thanks for the explanation, a safer trade would be to do an atm calendar spread, sell the front month buy the furthest month when vix spikes. Since when vix spikes there is a blackswan event happening, that way you are protected against the current event as even if vix spikes again tomorrow your near month will cover. The only risk then becomes there is another unrelated blackswan after your front month expires. It's a risk but a lot smaller. yes the mean reversion nature makes this a possible play. Most people knows shorting vix when it spikes is a good bet, but as you said some do not understand the vix futures does not behave the same as vix and as such did not get their expected result. By selling a call, you are also getting the premium in addition to waiting for vix to revert. And by using the furthest month you get the max premium as vix spikes dont happen often so you want to get as much as possible when it does, even though you are extending the timeline. I would never do this though as i dont have the experience on this, but i am sure those who knows the exact behavior of vix futures in the past when the vix spiked to 60-80 can make some very good plays on it.
From its inception in 1990 the VIX never got above 50 until late last year. So actually, no one has much historical information on such spikes.
Data is available back to June 1988, using the 'old' VIX Although VIX data was not calculated for the October 1987 crash, VIX was roughly <b>150</b> on that Monday and Tuesday. Yes, 150 Mark
Tell that to the guys who bought ATM calendars at 40 vix in early October as the vix was making new highs. I personally know of one rmm firm who blew their account as they got caught being long the front switch when it inverted 20 handles. There is no such thing as smaller risk when you are selling var. Buying calendars into a spike is analogous to selling credit default swaps into bankruptcy rumors. When the piper calls you get cleaned out.
I made a typo: "sell the front month buy the furthest month" should be "buy the front month and sell the furthest month" If you dont overleverage, how is this the same as selling cds during bankruptcy? 1) You have a blackswan event, vix spikes 2) Once the vix reachs certain level you think is a good time to short. You buy the front month and sell the furtherst back month(~6months) calls for atm calendar 3A) If tomorrow (and the next day etc..) this blackswan event causes vix to continue to spike, your long front month calls is the hedge. Sure you will lose money with a net short vega but been long gamma should offset some, and it's nothing like writing a naked short call 3B) If tomorrow the blackswan event ends, and vix drops back. You lose the front month premium when it expires, but pocket the spread when the backmonth expires. UNLESS there is another blackswan event of greater magnitude before the back month expires, then you get wiped out as now you have a naked call.
I apologize for a question if it's off topic. However, this has been an interesting thread! Has me wondering. I'm considering buying LEAP's. Anyone trading leaps, or in the know, please chime in. Thanks!