Author Topic: Fun with VIX options  (Read 34582 times)

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #300 on: March 09, 2018, 12:24:16 PM »
UVXY has seen some weird price action against the VXX but has recently seemed to settle into returning 1.5x of VXX daily.  If I hold my puts to expiry, I should come within spitting distance of break even.  I have a lot of "dead money" in that trade!

ChpBstrd

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Re: Fun with VIX options
« Reply #301 on: March 12, 2018, 04:50:57 PM »
We're back in contango on the VIX futures.

http://www.tradingvolatility.net/p/datasourceurldocs.html

Now we get to see how UVXY performs in a normal environment after their restructuring.

hodedofome

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Re: Fun with VIX options
« Reply #302 on: March 20, 2018, 08:14:38 AM »
VIX futures flip flopping between backwardation and contango every week now. The volatility of volatility continues...

starguru

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Re: Fun with VIX options
« Reply #303 on: May 21, 2018, 01:19:07 PM »
So is this trade now dead after the UVXY went to 1.5x?   My PuTs are still down about 80% even thought the UVXY price is only about 20% more than when I bought them.


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Financial.Velociraptor

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Re: Fun with VIX options
« Reply #304 on: May 21, 2018, 03:52:23 PM »
So is this trade now dead after the UVXY went to 1.5x?   My PuTs are still down about 80% even thought the UVXY price is only about 20% more than when I bought them.


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I am holding 76 of the 6 strike 17JAN2020 expiry puts.  I purchased at 4.35 and they currently sit at 2.55.  That is an unrealized loss of 13,756, which is the main driver of my portfolio so far this year (still down 3,418 ytd.)  I expect around the time the underlying gets down to the 6 strike, they will be close to breakeven.  That is just a spitball estimate based on what I see the Greeks doing at the moment.  I will sell either way at 6 and sit out a month to avoid the wash sale if necessary.  I will also be evaluating whether to take a tax loss harvest in late December on this trade if we are not close to 6 by the time.  That could go either way depending on where I stand versus collecting Obamacare credit.

I think the trade still works so long as you have an entry price that is based on 1.5 leverage.  Having an entry that is based on 2.0 and needed to sell based on 1.5 is a killer and has left me with more than a year's worth of 'dead money'. 

What to do I think largely depends on your tax implications.  Do you want recovery in the current period or the next one for tax purposes?  At some point you probably have to take the hit if you bought when leverage was 2x...

ChpBstrd

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Re: Fun with VIX options
« Reply #305 on: May 21, 2018, 08:52:24 PM »
So is this trade now dead after the UVXY went to 1.5x?   My PuTs are still down about 80% even thought the UVXY price is only about 20% more than when I bought them.


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The 1.5x leverage has somewhat stabilized UVXY, but the options pricing should simply adjust to the slightly lower volatility. Maybe instead of buying puts $10 OTM you now sell them at $7 OTM.

As for me, the past 6 months has demonstrated what a loose cannon the Trump administration is, and how betting on low volatility is no safe bet at all in this environment. Rising consumer debt, interest rates, and oil are other reasons not to bet on volatility staying low. So for me, it seems like there was a season for this trade and that season has probably passed. I only own a couple $6 puts and they have a limit order that was almost hit today.

starguru

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Re: Fun with VIX options
« Reply #306 on: May 22, 2018, 07:19:24 AM »
Yeah I have the Jan 2019 $6 PuTs and have the feeling I’ll lose it all.  Not sure if I should sell and take the significant loss or just ride it out.  There is still months.  No tax implications as this is in an IRA.


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talltexan

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Re: Fun with VIX options
« Reply #307 on: May 22, 2018, 02:11:06 PM »
I had a habit of dividing my money into two contracts always. The thought was that--in the short term--one could get wiped out--but the other would stay alive and keep me going.

My June options are basically a cup of coffee this stage. My September options are down about 85% from where I bought, but they're enough that I could roll them to something later. With the June ones getting wiped out, it's probably best to roll them to two different times to keep this same approach going.

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #308 on: June 06, 2018, 03:29:13 PM »
Since February, I have been shorting VXX.  I'm up to 728 shares with proceeds of 29,488.  Unrealized gains sit at 5,988.  It is costing me about 100 a month in borrowing fees.  Anyone else in this trade?

thunderball

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Re: Fun with VIX options
« Reply #309 on: June 06, 2018, 04:15:02 PM »
Since February, I have been shorting VXX.  I'm up to 728 shares with proceeds of 29,488.  Unrealized gains sit at 5,988.  It is costing me about 100 a month in borrowing fees.  Anyone else in this trade?

No, but looking at the chart, I wish I were!  Nicely done.

eudaimonia

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Re: Fun with VIX options
« Reply #310 on: June 06, 2018, 05:07:34 PM »
I haven't been short continuously since February. I was actually long VXX going into the huge vol spike and then went to cash until beginning of May when the /VX curve and Skew became more normalized. Currently, short VXX via a synthetic June 15 combo of short calls and long puts. 12 of these combos (since May 5th) and up about $10k.
« Last Edit: June 06, 2018, 05:12:48 PM by eudaimonia »

talltexan

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Re: Fun with VIX options
« Reply #311 on: June 07, 2018, 08:25:51 AM »
I'm sad to admit I didn't have the guts to put more into this trade. My June options are cooked. My September options have doubled in the last month, but I didn't put more in at the low-point. Staying with this trade requires fortitude.

ChpBstrd

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Re: Fun with VIX options
« Reply #312 on: June 07, 2018, 02:29:11 PM »
I've decided the low-vol bet is not for me during the Trump administration. Dude is setting little fires everywhere - and at market peaks! Tariffs? Really?

Given the near certainty of problems, I'm beginning to understand the appeal of 2020 UVXY long calls, although I can think of many cheaper lottery tickets.

hodedofome

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Re: Fun with VIX options
« Reply #313 on: June 08, 2018, 01:38:50 PM »
Since February, I have been shorting VXX.  I'm up to 728 shares with proceeds of 29,488.  Unrealized gains sit at 5,988.  It is costing me about 100 a month in borrowing fees.  Anyone else in this trade?

I've been short a few years now. I did cover a bit during the spike, as I was getting concerned about margin, but I'm still in.

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #314 on: June 08, 2018, 05:57:54 PM »
Since February, I have been shorting VXX.  I'm up to 728 shares with proceeds of 29,488.  Unrealized gains sit at 5,988.  It is costing me about 100 a month in borrowing fees.  Anyone else in this trade?

I've been short a few years now. I did cover a bit during the spike, as I was getting concerned about margin, but I'm still in.

Have you ever been forced out due to broker inability to borrow shares?

hodedofome

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Re: Fun with VIX options
« Reply #315 on: June 11, 2018, 09:39:05 AM »
Since February, I have been shorting VXX.  I'm up to 728 shares with proceeds of 29,488.  Unrealized gains sit at 5,988.  It is costing me about 100 a month in borrowing fees.  Anyone else in this trade?

I've been short a few years now. I did cover a bit during the spike, as I was getting concerned about margin, but I'm still in.

Have you ever been forced out due to broker inability to borrow shares?

I've never been forced out of short VXX, even after the huge spike this year.

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #316 on: June 12, 2018, 01:59:52 PM »
I closed my 6 strike puts today after an unlikely to be filled limit order cleared the market.  I booked a 13k+ short term capital loss.  That probably gets me qualified for the maximum ACA subsidy again this year so it isn't all bad.  I'm sitting out the trade for a month (wash sale rule) and then getting back in with a 5% notional exposure to UVXY as a synthetic short.  With the underlying 1.5x leverage, my net exposure from the short call will be 7.5%.  The early year volatility event caused UVXY to roughly double so I set my exposure at level that will top out my exposure between 15 an 20%. 

I'm letting my VXX direct short wind down.  The trade "works" but the hard to borrow fee is eating into me at about 100 dollars a month even during the current low vol environment.  I'd rather be synthetic and I'd rather play the 1.5 leverage.  I'm not buying to close, I'm just letting the current shares decay to zero.  IB doesn't allow fractional shares so I'll naturally exit the trade a little bit at a time as the result of multiple reverse splits.

starguru

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Re: Fun with VIX options
« Reply #317 on: June 25, 2018, 02:09:03 PM »
I wonder, being down about 85% on this trade, with with 6 months to go, if it makes sense to initiate a position in the underlying directly, as sort of insurance. 

1.  If underlying spikes, I could come out ahead or at least seriously mitigate any loss on the PUTS (depending on how much I invest in the underlying)
2.  If the underlying bounces around in this 10-16 range for that time Ill lose my PUTS and stay roughly the same on the long position.  A lot depends on the exact details of the trade.
3.  If the underlying drops my PUTS could become profitable or make up a lot of the ground they lost, and I would suffer a loss in the long position. 

Does this make sense or am I taking nonsense.  With only 6 months to go and things looky iffy vis-a-vis trade wars and whatnot, what to do?  I could also just let my PUTS expire worthless or get out now with an 85% loss....

ILikeDividends

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Re: Fun with VIX options
« Reply #318 on: June 25, 2018, 04:54:58 PM »
I wonder, being down about 85% on this trade, with with 6 months to go, if it makes sense to initiate a position in the underlying directly, as sort of insurance. 

In a word, no, it doesn't make sense.  Insurance is something you buy before the catastrophe.  You can't insure against something after the fact.

Ask yourself this: if you didn't have a put position now, would a long position in the underlying look attractive to you?  The answer to that question should inform your decision.

As for your current position, whether to take your lumps now, or risk the remaining 15% hoping for a recovery within 6 months, is really the only rational decision to be made.  Trying to retro-fit a hedge here, in hopes of recovering the 85%, at this late stage in the game, smacks of doubling down after a string of lost hands of Black Jack.

Simply put, evaluate initiating a new trade on its own merits, independent of your existing position.

Buying a bear put spread (rather than just buying a put outright), when you originally opened this position, would have been a way to hedge (by reducing the cost to enter the position).  But it is too late to do that now.  Legging in to a spread now would only hedge the remaining 15%.  And it would virtually guarantee that you'd never recover the lost 85%.  What would be the point of doing that?
« Last Edit: June 25, 2018, 05:53:50 PM by ILikeDividends »

starguru

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Re: Fun with VIX options
« Reply #319 on: June 26, 2018, 07:02:24 AM »
I wonder, being down about 85% on this trade, with with 6 months to go, if it makes sense to initiate a position in the underlying directly, as sort of insurance. 

In a word, no, it doesn't make sense.  Insurance is something you buy before the catastrophe.  You can't insure against something after the fact.

Ask yourself this: if you didn't have a put position now, would a long position in the underlying look attractive to you?  The answer to that question should inform your decision.

As for your current position, whether to take your lumps now, or risk the remaining 15% hoping for a recovery within 6 months, is really the only rational decision to be made.  Trying to retro-fit a hedge here, in hopes of recovering the 85%, at this late stage in the game, smacks of doubling down after a string of lost hands of Black Jack.

Simply put, evaluate initiating a new trade on its own merits, independent of your existing position.

Buying a bear put spread (rather than just buying a put outright), when you originally opened this position, would have been a way to hedge (by reducing the cost to enter the position).  But it is too late to do that now.  Legging in to a spread now would only hedge the remaining 15%.  And it would virtually guarantee that you'd never recover the lost 85%.  What would be the point of doing that?

Thanks for the reply.  Its funny you mentioning blackjack, because I thought it was analogous as well.  The thing is insurance can be a good choice in black jack.  Its a question of expected value.  How to do the calculations?

Also, would UVXY be a good investment right now?  There are many ways to see volatility spiking in the near term with all uncertainty Trump injects into the world. 

ILikeDividends

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Re: Fun with VIX options
« Reply #320 on: June 26, 2018, 04:18:55 PM »
I wonder, being down about 85% on this trade, with with 6 months to go, if it makes sense to initiate a position in the underlying directly, as sort of insurance. 

In a word, no, it doesn't make sense.  Insurance is something you buy before the catastrophe.  You can't insure against something after the fact.

Ask yourself this: if you didn't have a put position now, would a long position in the underlying look attractive to you?  The answer to that question should inform your decision.

As for your current position, whether to take your lumps now, or risk the remaining 15% hoping for a recovery within 6 months, is really the only rational decision to be made.  Trying to retro-fit a hedge here, in hopes of recovering the 85%, at this late stage in the game, smacks of doubling down after a string of lost hands of Black Jack.

Simply put, evaluate initiating a new trade on its own merits, independent of your existing position.

Buying a bear put spread (rather than just buying a put outright), when you originally opened this position, would have been a way to hedge (by reducing the cost to enter the position).  But it is too late to do that now.  Legging in to a spread now would only hedge the remaining 15%.  And it would virtually guarantee that you'd never recover the lost 85%.  What would be the point of doing that?

Thanks for the reply.  Its funny you mentioning blackjack, because I thought it was analogous as well.  The thing is insurance can be a good choice in black jack.  Its a question of expected value.  How to do the calculations?

In a 52 card deck there are 16 cards that will make a dealer's ace into blackjack (which is where your insurance side-bet wins and gets paid 2 for 1).  That leaves 36 cards in the deck that will turn your insurance side-bet into a loss.  Basically, that's 36 to 16 against winning the side bet; i.e., 2.25 to 1 against (divide 36 by 16).

Since the house only pays you 2 for 1 if you win, the house's "invisible" cut is 0.25 points. A true-odds payout would have paid $2.25 for every $1 of insurance bet. But they couldn't afford to build those big beautiful casinos by offering true odds payouts.  ;)

So if you insure a $200 bet for the max of $100 in insurance, you supposedly win if the dealer flips a blackjack. But if you don't also have a blackjack, you lose your $200 bet and win $200 on your insurance bet, for a break-even outcome overall.  But the house still wins in that they are going to keep $25 by paying you less than true odds when you win.

It's kind of like a game of coin flipping for a dollar if you lose, and only paying you 98 cents when you win.  The casino doesn't fund a new hotel wing based on any one such flip of the coin.  They win by players flipping that same coin hundreds of thousands of times.

Of course, in blackjack, you know your own cards, and you can usually see other players cards as well.  You can discount the dealer's down card with that information.  If the table is already rich in 10s and face cards, the odds that the dealer has blackjack go down, which would make insurance a bad bet; strictly by the numbers.  Conversely, if the table is rich in little cards, insurance is almost mandatory if you have a decent hand.  And it would be downright reckless not to insure your own blackjack, if you have one.

If you've been counting cards all along, you can use the additional information from previous hands to inform your decision to bet or not.  If those 16 cards have already been dealt out, you know with certainty that the dealer doesn't have blackjack.  That is the extreme scenario where insuring even a blackjack becomes an obviously bad bet.  You'd still net an even money win on your blackjack, but you could have made 1.5 to 1 on it without using insurance.

These days, though, it's hard to find a casino that deals single-deck blackjack, or that deals out the entire shoe before reshuffling. :(

Quote
Also, would UVXY be a good investment right now?  There are many ways to see volatility spiking in the near term with all uncertainty Trump injects into the world.

I would never go long one of these leveraged products simply because they are not designed for long term holding.  They are designed for traders, and I've proven more times than I care to admit that I have no aptitude for trading.
« Last Edit: June 27, 2018, 06:21:43 AM by ILikeDividends »

ChpBstrd

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Re: Fun with VIX options
« Reply #321 on: June 26, 2018, 07:07:48 PM »
The difference between blackjack odds and volatility odds is that one is a mathematical probability and the other operates as a chaotic system. Attempts to apply probabilistic thinking to volatility may not yield the expected outcomes.

I am intrigued by the idea of going short UVXY and long the VIX using options. Do the computers that price options factor in the trading friction, expense ratio, and contango losses inherent in UVXY, or could I harvest those factors essentially risk free? I set up a paper trade last week to see how this setup would behave, doing a bear call spread on 1000 shares of UVXY and a bull put spread on 1500 units of VIX. Performance has been flat so far.

ILikeDividends

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Re: Fun with VIX options
« Reply #322 on: June 26, 2018, 07:51:50 PM »
The difference between blackjack odds and volatility odds is that one is a mathematical probability and the other operates as a chaotic system. Attempts to apply probabilistic thinking to volatility may not yield the expected outcomes.

I am intrigued by the idea of going short UVXY and long the VIX using options. Do the computers that price options factor in the trading friction, expense ratio, and contango losses inherent in UVXY, or could I harvest those factors essentially risk free? I set up a paper trade last week to see how this setup would behave, doing a bear call spread on 1000 shares of UVXY and a bull put spread on 1500 units of VIX. Performance has been flat so far.

Interesting.  Those are both credit spreads.  Your risk is the difference between the strikes of each spread, minus the credit you received for each.  And then divide the total risk by 2, because only one spread can be a loser at expiration (this assumes the width of both spreads is the same).  Actually, it would be MAX(risk of either spread), since you have different unit counts.

Your credit goes up the wider the spreads are, but your risk typically goes up, by increasing the width of the spread, more than the credit does.

I'm assuming those are extremely narrow spreads; e.g., one strike wide?
In other words, have you collected enough total premium from both spreads to cover the loss of a move completely through the short strike of the spread having the most risk?

Edit to add: A perfect storm of whip-saw and early assignments could actually cause you to lose on both spreads.  That would seem exceedingly rare, but I'm not sure dividing the total risk by 2 is entirely appropriate.  Hmmm.

Edit to add II: If you put this structure entirely on UVXY (or on VIX), except for the different unit counts on each wing, it would be an Iron Condor.  So I guess it's sort of a lopsided Iron Condor. ;)  What advantages do you see by splitting the structure across two different symbols?  I know one is leveraged and the other isn't.  Presumably that explains the lopsided structure, but how is that an advantage?

A standard Iron Condor is typically employed when the underlying is perceived to have low volatility.  Since UVXY exaggerates volatility by design, I would think that VIX would be a superior vehicle for the whole structure. (?)

Finally, your lopsided iron condor, across the two tickers, is 1.5 times heavier on the VIX wing than on the UVXY wing.  Which, on the surface, appears to be an attempt to normalize risk against the 1.5x leverage of UVXY.  So it seems like a lot of work to achieve what a standard Iron Condor already does; which is to establish a credit position with limited risk, and having a directionless bias.

Over time I would expect the only difference in performance (lopsided vs standard) to be accounted for by the minor increase in the fees paid to put on two trades (assuming there is an increase) versus one trade.  That would depend on your choice of broker more than anything else.

The lopsided version would sometimes lose less, and sometimes lose more, depending on which wing gets busted by a market moving against you.  In a standard Iron Condor, either busted wing hurts equally badly when you lose, but the differences should average out to roughly the same pain over a series of bad trades using either structure.
« Last Edit: June 27, 2018, 04:08:53 AM by ILikeDividends »

ChpBstrd

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Re: Fun with VIX options
« Reply #323 on: June 27, 2018, 07:10:34 PM »
The difference between blackjack odds and volatility odds is that one is a mathematical probability and the other operates as a chaotic system. Attempts to apply probabilistic thinking to volatility may not yield the expected outcomes.

I am intrigued by the idea of going short UVXY and long the VIX using options. Do the computers that price options factor in the trading friction, expense ratio, and contango losses inherent in UVXY, or could I harvest those factors essentially risk free? I set up a paper trade last week to see how this setup would behave, doing a bear call spread on 1000 shares of UVXY and a bull put spread on 1500 units of VIX. Performance has been flat so far.

Interesting.  Those are both credit spreads.  Your risk is the difference between the strikes of each spread, minus the credit you received for each.  And then divide the total risk by 2, because only one spread can be a loser at expiration (this assumes the width of both spreads is the same).  Actually, it would be MAX(risk of either spread), since you have different unit counts.

Your credit goes up the wider the spreads are, but your risk typically goes up, by increasing the width of the spread, more than the credit does.

I'm assuming those are extremely narrow spreads; e.g., one strike wide?
In other words, have you collected enough total premium from both spreads to cover the loss of a move completely through the short strike of the spread having the most risk?

Edit to add: A perfect storm of whip-saw and early assignments could actually cause you to lose on both spreads.  That would seem exceedingly rare, but I'm not sure dividing the total risk by 2 is entirely appropriate.  Hmmm.

Edit to add II: If you put this structure entirely on UVXY (or on VIX), except for the different unit counts on each wing, it would be an Iron Condor.  So I guess it's sort of a lopsided Iron Condor. ;)  What advantages do you see by splitting the structure across two different symbols?  I know one is leveraged and the other isn't.  Presumably that explains the lopsided structure, but how is that an advantage?

A standard Iron Condor is typically employed when the underlying is perceived to have low volatility.  Since UVXY exaggerates volatility by design, I would think that VIX would be a superior vehicle for the whole structure. (?)

Finally, your lopsided iron condor, across the two tickers, is 1.5 times heavier on the VIX wing than on the UVXY wing.  Which, on the surface, appears to be an attempt to normalize risk against the 1.5x leverage of UVXY.  So it seems like a lot of work to achieve what a standard Iron Condor already does; which is to establish a credit position with limited risk, and having a directionless bias.

Over time I would expect the only difference in performance (lopsided vs standard) to be accounted for by the minor increase in the fees paid to put on two trades (assuming there is an increase) versus one trade.  That would depend on your choice of broker more than anything else.

The lopsided version would sometimes lose less, and sometimes lose more, depending on which wing gets busted by a market moving against you.  In a standard Iron Condor, either busted wing hurts equally badly when you lose, but the differences should average out to roughly the same pain over a series of bad trades using either structure.

I simulated buying $1 wide verticals at the money (at the time a couple weeks ago), buying the first OTM option and selling the first ITM option in each trade. The prices were:

UVXY Aug 17 2018 bear call spread
Sold 10 $8 calls for $3.18/share incl commissions
Bought 10 $9 calls for $2.61
----------
Net credit: 3180 - 2610 = $470

VIX Aug 22 2018 bull put spread
Bought 15 $12 puts for $0.55
Sold 15 $13 puts for $1.00
-------------
Net credit: 1500 - 825 = $675
--------------
Total credit: 470+675 = $1145

IMO this strategy looks more like the rarely discussed Box arbitration strategy, except with different ticker symbols. In the Box strategy, you trade a call spread and a put spread to risklessly arbitrage any gap in the price between the two.

Now, in theory I have $1k risk on the UVXY bear spread and another $1500 risk on the vix bull spread. However, I think the probability is very low that UVXY rallies or holds steady while the VIX sits still or declines. That's my losing big scenario. I know UVXY does not track VIX longer than 1 day, and that UVXY is a bet on backwardization in VIX futures, not 1.5 times VIX. However it seems nearly impossible that VIX would drop in absolute terms for a couple of months while the market remained in a state of backwardization. Thus, my risk seems logically a lot less than the full $2500.

I lose $1500 on my VIX bull spread if VIX falls below $12. In that low volatility scenario, UVXY has almost certainly fallen from where it was, the UVXY bear spread expires with both options worthless, and remember I still keep my $1145 premium received to offset said loss. Net loss: $355 plus one more commission.

If the UVXY bear spread loses its maximum of $1k, it is almost certainly because VIX went to the clouds and my VIX bull spread is now worthless. I pay off the loss from the $1145 premium received and keep the change. Net gain: $145 and thanks for saying/doing something stuipid, Trump!

One point of the experiment is to see if a 1X UVXY 1.5X VIX ratio box spread breaks even. If it does not, and the actual weightings should be something different, the arbitrage opportunity could be even greater or nonexistent. Good to know either way.

Another point is to explore exiting one of the spreads early at a cost less than the credit I received initially or rolling to a guaranteed profit position. We know when a spike is occurring and we know the spread prices will change at that time.

Why not use condors? I.e. a long condor in VIX and a short condor in UVXY? I guess my hypothesis is not that their implied volatility is understated/overstated compared to each other. It's that the two instruments are correlated in a way not reflected in options pricing models. UVXY can't generally rise while the VIX falls and vice versa. By placing a cross-bet, my credits are the sum of the probability-weighted value of each spread, but my amount at risk is logically less than the sum of both risks.



ILikeDividends

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Re: Fun with VIX options
« Reply #324 on: June 28, 2018, 03:43:21 AM »
Why not use condors? I.e. a long condor in VIX and a short condor in UVXY?

I was actually questioning why not just short an Iron Condor on VIX.  It has a very similar structure as your box spread has; a bull put spread paired with a bear call spread.  But placed all on the same underlying, rather than spanning two different underlying assets that are somewhat correlated (correlated in direction, anyway, not in magnitude).  As well, a Condor is equally balanced on both wings, where your box spread isn't.

But never mind that now. I understand more about what you're trying to do. You are looking for systemic inefficiencies in option pricing that might be exploitable. You posted words to that effect previously, but I couldn't quite grasp the means of going about doing that. Not that I've fully internalized the method even now, but I'm a lot closer.  Thanks for elaborating.  I would certainly be interested in reading any findings you care to post about your experiment.
« Last Edit: June 28, 2018, 04:42:22 AM by ILikeDividends »

specialkayme

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Re: Fun with VIX options
« Reply #325 on: June 28, 2018, 07:18:51 AM »
Thanks for elaborating.  I would certainly be interested in reading any findings you care to post about your experiment.

+1

ChpBstrd

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Re: Fun with VIX options
« Reply #326 on: June 28, 2018, 09:08:54 AM »
Why not use condors? I.e. a long condor in VIX and a short condor in UVXY?

I was actually questioning why not just short an Iron Condor on VIX.  It has a very similar structure as your box spread has; a bull put spread paired with a bear call spread.  But placed all on the same underlying, rather than spanning two different underlying assets that are somewhat correlated (correlated in direction, anyway, not in magnitude).  As well, a Condor is equally balanced on both wings, where your box spread isn't.

But never mind that now. I understand more about what you're trying to do. You are looking for systemic inefficiencies in option pricing that might be exploitable. You posted words to that effect previously, but I couldn't quite grasp the means of going about doing that. Not that I've fully internalized the method even now, but I'm a lot closer.  Thanks for elaborating.  I would certainly be interested in reading any findings you care to post about your experiment.
My bedtime reading is a finance textbook explaining the Black-Scholes options pricing model. My thoughts at the moment are "damn, that's a brutally efficient market, run by superfast computers playing a zero-sum math game that my dumb ass can barely comprehend." It's a strong deterrant from taking directional bets based on opinions/guesses inevitably influenced by financial media/social media and biases. The computers have been taking money from such people for a long time.

Correlated but independent assets are interesting because it is not clear whether the computers can simultaneously eliminate all arbitrage opportunities within a ticker symbol and also between correlated symbols. How would you program that? How would you calculate an option price that factors in the SD of the natural logrithm of every other correlated asset, neutralizing all arbitrage opportunities, without deviating from the probabilistic value of the original asset itself? My brokerage's software can do beta weighting, but we're still not teaching computers about the qualitative differences and similarities between things like UVXY and VIX. If humans have any advantage, it's in qualitative thinking or insider/client information.

One benefit of this box-ish strategy is that one might roll the winning spread into a sort of lopsided volatility condor, taking an additional net credit in the future based on whether volatility rises or falls. However, this would come at the cost of trading an almost risk-free arbitrage position to get an efficiently priced condor. I don't play chess, and I struggle a bit with such 4 dimensional strategic thinking.

The position is up $12 since a couple weeks ago. Yesterday it was down $40. Basically lumps in the bid-ask spreads. Time will tell if 1:1.5 is the risk neutral ratio.


ILikeDividends

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Re: Fun with VIX options
« Reply #327 on: June 28, 2018, 07:13:52 PM »

Correlated but independent assets are interesting because it is not clear whether the computers can simultaneously eliminate all arbitrage opportunities within a ticker symbol and also between correlated symbols. How would you program that?

I'll go out on a limb here and suppose they could employ a Monte Carlo method.  You might find this quite interesting:

https://en.wikipedia.org/wiki/Monte_Carlo_methods_in_finance

Most notably, this excerpt in the introduction seems to hit the nail on the head:

"The advantage of Monte Carlo methods over other techniques increases as the dimensions (sources of uncertainty) of the problem increase."

And this link discusses Monte Carlo specifically as applied to option pricing:

https://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricing

"In mathematical finance, a Monte Carlo option model uses Monte Carlo methods to calculate the value of an option with multiple sources of uncertainty or with complicated features."

Black-Scholes is far more computationally efficient than Monte Carlo (perhaps orders of magnitude more efficient), but there are many option pricing problems that cannot be solved by Black-Scholes. Monte Carlo is the big gorilla you call in to solve for those.

If you've got a standard, vanilla, run-of-the-mill option pricing problem to solve, Black-Scholes should probably still be the go-to tool to solve it.  Monte Carlo could solve it too, but that would be over-kill; kind of like killing a fly with a hand grenade.  How dead do you need that fly to be?  ;)

As computers get faster and faster, the downside of applying Monte Carlo becomes less and less important, and it can be more widely applied to solve problems that wouldn't have been practical to solve on older computers.

None of that proves whether UVXY and VIX do, in fact, take each other's features into account when solving for pricing, but the tools to do so would seem to be available.  The only real question is whether the inefficiencies you are looking for have or have not already been accounted for in the pricing models.

« Last Edit: June 29, 2018, 01:16:01 AM by ILikeDividends »

ChpBstrd

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Re: Fun with VIX options
« Reply #328 on: July 01, 2018, 10:04:22 PM »
Yes, Monte Carlo would be the way (I suspect a spreadsheet exercise could create similar function lines).

Question is: If B-S and Monte Carlo yielded two different prices for an option, which would you use? It seems as if the risk of mis-pricing an option is so bad you wouldn't want to deviate more than a penny or two from B-S. Otherwise, you are either never able to make a trade or you get taken advantage of by an arbitrageur using B-S. However, if a Monte Carlo simulation could persuade you that there are more gains to be had in a cross-asset trade like I'm describing, maybe you take that loss? It's kind of like a 2nd-order bid-ask spread.

Again I remind myself options are a zero net sum game. When an individual investor trots into the marketplace with a theory in hand, supercomputers with decades of experience usually take their money faster than a blackjack dealer playing with toddlers.

At the moment, my little trade simulation is up $43 - but it started up $40 due to the time between setting up each leg. That's a bid-ask blip in terms of these highly volatile options. $3 gain on top of a $1145 credit, or +0.26% in 10 days (roughly 9.5% annualized so far, but the sample is way too small to be conclusive). I saw at one point it was up $112, but that anomoly quickly disappeared.

If there is no arbitrage opportunity, that would be interesting too because then a pair of credit spreads like I'm trying here might offer a way to borrow large sums of money at close to the risk free rate - or at least the borrowing rates large funds have available.

ILikeDividends

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Re: Fun with VIX options
« Reply #329 on: July 02, 2018, 02:25:05 AM »

Question is: If B-S and Monte Carlo yielded two different prices for an option, which would you use? It seems as if the risk of mis-pricing an option is so bad you wouldn't want to deviate more than a penny or two from B-S. Otherwise, you are either never able to make a trade or you get taken advantage of by an arbitrageur using B-S.

I can't claim to know the subtle differences between BS and MC outcomes, beyond the likely possibility that MC probably takes longer (compute time) to resolve than BS does.  I would expect the differences (if any) in the computed results to be tiny fractions of a penny if the dimensions of the problem are the same, although, I have no empirical evidence to offer in support of that assumption.

If there are more problem dimensions than BS can handle, then I would expect MC to converge on a more accurate solution.  But that additional accuracy wouldn't, in and of itself, make MC a more viable solution.

To my way of looking at this, the most significant difference between applying a BS versus an MC solution would be defined by whatever the state of the art capabilities are in high performance computing hardware, as compared with the past. E.g., if MC computes a more accurate solution, but takes 5 seconds longer to do that than BS (or some combined heuristic), then could MC really be regarded as a practical (superior) solution in the context of an exchange trading tool?  I don't really know.

With the unrelenting advances in computing horsepower, I would expect, at some point, that MC will become more viable to apply in a wider area of problem spaces. But is the computational horsepower yet available to offer a practical solution for this problem by applying MC now?  I don't know.

Quote
If there is no arbitrage opportunity, that would be interesting too because then a pair of credit spreads like I'm trying here might offer a way to borrow large sums of money at close to the risk free rate - or at least the borrowing rates large funds have available.

I don't know that there would never be an arbitrage opportunity even if the options were accurately priced in real-time, regardless of the method used to price the options.  To suggest otherwise would be to suppose that the main goal of pricing options is to eliminate the possibility of arbitrage.

I tend to think that the primary goal would be to match supply with demand for a particular issue, but I'd have to work in CBOE to know for sure.  And I don't.  ;)

I do, however, tend to think that any arbitrage opportunities should rapidly correct in response to supply and demand imbalances W.R.T. any correlated issues. Opportunities created by supply and demand imbalances wouldn't be systematic; you'd have to be Jonny-on-the-spot with timing in order to exploit those kinds of imbalances.

I am definitely not a Jonny.  But I am certain that there are quite a lot of Jonnys out there. ;)

Update to add:  Some of the bigger "Jonnys" have supercomputers co-located and connected by fiber optics, or use microwave network technologies (which is faster than fiber optics), to feed market data to their trading systems much more rapidly than a typical armchair trader could ever hope to do over the internet. 

No matter how superior the armchair trader's system might seem, in theory, it suffers a distinct disadvantage in that the data it is using to base decisions on is already old by the time s/he gets it, and has likely already been acted on by someone having faster access to the information, faster computing hardware, and the ability to enter trades, bypassing a broker's system and any human interaction, directly into the exchange.

The race to exploit the information advantage using technology has been on ever since the invention of the telegraph.

The section on low-latency strategies in this article touches on that a little bit:

https://en.wikipedia.org/wiki/High-frequency_trading
« Last Edit: July 03, 2018, 01:46:43 AM by ILikeDividends »

ILikeDividends

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Re: Fun with VIX options
« Reply #330 on: August 07, 2018, 06:26:02 PM »
Today I established a position in 18 contracts of UVXY 01/17/2020 6.00 P; filled at $4.30.
For any who are still interested, after UVXY changed to 1.5x leveraged, UVXY finally hit an all time low today of $8.29.

Not surprisingly, I'm still down about 37% on the 2020 puts I bought last December, when UVXY was 2x leveraged.  I'm not sure how fast or far below the $6 strike it would need to fall in order for me to recover, but I've set a no-later-than deadline of December 19th, 2018, to take my lumps and exit, to prevent a short term capital loss turning into a long term capital loss.

It seems to me it's now a race between the now-muted value-destroying effects of daily re-balancing into contango versus the time decay of my already-crippled put options premium.

I might decide to exit earlier, but that's my deadline for staying in unless something extraordinary happens in the next few months to change my mind.

Best of luck to anyone who is still in this trade; I suspect we'll need a lot of that luck to recover enough just to break-even.
« Last Edit: August 08, 2018, 02:36:59 AM by ILikeDividends »

talltexan

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Re: Fun with VIX options
« Reply #331 on: August 08, 2018, 07:10:46 AM »
I saw that headline. I think my June strike price was $8, so the options wouldn't have ever gotten into the money anyway.

Just checking back, it now seems that I also had a September put at a strike of $7. Probably should have held that one past July 12, could have climbed back up out of the huge hole. It was down about 80% when I sold, and it had been down as much as 90%.

ChpBstrd

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Re: Fun with VIX options
« Reply #332 on: August 08, 2018, 11:58:04 AM »
Quote

I simulated buying $1 wide verticals at the money (at the time a couple weeks ago), buying the first OTM option and selling the first ITM option in each trade. The prices were:

UVXY Aug 17 2018 bear call spread
Sold 10 $8 calls for $3.18/share incl commissions
Bought 10 $9 calls for $2.61
----------
Net credit: 3180 - 2610 = $570*

VIX Aug 22 2018 bull put spread
Bought 15 $12 puts for $0.55
Sold 15 $13 puts for $1.00
-------------
Net credit: 1500 - 825 = $675
--------------
Total credit: 570+675 = $1245*


Just realized I forgot to give everyone an update!

Today's mid prices:

UVXY Aug 17 '18 bear call spread
     $8 calls @ 0.50 x -10 = -500
     $9 calls @ 0.25 x10 = 250
     -----------
     Net position: $-250 (a gain of $320 against the $570 credit received to enter the position)

VIX Aug 22 '18 bull put spread
     $12 puts @ 0.40 x 15 = 600
     $13 puts @ 1.03 x -15 = -1545
     --------------
     Net position: $-945 (a loss of $270 against the $675 credit received to enter the position.
--------
Total net: 320-270 =  .....$50 in 42 days before commissions.

That doesn't sound like much, but for a position that would require 1500+1000-1245=$1255 in net cash sidelined for margin, it works out to a (50/1255)*(365/42)=34.6% annualized return. Not bad for an arguably risk-free or at least arbitraged position!

Obviously commissions for at least 6 total trades (4 to enter + 2 ITM positions to close) would eat some of that margin for us retail investors, but YMMV depending on your broker and scale. TastyWorks.com for example is very cheap. I bet a person could squeak out a double-digit annualized return.

This result was obtained during typical bull market contango conditions, when simple long puts in UVXY would have done better, though at higher risk. I wonder how the position would have done in Feb-March 2018?

*corrected a math error from my June 7 post. The credit would have actually been $100 higher.

pressure9pa

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Re: Fun with VIX options
« Reply #333 on: August 09, 2018, 08:43:59 AM »
Hello Everyone,

I'm somewhat new around here (been lurking a couple of months), and last night I read this entire thread with historical charts of the VIX and UVXY in other windows waiting to see what the reaction would be with each event.  Made for about 90 minutes of really entertaining reading!  Anyway, even though it looks like the original strategy is dead (or on life support), I wanted to express my appreciation for those willing to share these kind of experiences and strategies. 

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #334 on: August 09, 2018, 08:50:56 AM »
Hello Everyone,

I'm somewhat new around here (been lurking a couple of months), and last night I read this entire thread with historical charts of the VIX and UVXY in other windows waiting to see what the reaction would be with each event.  Made for about 90 minutes of really entertaining reading!  Anyway, even though it looks like the original strategy is dead (or on life support), I wanted to express my appreciation for those willing to share these kind of experiences and strategies.

I wouldn't say it's dead.  I still have 6.71% of my portfolio short VXX.  I am going to start using synthetic shorts of UVXY once the allocation falls below 5%.  That is, I targeted 7.5% for VXX and now that UVXY has stabilized, I am using the same exposure (5% * 1.5x leverage).

ILikeDividends

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Re: Fun with VIX options
« Reply #335 on: August 09, 2018, 03:19:52 PM »
Anyway, even though it looks like the original strategy is dead (or on life support) . . .
Likewise, I wouldn't say the strategy is dead, either.  Any position entered when UVXY was 2x leveraged (like mine), however, is now permanently impaired, and is definitely on life support. 

I liken the surprise change to 1.5x leverage to buying a 10 Lb sack of potatoes at Costco, only to have the guy checking receipts at the door remove 2.5 Lbs from the bag without giving a partial refund.  Effectively, the options I paid full price for have been swapped for options of lesser value.

That change to leverage was a one time event.  Any short bias trades put on after that will not start out with such a crippling handicap, and should still enjoy the value-destroying features of UVXY; just at a muted pace with lower leverage.

Once I clean up the mess that my current position has become, I will look to put on another position after observing how UVXY behaves over the remaining months of this year.  If my position recovers meaningfully before mid-December, such that the value of harvesting the short term loss approaches a trivial amount, I might very well ride it out beyond the end of the year.

Edit to add:
I am going to start using synthetic shorts of UVXY once the allocation falls below 5%.
It seems this strategy could have very likely side-stepped the carnage wrought by the change in UVXY leverage.  I can appreciate the appeal of a synthetic short; however, the risk is not defined, as it is with a long put. So if or when I take another bite of this apple, I'll probably stick with buying long-dated puts.

If the coming months do not indicate that the new UVXY can still destroy value faster than LEAP premium decays over time, then I'll probably stay out of this strategy for good.

My December deadline aligns nicely with the opening of the 2021 puts in November. If I choose to, I can then take my lumps and roll my crippled 2020 options out to a fresh position having more breathing room in the calendar, slower time decay, and suffering no preexisting traumatic injuries.  All things remaining equal, the 2021 puts should cost significantly less than what I paid for the 2020 puts twelve months earlier.
« Last Edit: August 09, 2018, 11:54:47 PM by ILikeDividends »

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #336 on: August 10, 2018, 12:18:57 PM »
I am going to start using synthetic shorts of UVXY once the allocation falls below 5%.
It seems this strategy could have very likely side-stepped the carnage wrought by the change in UVXY leverage.  I can appreciate the appeal of a synthetic short; however, the risk is not defined, as it is with a long put. So if or when I take another bite of this apple, I'll probably stick with buying long-dated puts.

That is my thinking.  Be hedged against another reduction in leverage.  The long put exposure treated me well for years then suddenly cost 13k+ with the leverage adjustment.  I switched to a direct short of VXX (a previous experiment with short UVXY proved shares are frequently hard to borrow at exactly the wrong time).  I set a pain threshold of 7.5% (that is, if vol went on a tear and my short tripled in value, my exposure would be 22.5% of portfolio [acceptable to me]).  It has worked well but I want the leverage factor back.  Thus, 5% exposure on UVXY synthetic to avoid being forced out of the trade at the worst moment by unavailability of shares to borrow.  I'm waffling a little. By the time I'm at 5% exposure, the yield curve may be inverting.  I don't think I'll add exposure in that scenario.

thunderball

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Re: Fun with VIX options
« Reply #337 on: August 10, 2018, 04:19:34 PM »

As a short VXX or long Put alternative, how about using an at-the-money debit spread on UVXY?  Granted, you're paying a sizable premium:

BUY +1 VERTICAL UVXY 100 19 OCT 18 10/8 PUT @1.41 LMT

Making only a max of $0.59....  but there's minimal theta decay since it's ATM, which you wouldn't have unless you went way ITM.

Thoughts appreciated!

ILikeDividends

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Re: Fun with VIX options
« Reply #338 on: August 10, 2018, 05:00:27 PM »

As a short VXX or long Put alternative, how about using an at-the-money debit spread on UVXY?  Granted, you're paying a sizable premium:

BUY +1 VERTICAL UVXY 100 19 OCT 18 10/8 PUT @1.41 LMT

Making only a max of $0.59....  but there's minimal theta decay since it's ATM, which you wouldn't have unless you went way ITM.

Thoughts appreciated!

I posited the same structure with a similar time frame on another thread about nine months ago.  The problem was that I was modeling the position using after hours quotes, as it appears you have also done.

Look at your trade again on Monday, during market hours.  You might find, as I did, that after hours quotes on UVXY options are wildly unrepresentative of what your actual pricing is likely to be.  When I checked pricing during market hours, I found that the reward part of the risk/reward ratio shrunk dramatically, offset by a corresponding increase in risk.

Caveat: UVXY was 2x leveraged when I did that.  I haven't revisited the question since UVXY adjusted to 1.5x, but I still regard after hours quotes as mostly fiction.

An argument for sticking with a simple long-dated put is that theta decay on a 2 year LEAP is extremely slow in its early half-life; hardly significant if your intention is to hold the position no longer than a few months.  That expected holding period, of course, might no longer be a practical expectation, given the adjustment in UVXY leverage.

An argument against an ATM spread is that the further into the money your long put goes, the less influence volatility exerts on the pricing of the option.  Financial Velociraptor has documented, up-thread, instances where he was able to exit profitably on days where the market actually went against him and volatility spiked. 

Volatility will always exert more influence on your short put than on your long put, once you start moving into the money; which could pinch your potential to exit the spread with maximum profitability.  ATM or near ATM, at least as far as I understand it, is the exit point, not the entry point, for this strategy.  A key to exploiting this effect, at least when using long puts, is to always make sure you enter the position OOTM, and during periods of low volatility.

Indeed, my long OOTM UVXY puts actually show a 4% GAIN for today, when UVXY moved against me by 7%.  Then again, that's an after hours quote.  So we can agree to dismiss that specific quote as mostly nonsense.  ;)
« Last Edit: August 11, 2018, 03:59:09 AM by ILikeDividends »

thunderball

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Re: Fun with VIX options
« Reply #339 on: August 11, 2018, 04:33:01 PM »

@ILikeDividends thanks for your reply.  You are correct in that was an after hours quote.  I'll take a peek again Monday to see if the same potential profit exists.  A directional LEAP likely makes more sense. 


thunderball

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Re: Fun with VIX options
« Reply #340 on: August 16, 2018, 07:42:35 AM »

Indeed, normal trading hours show little premium indeed from an ATM spread:

BUY +1 VERTICAL UVXY 100 21 SEP 18 11/9 PUT @1.53 LMT

$0.47 does not seem worthwhile.