Thank you for taking the time to comment and help. Another question: Why is it a poor man's vehicle to trade volatility? I have been trying to find a simple way to trade volatility, so this may be what I am looking for? Regards,
there is no simple way to trade volatility... as you can not directly trade it without hedging with the underlying, and or trading futures on volatility directly..
Well, there are but for institutional traders - you can trade variance and volatility swaps. CBOE attempted to introduce variance futures, but they failed spectacularly.
I remember a specific thread on here years ago about variance futures... I remember trying to figure out the contract etc... The whole contract was set up where your average guy couldn't clearly understand the thing.. but it was so illiquid and not available by most brokers I couldn't trade it..
Yeah, a true recipe for success, right? Add an unreasonably high margin to that... The popularity of the VXX/VIX among retail makes me wonder if a formulaic delta-hedged straddle ETF, something like the put-write index would be a success. It's not very hard to do, it's just a question of institutional desire which, in turn, is linked to potential assets.
I know... That seems the most reasonable. I talked to the founder and lead quant about a quantative strat ETF .. if he can do that I don't see why a Delta hedge spx straddle ETF couldn't be automated and started.. that seems like a good idea considering the premium people are willing to pay to get exposure to vol without strike risk
What is gonna be the difference between rolling in vix futures and Delta hedged straddle fund.... Delta drift , strike stickyness , etc. Idk..
It's a very different risk premium and with it comes a different PnL profile. Gamma is a gap risk vehicle, so you pay/collect way more in good times and have a much quicker draw-down/recovery cycle when things turn bad. Think of it this way - imagine a curve with 1m at 9% and 1m1m at 10%. The market would most probably be realizing 6ish to 7ish and you paying a vol of roll-down to own forward vol. One day our commander in chief does something smart and suddenly the market gets a 5% daily shock. On a delta hedged short-dated gamma position, you will realize a large jump in pnl. However, implied vol goes rich after a move like that and you very quickly recover when you sell the new option since you are looking at gamma weighted difference between IV and RV. On the other hand, forward vol will not spike as much, but the level of implied might stay elevated for a long time and, with inverted curve you will probably have a very different roll-down profile.