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Is This The Most Successful Trade Of The Last Decade?

Tyler Durden's picture




 

If the longs use VIX products as hedging instruments, then why would anyone take the other side? Especially in light of the fact that, as we discussed previously, only 1 in 20 "skilled" traders profit from VIX ETFs.

Because, being short volatility can be very profitable, according to Goldman. Year-to-date this short vol index is up 56%, and selling the front-month VIX has earned a massive 114 vol points...

The Short Story:  Short VIX futures index +56% ytd;  If the longs use VIX products as hedging instruments, then why would anyone take the other side? Because, being short volatility can be very profitable. The S&P 500 VIX Short-term Futures Daily Inverse Index (SPVXSPI) tracks the profitability of being short a constant maturity 1m VIX future and is the benchmark for ETPs such as the XIV and SVXY. Year-to-date this short vol index is up 56%.

 

 

In low vol environments VIX futures tend to trade above VIX spot and futures typically roll down the curve to settle at VIX spot.

 

Short VIX futures strategies profit from the contango in the VIX futures curve. The steeper the VIX term structure, the higher the (futures-spot VIX) basis, and short VIX strategies tend to be profitable as futures roll down the curve. There are many investors who try to profit from this well publicized phenomenon: sell a VIX future, capture roll down, do it again (wash, rinse, repeat).

 

Prior to VIX Weeklys if you wanted to capture the roll-down you might have sold the front-month contract and hoped for the best. Short vol investors know that putting all of your eggs in one basket can be a risky strategy.

 

VIX Weeklys may provide more flexibility with investors positioning for the roll-down a bit week each week by simply spreading out their monthly trades. Instead of selling $100 on the front month VIX future an investor might sell 1/4th of the notional per week which may help smooth the return profile. The VIX often mean reverts quickly so if one contract expires in the red, the other contracts may pick up the speedy mean reversion and end in the green.

 

On the tactical side, we could see more investors positioning for a swift decline in volatility post an event (FOMC for example). 

Shorter-dated VIX futures track VIX spot more closely

A one-month VIX future has a beta of 0.44 to the VIX. For example, if the VIX moves up a vol point, a future with one-month left to expiration tends to move up a little less than half as much, or 0.44 vol points.

 

Higher betas for shorter-dated tenors. The beta between a future with one week to expiry and the VIX has been 0.64 or 1.4x higher than a one-month future and 2.2x more sensitive to VIX moves than a future with three-months remaining to expiration.

 

Many exchange traded VIX products are benchmarked to constant maturity VIX futures. As a cross check on our reaction function we create constant maturity one- to six-month VIX futures each trading day and estimate the betas back to VIX changes.  The results are very similar, with a constant maturity one-month VIX future having a beta of 0.45 to VIX changes and threemonth futures at 0.27, very close to what our reaction function would have predicted (1m: 0.44; 3m: 0.29).

 

 

 

Shorter-dated VIX futures track (have more manipulative leverage) the market more closely...

The beta between daily changes in the VIX and daily S&P 500 returns has been -1.2 using data back to 2004. A beta of -1.2 implies that for every -1% decline in the S&P 500 we would expect the VIX to go up by 1.2 vol points (say from 15 to 16.2).

 

The beta of a one-month VIX future to S&P 500 returns is -0.60, roughly one-half the sensitivity between the VIX and market returns; about 1.5x that of a three-month future (-0.41) and 2.1x a six-month future (-0.28).  We make two important points here: (1) you cannot trade spot VIX and the betas between the tradable VIX futures and the market have historically been much lower; (2) the betas fall off dramatically as you move further out in the term structure.

 

 

As a VIX future approaches settlement, its sensitivity to S&P 500 returns grows exponentially. The beta of a VIX future to S&P 500 returns moves from -0.6 on a one-month future to -0.74 on a two-week and -0.86 on a future with one-week left before VIX settlement and -1.15 with one-day left to maturity which approaches the beta of VIX spot (-1.2).

*  *  *

So - in summary - being short vol has been among the best performing trades of the last decade (never mind the risk-side) and, the introduction of weekly VIX futures (and the exponential decay implied by these volatility-inducing instruments) offers, according to Goldman Sachs, even more opportunity for active risk takers to sell vol, scrape premium, and face unlimited downside risk... playing the contango collapse game until there are no more musical chairs left.

 

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Sun, 08/02/2015 - 17:54 | 6382690 jmack
jmack's picture

Shhhhh!!!!

Sun, 08/02/2015 - 17:59 | 6382713 negative rates
negative rates's picture

Casino economics is the BEST economics.

Sun, 08/02/2015 - 18:32 | 6382795 kaiserhoff
kaiserhoff's picture

Great article, but it assumes a lot of specialized knowledge.  Try this.

A hedgie owns lots of Faceplant, and wants to buy insurance.  They could buy puts, which truly are the best insurance available or buy VIX (essentially a volatility index) on the theory that, if face plant goes down, VIX will go up.  This is NOT a hedge, it is at best a pair trade, and they could easily lose money on both sides.

From the systems standpoint, it's worse.  Guy selling puts may want to buy Faceplant on the cheap, or may already be short, ie, there is little or no systemic risk.  Dude selling VIX cannot be covered, because, as suggested by the article, every month, or worse week of vix stands on its own, and is poorly related to ANY OTHER INSTRUMENT.

Sun, 08/02/2015 - 18:42 | 6382825 0b1knob
0b1knob's picture

Short volatility can be consistently profitable.   Until it isn't.

Selling way out of the money puts on baskets of stocks was a "can't lose" proposition for Long Term Capital Management.   Remember them?  Me neither...  

Sun, 08/02/2015 - 18:59 | 6382862 negative rates
negative rates's picture

Sounds like you need help picking the right game, go with blackjack and always double up on 11's openers.

Sun, 08/02/2015 - 17:58 | 6382705 withglee
withglee's picture

The introduction of weekly VIX futures (and the exponential decay implied by these volatility-inducing instruments) offers, according to Goldman Sachs, even more opportunity for active risk takers to sell vol, scrape premium, and face unlimited downside risk... playing the contango collapse game until there are no more musical chairs left.

We need "smoke" futures and "mirror" futures.

Sun, 08/02/2015 - 18:01 | 6382719 kaiserhoff
kaiserhoff's picture

and "Miss Piggy Pink" lipstick futures.

Sun, 08/02/2015 - 17:59 | 6382711 kaiserhoff
kaiserhoff's picture

Trading VIX makes sub prime loans look sane.  This is not any kind of "product", just a completley artificial construct, that makes some fools "appear" to have insurance..., for risks that cannot be insured.

Sun, 08/02/2015 - 19:51 | 6383026 AUD
AUD's picture

You could say the same thing about gold futures. The whole point of futures is, or was, to monetise commodities.

You can't monetise money

Sun, 08/02/2015 - 18:01 | 6382720 DontFollowMyAdv...
DontFollowMyAdviceImaDummy's picture

OH LOOK!  THE CASINO JUST ADDED A NEW SIDEBET TO THE CARNIVAL SPIN-THE-WHEEL GAME!!! yippee!

Sun, 08/02/2015 - 18:16 | 6382747 falak pema
falak pema's picture

The Argentinians understand the Tango part of it;  its the CON part that bemuses them.

To understand the contango run away game you have to be  of the stamp of Lawrence of Arabia : a man who thought he brought peace to a united Arabia; but as time would prove  a fool who worked for the new born Oligarchy of Oil in ex-Ottoman lands.

In fact he brought the carve up of the future Oil patch with the creation of Balfour's promise.

We are still paying that price. Contango, some awesome toxic bet on the future; an invention of greed gone mad.

They call it capitalism's raison d'etre. It only works if you control the future like a bitch slave. Not like a free social denier. Cos capitalism does not know how to treat social questions at par with uber alles hubris.

$ hegemony is about "for us or against us" bipolar choice.

Contango knows not tango as permanent man-woman game.

It can't satisfy the woman or slave 'cos it has to satisfy the master.

 

Sun, 08/02/2015 - 18:20 | 6382761 Catullus
Catullus's picture

I suppose present and future value are capitalist conspiracies too.

Sun, 08/02/2015 - 18:51 | 6382841 The Delicate Genius
The Delicate Genius's picture

No, but the value of capital in present and future is greatly affected by conspiracy.

Sun, 08/02/2015 - 19:00 | 6382865 withglee
withglee's picture

I suppose present and future value are capitalist conspiracies too.

The interest rate number they require has certainly been proved to be one.

Sun, 08/02/2015 - 18:17 | 6382751 Catullus
Catullus's picture

It helps when the fed is underwriting spy puts through its conduit trading shops.

The Greenspan/Bernanke Put is a series of actual puts. It's not theoretical.

Sun, 08/02/2015 - 18:18 | 6382755 The Delicate Genius
The Delicate Genius's picture

over my head.

I'd rather just bet football.

Like a fuckin' gentleman.

Sun, 08/02/2015 - 22:00 | 6382974 Turin Turambar
Turin Turambar's picture

Shorting UVXY and TVIX has been almost as good as printing one's own money over the last 7 years.

Sun, 08/02/2015 - 23:34 | 6383624 BullyBearish
BullyBearish's picture

And going long UVXY when things start flying apart will be THE TRADE OF THE LAST 8 YEARS!!!

Sun, 08/02/2015 - 23:59 | 6383668 Assetman
Assetman's picture

While true, the mere fact the Goldman is highlighting the short VIX trade better make you wonder about the timing of making that last short TVIX venture.

When Goldman goes one way, it's generally a good idea to go the other way.

At some point when we've come full circle and the interventionists come back and 'save the day'... I think going back and shorting those instruments will be very low hanging fruit again.

I gather if the Fed is printing money, you might as well own the side of the bet that will help print money for you, especially if the time decay is working in your favor.

I think the bets go off if the Fed is taking the punch bowl away.  Money could be made, but it becomes harder to do.

 

Mon, 08/03/2015 - 01:26 | 6383837 q99x2
q99x2's picture

Prosecute Blankfein for blasphemy.

Mon, 08/03/2015 - 08:44 | 6384357 kralizec
kralizec's picture

My best trade is fiat for shiny.

Mon, 08/03/2015 - 12:20 | 6385144 satan2liberals
satan2liberals's picture

 

Perhaps the authors should wait until the new vix futures gets a following before they tout a trading idea based upon them.

The previous VXST contracts WERE A COMPLETE FLOP.

 

the 8/3 has traded a whopping 150 contracts today

the 8/12 has traded a whopping 60 contracts

the full 8/19 contract 37,300

 

I'll gladly trade these if the volume supports a narrow bid ask spread.

 weekly vix opions are in the works , which should help support futures volume

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