Is it possible to execute a conversion or reversal arbitrage on the VIX to take advantage of extreme put call parity distortions and use a VIX CFD to simulate the underlying? If this works it could make huge pofits
Where exactly do you see put/call parity distortions in VIX options? In general, VIX combos trade pretty much on top of the VIX futures.
I find when the VIX gets a lot lower then it is now there are big price distortions. Because it is anticipated that it can only go higher.
The synthetics trade within pennies of the futures; whether it be 12 or 40 VIX. The liquidity is very good in the options and there are no conversions paying more than 50bp over LIBOR, even on dislocations. So I don't really get where you're coming from with these "distortions", especially a lower vol/var. Opportunity on low vol is analogous to trading conversions on shares at zero rates, there is no low-hanging fruit there... now at 10% GEs and 50-vol you will see some opportunities. My guess is that you're somehow marking cash to the options with some time left to expiration.
vix spot at 41, atm 40p $10.5 40c $2.3 the reason is because the underly is based on forward price(futures) at expiration. so the markt is expecting the vix to drop back close to 30 at expiration. is my reasoning correct. also why is there such a big disconnect between the spot and future which is at 31 right now. thanks
The Sept future has a month to go. The VIX never stays in the 40s for long (except during the panic of 2008/2009) so it's a very reasonable guess that in a month the VIX will be back near 30.
I just checked VXX few moments ago. At 40.80. I think it is short between current price and 42 for today.