Author Topic: Options heretics thread - VXX and other ^VIX products  (Read 2011 times)

Financial.Velociraptor

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Options heretics thread - VXX and other ^VIX products
« on: August 17, 2020, 02:44:32 PM »
Multiple people are expressing interest in a deep dive into why I like to bet against VXX.  I'm a little behind today as the power was out at my place for about 6 hours.  I'll be back later this evening to flesh this out.

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I'm known in certain quarters of the interblabbowebosphere as the guy who remains persistently bearish on VXX and backs that up with real money bets.  I'll be describing why here.

VXX is a really terribly designed product.  I'm somewhat surprised the SEC allows it to persist since it consistently falls 60% a year.  Here's why - VXX is intended to track the daily price movement of the ^VIX index (the "fear gauge").  It actually does a not bad job on a daily basis.  Over long periods of time however, it is certain the ETN's construction will lead to destruction of value.  To capture the movement in the ^VIX (which you can't invest in directly but can buy futures on) it invests in the front month and second month futures.  It rolls this position DAILY. 

In commodities and futures markets the normal state of affairs is something called "Contango".  This is where the longer dated prices/futures are more expensive than the shorter dated ones.  This makes sense as there should be more time value if you have more time to be proven right.  Rolling daily means the fund repeatedly sells a cheap asset to buy a more expensive one.  Under normal circumstances this bleeds of a sliver of value daily.  These slivers compound relentlessly.

I want to be the firs to warn that the trade I'm going to show here is not for a "large" allocation.  The ^VIX and of course VXX from time time explode upward due to volatility events (usually market crashes).  When fear is high, VXX can double or triple in just a few weeks or months.  Over long periods of time, it will decay about 60% a year but there is a non-zero chance of a bet against VXX going to zero.  Thus you can't go "all in". 

There are two ways to bet against VXX: a direct short of the underlying and buying long puts.  I have successfully shorted VXX before but it can sometimes become hard to borrow and there is theoretically more risk involved.  Buying puts has a pre-defined risk profile and I'm going to focus there.

What I regularly do is deploy 5 to 10% of my capital in my trading account to long dated long puts, usually buying the longer dated leaps such as the 21JAN2022 puts.  I will go out of the money a few percent (or a few strikes if you prefer) and hold until the put moves near/into the money.  Since the beginning of the year I have closed one such trade for 1270 in profits on 12590 capital at risk (153% annualized return) and 1100 on 14650 capital at risk ( 43% annualized return).  I have a deeply underwater 13 strike put from January that is 5572 in the red (14700 capital at risk).  I will have to hold that one until at least the underlying gets back to 13 (another 47% decline) and probably longer to break even.  It is highly likely I will ultimately come out ahead though if I can just be patient with the "dead money".

I have another VXX long put at the 23 strike purchased on 5AUG2020 for 9.15 a share.  That is currently worth 9.83 a share.  I expect to roll soon.  Given the current delta, I have about 50 cents more of upside so will target around 10.35 to exit.  Thats about a 13% gain and it could realistically happen in less than 30 days. 

Note that while the underlying falls about 60% a year on average, you can make a lot more than 60% a year with long dated puts.  There are about seventeen 5% drops (compounded) in a 60% decline ( 85%).   Also, the long dated put gives you leverage.  Doubling or tripling your money on 10% of your portfolio most years is a reasonable expectation.  Just don't get greedy.  This is always a non zero chance your put could expire worthless.

I sincerely hope this helps someone without it causing anyone to take unreasonable risks.

« Last Edit: August 17, 2020, 05:24:58 PM by Financial.Velociraptor »

hodedofome

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #1 on: August 17, 2020, 08:28:56 PM »
All the good products have been shut down. XIV, TVIX etc. what’s a guy gotta do to lose his money quick these days?

I lost $20k overnight on XIV back in 2014. That was a fun day.

ChpBstrd

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #2 on: August 18, 2020, 09:39:35 AM »
My 2 cents:

VIX peaks are typically short-lived, because when option prices deviate from their long-term expected values in response to short term concerns, arbitrage opportunities are quickly exploited. It seems logical to buy puts cheaply during one of those peaks in the VIX, but what I’ve found is that the options market for vol does not work the same way as it does for stocks - and not just because they are European style options.

When VIX hit 80 back in March, I ran out to check options quotes and found they were barely changed compared to when VIX was 30ish. Additionally, there were mere pennies on the dollar to be picked up by doing bearish spreads in the 30’s or 40’s. The options market had priced in an inevitable return to VIX normalcy.

In hindsight, the correct risk posture at that point would have been to go long stocks and then write a ladder of bull spreads on the VIX as a hedge. It is certainly possible for VIX to fall even as stocks grind lower, especially from such historic heights, but the two are reasonably counter-correlated.

VVIX, or the volatility of the VIX, is a reasonable metric for the priciness of VIX options. 100 can be considered roughly par.

As @Financial.Velociraptor noted, this is only for speculative asset allocation levels. The future is not obvious, even if these instruments respond predictably to that future.

hodedofome

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #3 on: August 18, 2020, 01:42:44 PM »
I just short VXX outright. It's average return since inception is -50% or so, and costs me around 7% in interest per year. I cover the short a bit when it's been down for some time, and add to it during big spikes.

When that 50 cent guy comes back in the market, I'm tempted to pare back the VXX short. He's been pretty on the money the past several years. Maybe I'll wait for the trade to move against him a bit then buy some VXX calls.

Stache-O-Lantern

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #4 on: August 18, 2020, 07:26:36 PM »
I have another VXX long put at the 23 strike purchased on 5AUG2020 for 9.15 a share.  That is currently worth 9.83 a share.  I expect to roll soon.  Given the current delta, I have about 50 cents more of upside so will target around 10.35 to exit.  Thats about a 13% gain and it could realistically happen in less than 30 days. 

I'm barely aware of the "Greeks" as it pertains to options.  Wouldn't delta move in your favor as the put moved into the money? How do you choose a price to exit at?  Assuming this is a put that expires on 21JAN2022, about 15 months from now, a good reason to sell soon would seem to be rolling into the 17JUN2022 options, giving yourself another 5 months of cushion.  Is there another reason to sell these relatively quickly?

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #5 on: August 18, 2020, 08:27:15 PM »
I have another VXX long put at the 23 strike purchased on 5AUG2020 for 9.15 a share.  That is currently worth 9.83 a share.  I expect to roll soon.  Given the current delta, I have about 50 cents more of upside so will target around 10.35 to exit.  Thats about a 13% gain and it could realistically happen in less than 30 days. 

I'm barely aware of the "Greeks" as it pertains to options.  Wouldn't delta move in your favor as the put moved into the money? How do you choose a price to exit at?  Assuming this is a put that expires on 21JAN2022, about 15 months from now, a good reason to sell soon would seem to be rolling into the 17JUN2022 options, giving yourself another 5 months of cushion.  Is there another reason to sell these relatively quickly?
@Stache-O-Lantern
Yes, delta works in my favor as the put moves closer/into the money.

Delta as a percentage of the underlying is highest exactly at the money.  I buy the puts slightly out of the money and target selling when they are at the money.  Sometimes I hold a little longer and let the put move deep into the money but that part is more art than science.

I am at the 21JAN2022 expiry as you guessed.  I'll likely roll to a lower strike at the same expiry.  I'll roll out to the new LEAPS (jan 2023) when they become available in october or november.  The Jun 2022 expiries are not likely to have very much liquidity at least compared to the annuals.

Stache-O-Lantern

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #6 on: August 18, 2020, 10:08:03 PM »
Financial.Velociraptor, by the way, thanks for posting more on this topic.

specialkayme

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #7 on: August 19, 2020, 05:16:21 AM »
@Financial.Velociraptor how long are you in each trade, on average?

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #8 on: August 19, 2020, 09:01:34 AM »
@Financial.Velociraptor how long are you in each trade, on average?

It varies wildly.  The two most recently closed positions were open 24 and 64 days.  I have one open position that has been open since January and another that has been open since early August that is close to rolling.  I've been in the trade as little as 5 days before and have had to hold for more than a year when it moved against me.

I'd say in "normal" markets (whatever those are) it runs about 45 days.

hodedofome

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #9 on: August 19, 2020, 10:05:04 AM »
If VXX was to experience a season of continuous backwardation would you bail on the trade until it returns to a contango situation? I'm looking at the late 90s where even though markets were rising, VIX was rising as well. That's my biggest concern with my VXX short, besides a nuclear war event that spikes VIX 500% overnight.

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #10 on: August 19, 2020, 10:34:39 AM »
I'd say in "normal" markets (whatever those are) it runs about 45 days.

That holding period is about what I expected.

To be honest, I was surprised your strategy involved buying puts so far out in time, that are also OTM. Typically when buying options (from what I've experienced thus far, not inclusive of VXX), you get more "bang for the buck" buying ITM options and watching them go further ITM (0.7 Delta typically), than buying OTM and hoping they go ITM (or NTM). I also typically see people going out in time the longer of 3x the expected holding period, or 2x the holding period plus 45 days, as usually more than that you're paying for too much premium that holds you down (for example, if you expect to have a 10 day average hold period buying the 65 day option, or if you expect to have a 45 day hold period buying the 135 day option). Not a set in stone rule of course, but the goal is to (i) avoid the 45 day theta collapse, and (ii) avoid buying too much time premium relative to your investment.

The VXX appears to not work in line with those strategies. For the January 2022 options, the further you go ITM you don't really get an increase in Delta (the 25 Put has a Delta of -.25, while the 30 has a Delta of -.29, and the 45 has a Delta of -.35), so it doesn't really make sense to go deep ITM with VXX. Longer options on VXX also don't appear to cost too much more (the January 2022 25 put is 10.5 while the January 2021 is 5.9). Considering I'm buying volatility premium ON A VOLATILITY INDEX, I expected the premium on extended time periods to be more than it is.

Thank you for sharing @Financial.Velociraptor and thank you for the opportunity to learn something new!

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #11 on: August 19, 2020, 01:28:10 PM »
I'd say in "normal" markets (whatever those are) it runs about 45 days.

That holding period is about what I expected.

To be honest, I was surprised your strategy involved buying puts so far out in time, that are also OTM. Typically when buying options (from what I've experienced thus far, not inclusive of VXX), you get more "bang for the buck" buying ITM options and watching them go further ITM (0.7 Delta typically), than buying OTM and hoping they go ITM (or NTM). I also typically see people going out in time the longer of 3x the expected holding period, or 2x the holding period plus 45 days, as usually more than that you're paying for too much premium that holds you down (for example, if you expect to have a 10 day average hold period buying the 65 day option, or if you expect to have a 45 day hold period buying the 135 day option). Not a set in stone rule of course, but the goal is to (i) avoid the 45 day theta collapse, and (ii) avoid buying too much time premium relative to your investment.

The VXX appears to not work in line with those strategies. For the January 2022 options, the further you go ITM you don't really get an increase in Delta (the 25 Put has a Delta of -.25, while the 30 has a Delta of -.29, and the 45 has a Delta of -.35), so it doesn't really make sense to go deep ITM with VXX. Longer options on VXX also don't appear to cost too much more (the January 2022 25 put is 10.5 while the January 2021 is 5.9). Considering I'm buying volatility premium ON A VOLATILITY INDEX, I expected the premium on extended time periods to be more than it is.

Thank you for sharing @Financial.Velociraptor and thank you for the opportunity to learn something new!

Your risk/reward are higher the further out of the money you go and lower the further into the money you go.  Likewise, your risk is highest the closer your expiry is.  If you bought say the March expiry in January, you probably would have ended up with an investment worth exactly zero dollars.  With the long dated options, I have a lot of time for contango to eat away at value and recover from a volatility spike.  I'm not aware of any 500+ day periods where you wouldn't have at least a small profit on VXX puts.  There are certainly lots of losing scenarios for short time periods though.  I learned this the hard way, by experiencing 100% losses while trying to knock it out of the park.

Back in grad school one of my Finance profs said "Daddy always said" ('daddy was also a Ph.D. professor of Finance from West Texas) "bulls and bars both make money but hawgs always get slaughtered".  I'm just trying to maximize my profit while covering my backside.  E.g. don't be a hog.

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #12 on: August 19, 2020, 09:47:27 PM »
This is fascinating. Thanks for posting @Financial.Velociraptor !

mntnmn117

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #13 on: August 20, 2020, 09:29:13 AM »
So the two ways you lose everything are that VXX get shut down and all your puts become worthless overnight or the market experiences a historically long period of volatility that extends past expiration?

ChpBstrd

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #14 on: August 20, 2020, 11:56:22 AM »
@Financial.Velociraptor why do you prefer VXX over simply VIX? Why take on the added complication of whatever the ETF might do?

Stache-O-Lantern

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #15 on: August 20, 2020, 01:18:48 PM »
@Financial.Velociraptor why do you prefer VXX over simply VIX? Why take on the added complication of whatever the ETF might do?

I'll hazard a guess and see if I'm right as I try to understand this.

I think it's because VIX is just a straight index, it has no overhead.  VXX, as an ETN, has actual operating costs as it tries to match the VIX.  The ongoing operating costs cause it to trend downwards over longer time spans.

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #16 on: August 21, 2020, 08:49:24 AM »
@Financial.Velociraptor why do you prefer VXX over simply VIX? Why take on the added complication of whatever the ETF might do?

^VIX is arguably efficiently priced and offers no edge.  I'm not betting on volatility.  I'm making a bet on contango in the market for ^VIX futures.  Over long periods of time VXX tracks ^VIX really badly.  Because it simulates the daily movement with a combination of the front month and second month futures on ^VIX and rolls daily; it daily sells a cheap asset to use the proceeds to buy a more expensive one.  This destroys value.

So ^VIX futures have time value that will always go to zero and are probably a losing bet.  VXX has decay built in that makes long dated puts attractive.
@ChpBstrd

cschx

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #17 on: August 23, 2020, 06:39:13 PM »
So then how does one actually bet on volatility? For example if you think markets are in crazy bubblicious territory and are facing some upcoming tail risk events... purely theoretical example, of course!

What is the VIX play that would have worked back in February?

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #18 on: August 23, 2020, 07:17:38 PM »
So then how does one actually bet on volatility? For example if you think markets are in crazy bubblicious territory and are facing some upcoming tail risk events... purely theoretical example, of course!

What is the VIX play that would have worked back in February?

^VIX or VXX calls when you think the markets are going to go into "Backwardation".

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #19 on: August 25, 2020, 12:03:10 AM »
Wow it’s like you read my mind @Financial.Velociraptor. I was about to ask you for more details and you already provided very in depth explanations. So thank you so much.

@mntnmn117 I’m assuming @Financial.Velociraptor wouldn’t just eat the loss on sustained volatility, but rather would roll out his long puts even further (for instance with his underwater 13 put) until it at least broke even.

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #20 on: August 28, 2020, 09:14:39 AM »
So then how does one actually bet on volatility? For example if you think markets are in crazy bubblicious territory and are facing some upcoming tail risk events... purely theoretical example, of course!

What is the VIX play that would have worked back in February?

TVIX - from $40 to $1,000 in less than 1 month. It's like winning the lottery.

Of course they shut the ETF down a few months ago...

cschx

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #21 on: August 29, 2020, 01:00:00 PM »
I've been reading more about this topic over here: Puts on VXX. According to their analysis it's better to buy XIV as opposed to buying puts on VXX, but neither of those strategies are long-term winners.

Since the VIX is mean reverting and central banks hate volatility, I wonder if the best strategy would be to wait for VIX to spike and then buy XIV? Timing the spike seems impossible... yet there was an interview on Realvision a while back where the analyst (Sven Henrich of Northman Trader) claimed you can chart the VIX, and that some predicted the March spike well in advance purely on the technicals.

The Fed has the unique ability to suppress the price of volatility, and they have been doing a smashing job of that since March. But just because the price of volatility has been driven down doesn't mean that uncertainty has been eliminated. In particular that VIX spike we had back in June gives the impression of massive uncertainty boiling just under the markets' calm surface.

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #22 on: August 30, 2020, 10:03:11 AM »
I've been reading more about this topic over here: Puts on VXX. According to their analysis it's better to buy XIV as opposed to buying puts on VXX, but neither of those strategies are long-term winners.

Since the VIX is mean reverting and central banks hate volatility, I wonder if the best strategy would be to wait for VIX to spike and then buy XIV? Timing the spike seems impossible... yet there was an interview on Realvision a while back where the analyst (Sven Henrich of Northman Trader) claimed you can chart the VIX, and that some predicted the March spike well in advance purely on the technicals.

The Fed has the unique ability to suppress the price of volatility, and they have been doing a smashing job of that since March. But just because the price of volatility has been driven down doesn't mean that uncertainty has been eliminated. In particular that VIX spike we had back in June gives the impression of massive uncertainty boiling just under the markets' calm surface.

You can't buy XIV any longer.  A vol spike caused its NAV to go negative and it shut down operations. 

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #23 on: September 02, 2020, 09:25:43 AM »
The VXX put trade has been frustrating lately.  The market has been up but VXX rises with it.  Ordinarily, they are inversely correlated.  Leads me to think the market is "climbing a wall of worry".  If expectations for future volatility are higher than current volatility (as evidenced by futures pricing), the big money is betting on a reversal.

cschx

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #24 on: September 03, 2020, 09:44:40 AM »
The VXX put trade has been frustrating lately.  The market has been up but VXX rises with it.  Ordinarily, they are inversely correlated.  Leads me to think the market is "climbing a wall of worry".  If expectations for future volatility are higher than current volatility (as evidenced by futures pricing), the big money is betting on a reversal.

Well the situation seems to be resolving itself!

Too bad I didn't take my own advice and buy vol when it was cheap. Now methinks it's too late, at least in the near term. Clearly I shouldn't be dabbling in this stuff at all, but it is fun to watch!

hodedofome

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #25 on: September 03, 2020, 07:35:57 PM »
The VXX put trade has been frustrating lately.  The market has been up but VXX rises with it.  Ordinarily, they are inversely correlated.  Leads me to think the market is "climbing a wall of worry".  If expectations for future volatility are higher than current volatility (as evidenced by futures pricing), the big money is betting on a reversal.

In the 90s the market was rising and volatility was rising also.

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #26 on: September 04, 2020, 05:28:41 AM »
Between uncertainty over corona virus and the 2020 election, I would expect volatility to increase.

The VIX shot up after the first week of June, when the economy was reopening.  A vaccine might cause a similar volatility spike - and the CDC is telling states to prepare for that on Nov 1st.  That's the same week as the 2020 Presidential election, so I expect volatility to be quite high during Nov 2-6.  If I had to buy put options on the VIX, I'd wait for Nov 2-6 and buy during that week.

(I don't plan to do so, as I expect my long-dated call options in Covid sensitive stocks will be more profitable.  But I also could be biased towards positive vaccine news, since that's where my investments are focused).

MustacheAndaHalf

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #27 on: September 04, 2020, 09:16:45 AM »
@Financial.Velociraptor - Looks like the cause of the odd VIX behavior has been discovered, at least according to this Financial Times article.

https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2

"SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally"

"This also helped explain the unusual sight of the US stock market climbing in tandem with the Vix index — often referred to as Wall Street’s “fear gauge” — and meant that equities were fragile and vulnerable to the kind of sudden setback that erupted on Thursday. “The equity volatility complex is acting ‘broken’ and indicative that ‘something’s gotta give’,” Mr McElligott warned in a note shortly before the Nasdaq fell 5 per cent. "

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #28 on: September 04, 2020, 10:39:56 AM »
@Financial.Velociraptor - Looks like the cause of the odd VIX behavior has been discovered, at least according to this Financial Times article.

https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2

"SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally"

"This also helped explain the unusual sight of the US stock market climbing in tandem with the Vix index — often referred to as Wall Street’s “fear gauge” — and meant that equities were fragile and vulnerable to the kind of sudden setback that erupted on Thursday. “The equity volatility complex is acting ‘broken’ and indicative that ‘something’s gotta give’,” Mr McElligott warned in a note shortly before the Nasdaq fell 5 per cent. "

Softbank! Those muthafuckas!  Seriously, those guys have built a really WEIRD financial services company.  Wouldn't surprise me if it eventually implodes like LTCM.

ChpBstrd

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #29 on: September 04, 2020, 01:17:03 PM »
@Financial.Velociraptor - Looks like the cause of the odd VIX behavior has been discovered, at least according to this Financial Times article.

https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2

"SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally"

"This also helped explain the unusual sight of the US stock market climbing in tandem with the Vix index — often referred to as Wall Street’s “fear gauge” — and meant that equities were fragile and vulnerable to the kind of sudden setback that erupted on Thursday. “The equity volatility complex is acting ‘broken’ and indicative that ‘something’s gotta give’,” Mr McElligott warned in a note shortly before the Nasdaq fell 5 per cent. "

I’m truly torn over whether I should subscribe to the FT or the WSJ. From the article:

Quote
dynamics around options meant the heavy purchases forced banks on the other side of the trades to hedge themselves by buying stocks, in a “classic ‘tail wags the dog’ feedback loop”. 

If the cat is out of the bag, then SoftBank could face massive losses on its long calls as market participants realize they were just pushing prices up. Additionally, Softbank’s counterpart banks who are holding tech stocks could face huge losses if the current rush to the exits continues beyond what they received from selling the calls (the same way one loses money on a covered call).


MustacheAndaHalf

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #30 on: September 05, 2020, 12:26:54 AM »
"SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally"
"This also helped explain the unusual sight of the US stock market climbing in tandem with the Vix index ..."
Softbank! Those muthafuckas!  Seriously, those guys have built a really WEIRD financial services company.  Wouldn't surprise me if it eventually implodes like LTCM.
From the article:
"Regulatory filings show SoftBank bought nearly $4 billion of shares
... SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought"

Softbank might be wasting $4 billion or so... which would be about 1% of their $300 billion in assets.  They're also a Japanese company, where bad loans tend to be allowed to roll over instead of forcing a bankruptcy (at least in the past - not sure how prevalent zombie company's are now).  So I don't think the stock market will punish them.  I wonder if their actions will be viewed as market manipulation (gone wrong) by the SEC?

More on topic: given this new information, what does it mean for buying VIX puts?


https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2
From the article:
Quote
dynamics around options meant the heavy purchases forced banks on the other side of the trades to hedge themselves by buying stocks, in a “classic ‘tail wags the dog’ feedback loop”.
If the cat is out of the bag, then SoftBank could face massive losses on its long calls as market participants realize they were just pushing prices up. Additionally, Softbank’s counterpart banks who are holding tech stocks could face huge losses if the current rush to the exits continues beyond what they received from selling the calls (the same way one loses money on a covered call).
Softbank: "I'd like to invest $4 billion in tech company call options"
Suze Orman: "With your $300 billion in assets, you can afford it.  Approved!"

By counterpart banks, do you mean investment banks like Goldman Sachs?  Seeing tech stocks making massive gains, the investment banks probably sold covered calls.  At least, I hope an investment bank wouldn't look at a stock like Apple gaining +132% in 12 months, and sell a billion dollars worth of calls without hedging their risk.  So you're probably right that the investment banks own shares - but I'd guess they already had large positions in tech companies.

ChpBstrd

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #31 on: September 07, 2020, 08:20:24 PM »
Something is not clicking with me about how a $4B investment would be enough to corner the market on shares in $2.1T market cap Apple, 389B market cap Tesla, etc. Oh yea, and spread the $4B across multiple tech stocks, making it even less effective. TSLA has an average volume of 75M shares ($31.35B) per day. Softbank's whole investment would be a tiny blip.

If I had $4B to spend and wanted to corner the market on a stock so my call options paid off, I'd be picking something relatively small cap because I'd have to wage a multi-week campaign of buying up much of the liquidity each day.

Fake financial news.

MustacheAndaHalf

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #32 on: September 08, 2020, 01:06:16 AM »
ChpBstrd - I wouldn't call it "Fake financial news", but maybe I can help make it click and see if you agree.

https://finance.yahoo.com/quote/AAPL?p=AAPL
The key aspect is the options (not stock), where the market is much smaller.  Options expire at various dates, so I'd have to guess which ones Softbank bought over the past few weeks.  For Oct 2, the most popular options had about $10 million worth traded Friday.  For Dec 18 expirations, all of them amount to $50 million or so (December has only one expiration date, while October has four).  Softbank spending $1 billion on Apple call options in a matter of weeks would easily impact the options market.

Also, just to clear one thing up: Apple's market cap doesn't determine it's stock price.  Most shares do nothing, and do not participate in price discovery.  Friday's trading determines the price of Apple stock.  On that day, 333M shares traded at about $123/share (mid day), for a total of about $41 billion worth.  You could easily push Apple's stock price around with $21 billion in purchases (half of one day's volume), despite it being 1% of Apple's market cap.

ChpBstrd

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #33 on: September 08, 2020, 10:21:46 AM »
ChpBstrd - I wouldn't call it "Fake financial news", but maybe I can help make it click and see if you agree.

https://finance.yahoo.com/quote/AAPL?p=AAPL
The key aspect is the options (not stock), where the market is much smaller.  Options expire at various dates, so I'd have to guess which ones Softbank bought over the past few weeks.  For Oct 2, the most popular options had about $10 million worth traded Friday.  For Dec 18 expirations, all of them amount to $50 million or so (December has only one expiration date, while October has four).  Softbank spending $1 billion on Apple call options in a matter of weeks would easily impact the options market.

Also, just to clear one thing up: Apple's market cap doesn't determine it's stock price.  Most shares do nothing, and do not participate in price discovery.  Friday's trading determines the price of Apple stock.  On that day, 333M shares traded at about $123/share (mid day), for a total of about $41 billion worth.  You could easily push Apple's stock price around with $21 billion in purchases (half of one day's volume), despite it being 1% of Apple's market cap.

I agree that the market for options is much thinner than the market for the stock, but because options prices are priced by a formula, any excess amount paid for an option would just disappear into counterparties' pockets due to put-call parity, especially among shortable stocks (see put-call parity). You'd have to move the stock too. The theory is that because Softbank bought so many call options, the other banks who sold them those options had to buy the stock, setting themselves up in a covered call position and bidding the stock's price up in the process. 

AAPL has an average daily volume of 168M shares ($19.7B)*. That's the amount traded every single day. Supposing that was roughly the volume in the spring, and supposing Softbank spent $1B on way-OTM Apple call options priced at 1/20th the price of the shares, that would mean Bank of America, Goldman Sachs, etc. would have had to buy $20B in Apple stock. That's about one day's volume, but it was almost certainly spread out over several weeks unless we are entertaining a theory that Softbank started the rally that momentum investors then continued without them. Over three weeks' time (15d), purchases for covered calls could have accounted for 1/15th of each day's volume.

Also, it was probably not necessary for all counterparties to buy stock. Some may have already owned the underlying stock. Others might have hedged their exposures with more options trades, such as selling the calls to Softbank as part of a condor or spread. Others might have hedged the sale of the overpriced call by shorting AAPL and buying a put. So make that maybe 1/20th of daily volume.

In comparison, when the Hunt brothers cornered the silver market in the late 70's / early 80's, they controlled 2/3rds of the volume via futures contracts.**

*https://finance.yahoo.com/quote/AAPL?p=AAPL&.tsrc=fin-srch
**https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp

MustacheAndaHalf

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #34 on: September 08, 2020, 10:16:35 PM »
From the articles I read, I have the impression buying a huge volume of options can move the stock price.  I don't know why - maybe high frequency traders are interpreting the options prices as a signal for the stock price?  There could also be arbitrage of some kind when the options diverge too far from the stock price, which would encourage buying stock to balance it out.

Another thing about options: supplies are limited (act now! :).  Sometimes I can only buy a single contract at a certain price.  Softbank was willing to pay more, so that raises the bid price.  I assume they bought up all the options in a range of prices since they had to much to invest.  So they probably raised the bid and ask prices due to their massive options buying.  Anecdotally, a CNBC contributor (not an ideal source - it's just an anecdote) who trades options said he was pushed out of the market recently in a way he hadn't seen before.  He might have a story to tell about the recent events - maybe I'll look for that.

Thanks for sharing the story of the silver market cornered by the Hunt brothers.  They had billions in the 1970s, and pursued an idea very different from the market, which caused them to buy up silver at crazy prices.  If they had bought more slowly at lower prices, they could have cashed out in the 1980s when inflation spiked as they predicted.  In a hopefully unrelated note, silver is up +49% this year (compared to gold +27%).


Heading back towards the topic, I tried to compare the ^VIX to ProShares UltraShort Silver (ZSL) in Google Finance, and failed.  Their graphs look similar, but Portfolio Visualizer says the two are only 0.3 correlated.  I guess silver is no substitute for the ^VIX.

talltexan

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #35 on: September 10, 2020, 02:34:23 PM »
In keeping with the spirit of this thread, I just sold a $70 put contract on $AEP; $139-ish in my pocket, and the contract strikes on 11/20. So I do bear risk over the, ahem, election.

YYK

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #36 on: March 24, 2021, 07:10:38 AM »
How is the VXX trade going these days? I'm not involved in this yet but I'm thinking I'd like to tip my toes in soon. With the market at all time highs I wonder if it's a bit dicer than usual.

talltexan

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #37 on: March 24, 2021, 08:27:53 AM »
Update: I'm continuing with my put-selling, short contracts on $JPM, $AEP, and $X (the last one wildly out of the money)

hodedofome

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #38 on: March 24, 2021, 08:28:10 AM »
How is the VXX trade going these days? I'm not involved in this yet but I'm thinking I'd like to tip my toes in soon. With the market at all time highs I wonder if it's a bit dicer than usual.

Personally, I would wait until another VIX spike. They happen at least once or twice a year.

MustacheAndaHalf

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #39 on: March 24, 2021, 08:55:17 AM »
Looking at the past year, the March 2020 spike in the ^VIX stands out.  But there have been a number of smaller spikes in volatility since then.

Setting aside my current annoyance with Vanguard, I'm liking "put spreads" more these days.  I'm trying to reduce the number of puts/put spreads so I can keep a better eye on them, and to make sure they're my best ideas - not just vague ideas.

I have a put spread on Dave & Buster's (PLAY).  Their share dilution means a recovery should be to a price/share that's 75% of their prior price.  So I bought a put option at $55/share, and sold a put option at $30/share.  Selling the $30 strike lowers my cost, and also pushes my breakeven point higher.

I've also got a pure put option, because I have no idea how far AMC is going to fall.  It's my favorite for taking a loss - it recently fell so fast, I had to race to buy put options.  So I have put options on AMC, for a number of reasons.

(1) Wall Street Bets can't fight printing more shares.  There are 4x as many AMC shares now compared to 2019.  That means their $16/sh price is more like $4/sh now.  (2) Streaming competition, their customers are staying at home, paying less for movies.  (3) Disney, a major source of movie theater revenue, has started offering movies on it's platform the same day the movies start in theaters.  (4) Massive debt load according to online websites - over 3x their market cap.

On the positive side, their might be a rebound visit to movie theaters over the summer - just to get out of the house.  I think put options on movie theaters should extend well past summer - enough time for normal revenues to kick in.

In case anyone is tracking this, for later:
AMC put at $12/sh expiring 2021-Sept-17
PLAY put spread from $55/sh to $30/sh expiring 2022-Jan-21

Actually September is a bit aggressive for AMC.  I'm going to look at longer-dated puts, since September is too close to the end of summer for my taste.

YYK

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #40 on: March 24, 2021, 09:27:04 AM »
How is the VXX trade going these days? I'm not involved in this yet but I'm thinking I'd like to tip my toes in soon. With the market at all time highs I wonder if it's a bit dicer than usual.

Personally, I would wait until another VIX spike. They happen at least once or twice a year.

I was somewhat thinking along these lines, but I remember from the UVXY thread a few years back that taking out puts at a VIX peak wasn't always a good idea because of the increase in vol pushing up options prices as well. VXX is a different product but I wonder if that holds to the same extent.

Financial.Velociraptor

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #41 on: March 24, 2021, 03:03:10 PM »
How is the VXX trade going these days? I'm not involved in this yet but I'm thinking I'd like to tip my toes in soon. With the market at all time highs I wonder if it's a bit dicer than usual.

OP here.  I had two sets of VXX puts open at the time of this post.  The higher strike has been sold for 1,530 in profit (30% annualized over 122 days holding period).  The 13 strike from before the COVID market crash is still underwater but getting close to break even.  I plan to exit it when I can at a modest profit and sit out the trade until the next market correction.  The CAPE is getting stupid high and it is prompting me to play more defense and less offense.
« Last Edit: March 24, 2021, 03:05:39 PM by Financial.Velociraptor »

park10

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Re: Options heretics thread - VXX and other ^VIX products
« Reply #42 on: April 06, 2021, 05:46:20 PM »
How is the VXX trade going these days? I'm not involved in this yet but I'm thinking I'd like to tip my toes in soon. With the market at all time highs I wonder if it's a bit dicer than usual.

OP here.  I had two sets of VXX puts open at the time of this post.  The higher strike has been sold for 1,530 in profit (30% annualized over 122 days holding period).  The 13 strike from before the COVID market crash is still underwater but getting close to break even.  I plan to exit it when I can at a modest profit and sit out the trade until the next market correction.  The CAPE is getting stupid high and it is prompting me to play more defense and less offense.

$VXX closed at $10.77 today. Well done..