Yes, indeed. I will look more at the pricing, but overall it looks as low risk and high probability. I've tried to focus on "what's the worst that could happen", which would be: 1) VXX put OTM; 2) VIX put ITM...and this would only happen, if M1 and M2 go in opposite directions (down/up) @ the settlement. I assume, that you would pick the Fri expiry for VXX of the same week as VIX expiration? I'm Seattle-based right now, so it's not quite like that...
I'd think if you take VXX roll risk along for the ride with the short ITM VIX put you're now much more beholden to what VX M1M2 does and there's about 9 different ways things can go (M1 down/unchanged/up * M2 down/unchanged/up). VX M1M2 sitting unchanged may hurt your short VIX put if both M1 and M2 decrease in parallel. VX M1M2 sitting unchanged may help your short VIX put if both M1 and M2 do nothing. VX M1M2 sitting unchanged may help your short VIX put if both M1 and M2 increase in parallel. VX M1M2 increasing is likely to help the short VIX put but also hurt the long VXX put. VX M1M2 decreasing is likely to hurt the short VIX put but help the long VXX put. Basically if the curve shape flattens or steepens it should help one side and hurt the other side at the same time, hence not what you want. But if the curve shape stays the same it only helps if M1 and M2 go up in parallel or do nothing in parallel (both seem unlikely to me). So some kind of synthetic short straddle CSO on VX M1M2 + short VX M1 put (your VIX put)?I don't know, but it seems like it introduces more ways to lose. And how much of that roll cost is already priced into the VXX puts?
This is a great analysis i960. From the backtests I've seen, which is mainly retail stuff, bank white papers and some material put out by CBOE, shorting vix calls and call spreads is the way to earn. The drawdowns are sharp of course but it does seem to work.
In forward or vol? Cause you know... No, if anything (in instantaneous terms), it's a conditional spread on M1/M2. Assuming that you work out the ratios to neutralize outright vol exposure (terminal notionals, of course), you are exposed to the vix spot vs vix roll.
Thanks for the detailed analysis. I believe that the entry into this position, relative to the ratio of M1/M2 that VXX holds, is an important factor. Not to say the premium paid/received, but it's another story. In which scenario we would realize the max loss? When the VIX settles at lowest price; while VXX unchanged/up. I've recently observed opportunities to sell VIX puts, when the ETP was 50/50 in M1/M2. I think it makes for a good example. The max loss would be realized, if both contracts move in opposite directions; as the short VIX P would get deep ITM and VXX P becomes worthless. The VXX M1-M2 structure makes it somewhat complicated. But essentially, we are using the M1/M2 spread - as long as M1 doesn't exceed the put strike price - the money isn't lost. However, I still wonder if using VXX puts is the most efficient way to do it. Well, the 'great vega short' by the policymakers has been going on for a long time. I've recently looked at the total $ vega volume of the whole VIX complex (which is supposed to be based on SPX IV, yeah); compared it to SPX/SPY. It's scary, especially in moments, when huge short de-leveraging is paired with panic buying. The ETPs re-balancing is non-linear; falling volatility begets falling volatility and rising volatility begets rising volatility. At some point the music will stop, and somebody will be left holding the bag.
Yeah. That's why those people work as strategists for derivatives desks as opposed to running their own portfolios at hedge funds. Any risk premium strategy would look good since 2009 especially when you add "parameters".
I get what you mean (I think). I've seen data on variance swaps during the 2008 crash. Losses were steep, very steep.
There are two parts to my statement. One is that a lot of bank papers are example of proper statistical masturbation. Since the strategy desks are not getting paid of risk adjusted returns but getting paid for publishing ideas that look good, they would frequently come up with back-fitted ideas (which is especially easy in vol space). In general, bank strategy pieces are to be taken with a huge grain of salt. Second one is that the risk premiums were at a nadir in 2009 and have gradually declined as the end-of-the-world fears did not realize. Considering the levels of risk premia currently and the asymmetry of losses, now is definitely not the time to implement something like that.