


A successful portfolio hedging strategy does two things: it protects against market declines, and it imposes minimal costs in rising markets. In a year like 2012, the ability to minimize hedging costs actually matters more than downside protection, and the VIX Portfolio Hedging (VXH) Strategy bested its benchmarks and peers by being more cost-effective. Let’s start with a look at how the S&P 500 and the iPath VXX ETN fared in 2012. The histograms at fig. 1 show daily…

How to trade a stall in fiscal cliff negotiations

Thursday, November 8, 2012

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The emerging post-election consensus is that the fiscal cliff is more likely to be addressed without roiling markets. President Obama, the theory goes, is stronger politically than he was in 2011, and Speaker Boehner also has more control over the Tea Party wing of the Republican party. The new power dynamic should make it easier for moderates to find a palatable mix of revenue increases and spending cuts. This morning, John Carney mentioned an alternative view: The…

VIX futures distortion meme as conceptual ecophagy

Thursday, August 16, 2012


Here, some more evidence that the “VIX ETPs are distorting the market” theme has, in spite of the arguments against it, gone mainstream: Hougan also cautioned investors from making use of volatility related products, singling out the $1.67 billion iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX). “VXX has been and will be and almost forever will be an incinerator for investors’ money,” Hougan said, noting the ETN is down 80 or 90 percent over…

How Options Markets Have Changed Since 2008

Monday, August 13, 2012


Financial markets change along with the real economies on which they depend. This maxim applies to investing strategies and options markets, too. For example, the “fire and forget” approach to option selling that some traders favored in the pre-crisis world is no longer tenable (if it ever was). Risk appetites have shifted, order flow is moving into different products, and the cast of influential market agents is composed of different actors. As detailed in the attached video, here are some…

SPX Options Yawn as Correlations Increase

Tuesday, June 12, 2012


Here are some observations about volatility and market conditions. 1. Option implied volatility is not especially high. With all the noise in the markets, you might think that options prices have baked in a lot of downside risk. They haven’t. One month SPX historical volatility is about 18%, and one month at the money implied volatility is closer to 20%. If we add in out of the money skew, VIX-style, we get an estimate of 23.5%. That ratio of implied to historical –…


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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