Registered: Oct 2012
10-24-12 02:07 PM
Quote from filthy:
i'm glad you liked the books. A new edition of "Volatility Trading" is coming out in April. It will have about 100 pages of new stuff.
I think the article will be out in the December issue but I'm really not sure. I know they have a very fast turn around time.
I'm fairly sure that the VIX trade will continue to work. I think generally there are two fundamental types of trades. Sometimes these are loosely called "alpha" and "beta" (very loosely). The first is an active trade that has to be worked at. It is the kind of thing that a trader makes rather than finds. An example would be a pit trader with unusual execution skill or a computer trader who has figured out how to game VWAP. The second type of trade is basically collecting a risk premium. These trades are easy to find. EG the low vol stock anomaly, the carry trade, the variance premium. These tend to exist for deep psychological reasons (this is a conjecture of mine. i don't think there is a concensus about why these exist). The trick here is to really understand what drives the premium, what the dangers are and when to avoid the trade. They are knowledge based, risk management trades. I think this VIX trade is one of these.
Yes. This categorization of trading is very clear and insightful.
Since most of us can't trade like market makers, perhaps the only way to profit is to untilize the risk premium. Behavioral finance has lots of theories on this.
I think the premium of vix futures is simply because of the favorite/longshot bias, just like you see in horse racing. There are so many people who want to make profit from the vix spikes, as a result they push the futures' price so high. And when it does jump to a high level, those investors can't wait to cash in the profit. As a result when the vix is high, the futures' price is in deep discount. This is the exactly the bias in horse racing that good hosrse are under bet and poor horses are overbet.