Registered: Mar 2007
04-16-12 01:39 AM
Quote from kinggyppo:
bout the same odds as a retail schlub making $$ on tvix.
...speaking of which, John Dizard's weekend column in the FT was all about the Vix, and had this to say:
Vix products are not for rational investors
“Everyone knows” that US residential real estate is a bad investment, with the Case Shiller Home Price Index having dropped by about 32 per cent since its 2005 peak. At the end of last week, the iPath S&P 500 Vix Short Term Futures Exchange Traded Note had lost that much in one month. Not seven years. One month. Over the previous six months, the vehicle had lost more than 69 per cent of its value. The managers didn’t do anything other than rigorously follow their charter, and their strategy has been fully disclosed, along with the trading history...
...Back in the real world, could the apparently frantic trading in Vix products threaten the financial system?
I doubt it, but the hedging activities generated by the Vix family may have had some effects on the S&P 500 Index. Howard Simons, of Chicago-area-based Arbor Research & Trading, says that on big down days the hedging requirements of those selling volatility products such as the Vix futures “requires more selling (in the S&P 500) in a cycle, reminiscent of the portfolio insurance made infamous in the 1987 crash”. But if the market makers’ hedging can exacerbate a sharp daily decline, it also leads to much more rapid recoveries in following days, as the price of implied volatility jumps. Over longer periods of time, Mr Simons, an acid Vix sceptic, believes that “the tail [the Vix] has wagged the dog [the S&P 500] and has compressed what used to be normal higher levels of volatility into a mix of a few bad days and a large number of quiet days”.
...and when you buy Vix futures or options, you are not actually buying “volatility”. Those products are based on the prices of forward start variance swaps. If you don’t know what that means, don’t buy Vix products.
Two things jump out of this:
1 - I started up a new - still small - position in May last week, and on Friday I experienced, on a tiny scale, what Dizard may have been talking about as to how on big down days you have to keep adding on. I went negative on vega in the first half of the day because the SPY put spreads were all well in the money. Figured I needed to add a little to put it back to positive. So I added one 137/131 @1.45, financed with a 19/23 Vix May call spread that I sold for 1.43. SPY was approaching 138 when this executed, and of course ended very close to 137. This made my vega slightly positive for the open tomorrow.
2 - "Forward start variance swaps": did a little research on this, and the first part is simple: forward start just means it starts at some point in the future with an underlying whose price is not yet known, of course, because of that future start. Variance swaps are swaps that pay off the diff between implied and realized vol. Now I don't recall seeing that either the options or the futures on Vix are based on variance swaps. The options I always understood to be options on the Vix futures, and the Vix futures I always thought were just futures on the Vix itself. Is Dizard right about this? And if so, does it matter? Do I really care?