Earlier this month I have performed the following VIX Backratio spread: - Bought 10 May 2008 20C @ 4.8 - Sold 20 May 2008 27.5C @ 2.4 I seem to be covered completely in a downtrending vix and in an uptrending vix covered up to 35 , from which I start losing money, sweet spot at 27.5. Vix seems to have trouble staying above 35 , but of course that could very well change next year.. I'm trying to assess trade management here, most favorably dumping the trade if VIX remains above 40 , where I will of course lose a few grand, but less and less with each passing day , due to favorable theta. Hope I'm not missing anything here.
Naked short VIX calls can be considered equivalent in risk terms to naked short index puts. If there is a major shock to the market, a terrorist attack is the simplest example, the VIX will explode. I know this is only a 10 lot naked which is small, but it is the idea of the trade that is problematic. Your risk/reward ratio is, as our local expert has said, insane.
Yes, I would be careful with this strategy. One look at an October 1987 VIX chart will give you nightmares. AZD
Why not do a calendar? As you are Long May20C's, go short 1/2 Jan 25C's ... The problem is that VIX is at such a low point right now that you want to be writing calls when its higher ...
Point of info: for the past year, Vix didn't get as high and stay as high as this "low point" until the end of July of this year. There's no physical law that says it can't go lower than this point and stay there.
It's funny that fin institutions go after physicists to solve their problems; an apparent disconnect.