So it all comes down to managing your risk, sizing your positions, hedging your tail risk and so on. There is one point that makes sense to me out of all this that inverse etfs are at higher risk of liquidation since an 100% intra-day spike is easier to happen when vix is 9 then when its 15-20. But if you read what their own note says, a 12 point vix spike will translate into 50% futures move, so its not going to be enough to trigger liquidation. So realistically we are talking about higher then 12 point spike something like 20 point spike in vix to get us there. Its a pretty unlikely event, but even if it does happen it only affects inverse etfs, specifically SVXY so that $1B or ~100K vix contracts that will be bought in front 2 month. It is a sizable position, but is it really going to cause market to melt down? The long vol etfs won't trigger anything on futures market. Here is volume/OI on Nov future on oct 19: 154K volume/372K OI. here is what SVXY is holding: Short 14K nov, short 79k dec. As I said, potentially an exciting day, maybe a week, thats it, nothing crazy All Morgan Stanley note said is this: since vix is low, risks of a one day event that can turn nasty have slightly increased since its easier to get that intra-day 100% spike when vix is at 9, thats all, also pointed to increased retail vol shorts and etf factor, just pointed those things out, also don't forget we had North Korea situation taking place, so a fair warning nothing more.
I can’t imagine there being a true contagion risk due to vol sellers, simply because none of them are systemically important. Even with the contribution of short gamma from all outstanding short RP, it’s not like it’s going to take S&P down 10%. Blow up will happen sooner or later. That’s a good thing. We might see a bunch of risk premium providers get blown up and be out permanently, a lot of people will get burned and stay away for a while. Maybe it’s not going to be due to a single “bad day” or even a week, we might need a few months of nastiness. Or, if we see a few successive 3+ sigma down days, it will be over quick. It’s certainly easier to blow up at these levels than when vol was at mid-teens, which will contribute to the story but not meaningfully.
ATM Vol at 7 is indicative of other risk premia. And combined that can take the market down 10-15percent.
It wouldn't require being faster than larger players. Here's a practical retail example: http://jonathankinlay.com/2016/07/developing-volatility-carry-strategy/
That's not what Bob is talking about. He was describing arbing the ETFs against the futures. Forget about that as I'm sure it's locked down. As far as that link goes it's just a spread trade that varies over time. If you want to trade the curve trade the spreads directly on CFE.
Yeah sure, but Bob was responding to my comment about 'Long VX futures short VXX; suggeting that a high fequency arb strategy was the only way to stuture the trade. But It wouldn't be the same as trading the curve. VXX suffers some kind of time decay( not just from contango)
Two things are not clear to me here (Maybe because I just woke up ): What does the actual portfolio look like? When do you enter and exit? Are the results from real trading? What do you do if the VIX were to spike 25%, 50%, 100%? How would the account owner deal with margin requirements during large VX up moves as there is no cross margining? Is the cost of shoring ETFs/ETNs included?
Seems lunacy to be selling vol now. What makes sense is to buy some way OTM SPX puts to hedge a diversified passive portfolio
It would be identical to trading the curve and VXX time decay is exactly from contango, just in a different form.