Yes, my colleague and he adds to his position, too. He explained it to me the same way. After some reasearch I am still hesitant, but for him it works.
I am shorting uvxy, and vxx..... But am very careful at vix being at the sub 20 levels. Uvxy can be hard to borrow at times, soo I borrow vxx or tvix. Anyways, If you try and short vxx and you short xiv, in 2011 vxx went up 400% from its lows...(UVXY went up 800% since its 2x) Therefore if you entered at that time, you would have been -400% in the negative in the position and your xiv short would have gained you like 95% or soo, soo overall you would have been deep in the red if you entered the position dollar neutral.Dont forget the most you can make shorting is 100%. But your loss is potentially unlimited. Be careful.
I was converting some charts to synthetics and I remembered this thread. I did a quick test. Account equity: 100k Every day, short sell SPY and SDS on market open, 50k each. Close positions on market close. Starting date of test: 28/Jan/1993 Ending date of test: 20/Nov/2012 Resulting equity curve attached. X axis = days, Y is NAV, no comissions. I know that's not exactly the holding period you discussed but it's worth a look regarding intraday moves. Seems like it's working kind of ok in the past few years but I have no idea what happened around year 2000 when it really didn't work at all. I just thought it's interesting. The drawdowns could be reduced if you had 2x capital on the short SPY because this equity curve is obviously positively correlated with the SPY itself in the last few years, which is logical if you think about it (aside from the fact that for matched volatility you would need 2x capital because it is a 2x inverse ETF).
Yes, the correction is overdue. Too many Hedge funds fading vega or what is going on in this market. I sit in Europe and I honestly believe Greece will be dropped, soon. Money pours into the country, but it does not reach the people by far. Too much corruption and ignorance. What a waste of German tax money. Billions are gone into pockets of a few in Greece. It will be never enough. The system has to collapse! It´s like a tumor, which kills you. But then the tumor is wiped out, too. Sad, but that´s how it is in this sick world. Is the USA better off? The answer is obviously is clear. It´s just a matter of time, Black Swan, but after that get in big.
Braindead trade. Not only is it hugely tedious to keep the sides balanced with one another, but you're really just collecting a small premium to provide someone else insurance against a tail event, which I think is what NJRookie means by convexity. Put another way, as long as the movements stay within the +/- 10% band between rebalancings (assume daily) you come out ahead. But what if you're short FAS and short FAZ to collect this "decay" premium. Now, what if a tail event happens and the market tanks by a huge amount, say 50%? the short contract (FAZ) will go up by 150% (and you'll be down 150% b/c you're short) but the long contract won't go down by 150%, since it can't go below zero. This is a ridiculous example but same math holds for smaller percent moves that are not unrealistic.
This is true - but this would be an event where the market just drops straight for all the days before you rebalance. If there are gyrations (like August 2011), you actually can survive this. -If you rebalance daily, you won't get enough (any) alpha to offset the short costs. -If you wait to long to rebalance, long trends will kill you. -They key is to find a nice middle ground.