Hi, I was thinking, if you thought volatility was low and you expected a spike in volatility what would be the preferred way to go about it? Buy VIX futures, possible, but you need to be right quickly as you generally lose in the roll. Short VIX puts, virtually no credit to be gained. Long VIX calls, potentially would require a pretty large move if you bought a longer dated option. Buy ATM ES Straddle, generally very expensive, but a low risk of paying the full premium. Of course no strategy is perfect and all have a cost to pay, just wondering if there are any thoughts on what the preferred way would be? A bit of background, ideally looking to capture that cyclical nature of the VIX, the short side selling after a spike probably easier than trying to exploit a turn up from the bottom hence the question. Tom
Not disrespecting you in any way but if you haven't found a suitable answer to this question in your extensive research, you shouldn't be embarking on vol product trading much less use an approach suggested in a public forum. Long volatility is risky unless you know what you are doing. Biggest bang for the buck will ofcourse be on direct vix futures or options on it.
Thank you but I was just asking for opinions, thats not the same as me not being educated on the subject or unaware of risks. But I like to hear other opinions and be challenged. There are lots of ways to exploit volatility I was just interested to hear if people over the years have settled on an approach they prefer. None of them are perfect, hence am keen on peoples's nuanced responses if there are any here.
My 2 cents: It seems your edge would be the reliability/accuracy of your expected spike in time and quantity! If you have those, you may be able to exploit, but without, IMHO is knowingly drinking the lethal koolaid. Some people do this, and IMHO, they are sometimes lucky. Predicting when a volatility spike will occur is not symmetrical with the prediction that a present volatility spike will subside! (This is in reference to SPX volatility - per your comments, not with specific equities) -- Would be nice if I am mistaken, and someone clarifies!
Yes the question assumed you were able to time a reversal in volatility and just how would you go about expressing it in the most efficient way. And yes, based on S&P not individual stocks
You've identified the issues. In my experience, other than intraday, trying to play long vol doesn't present a good risk/reward profile, or a good use of assets, whatever the instrument.
My approach right now is to sell SQQQ calls and buy VIX or VXX calls with the premium. VXX trades at 1.5x the IV and VIX trades at twice the IV. However, the average downward betas are 2x and 4x as high as SQQQ, respectively. This has worked well in the past, but there is no guarantee it will work in the future. This strategy would fail if there is a gradual sell-off that last for months without a spike in VIX. In the 2018 sell-off, this strategy came close to failing, which should give you an idea of what kind of market it would struggle in.
I trade UVXY almost daily. Right re best for daytrading vs. swingtrading. I traded VXX successfully on flash crash day years ago.. Volatility is the toughest thing to trade and for very experienced traders. I'm a dinosaur lol