short nov/dec at -.02. If this moves against me like it is looking it might, I will close it out pretty quickly.
Scratch that, out at .01. I'm at home sick with the flu, time to go back to sleep lol. With the vix falling below 20, I'm wondering if this is at least a short term bottom
If you are trading spreads(60+ days out) outright when the curve is as flat as it has been for the past few weeks you are doing nothing but expressing a purely directional view on the ES. In which case it is better to just trade the vix futures outright or better yet use the ES. I see no reason to pay up in commissions or tie up more margin for the sake of just being in spreads. Wait for some steepening and then trade slope dislocations. Just my 2 cents.
It seems that the "slope dislocations" you refer to could be driven by short term / panic order flow and provide good mean reversion opportunities appropriate to someone with a fee disadvantage. And perhaps these dislocations are more pronounced than in the ES. I know little about this product complex but have been trying to learn. Last Tuesday I considered a short vol ndj fly - was expecting a major bottom in the ES and therefore a change in the curve shape (U shaped back to R shaped/contango). Fact is I've no mathematical talent and no experience with term structure models or trading non directionally. As a result I've developed decent directional senses but fear I am barking up the wrong tree in trying to use the Vix term structure as a proxy for ES which as you point out is not efficient. And while I'd like to diversify I wonder about trying to compete in an area which seems to rely heavily on areas where I am weak. I've always looked to take the other side of panic/uninformed flow at prices away from value, and have run several capacity constrained short term directional futures strategies based on this concept. In the high frequencies and for a couple of ticks. Which has become progressively more difficult until I've gone from trading a few dozen times a day to a handful of times per week, and now at a fee disadvantage which rules out anything very short term/small expectancy. These bottoms which occur a couple of times per year could be traded as ES outrights, but I'm looking for extra convexity either in VIX spreads/flies or have also considered short strangles on European style index futures options. I've never carried futures overnight and have ingrained a mentality over years that my exposure is short term and if I'm wrong I can pay up a few ticks and get out nearly immediately. So it is extremely difficult for me mentally to deal with the change in risk profile of carrying overnight, and this goes over easier with me if it is spreads/flies in a different product complex. I wouldn't be carrying ES futures overnight for the last week, but a Vix fly or a vertical spread on VXX options is a different matter. While I don't expect anyone to give out edge I would be grateful for some guidance on whether I am even anywhere near asking the right questions. Where would I start to investigate whether there are situations where an accurate read of ES futures (next 3-10 days) could produce a better trade in the Vix complex...
My question would be if you want to be short vol why the ndj fly as opposed to the long nov/dec in smaller size? Better yet, why not sell Nov outright in even smaller size? Not only is there no inherent edge in using the fly but you are also paying double the commission and double the haircut. In fact at certain times when the curve is most likely to shift up or down instead of change its shape/slope the edge is in the outrights as you cant capture that with spreads. The only reason to go the fly route given the current structure would be if you are seeing a dislocation in DEC. Which given the calendar would be very hard to justify. An accurate read of the SP term structure could produce a good trade in the VIX complex. An accurate read of the ES could produce a good trade in...well the ES In all seriousness, flat curves are very binary in my opinion and since i am not a directional guy i avoid them like the plague. I much rather wait for proper dislocations and do some replication(vol against delta/gamma, spot against implied or if you want to get fancy even sp vol against vx vol).
I've started with the answer - calendar spreads and flies - classic case of "if the only tool you have is a hammer, everything looks like a nail". As you say, short Nov outright or even long ES would have been a superior trade. It seemed to be out of line with the adjacent months so a natural choice for the body of the fly. My thesis was that in panic conditions particular months may get out of line, capture with a spread or fly. I'm not yet familiar enough to know if it was a true dislocation, but even if it wasn't the trade would get some assistance from the decline in vol I was expecting. Thank you - this is along the lines of what I was looking for and has sparked some ideas. Of course that I struggle at this early stage means I likely won't be competitive, but I like to learn and more importantly challenge my inaccurate thinking. Plenty of lessons in how I have approached this. One weakness in thinking about vol replication is understanding why this would be a manual trade...why can the vix term structure to get considerably out of line with the price of replicating the vol in other products. I'd have thought this would be arbed out, which highlights a weakness in not knowing the limitations of algos being used. Must be related to knowledge which is difficult to program, not something which can be modeled exactly...sorry thinking out loud here. Thanks for your comments.
It is being arbed and it doesn't get considerably out of line. Not anymore anyway. The party has been over for a while now. You should've seen the things going on in '07-'08 and some even as late as '12-'13. IMO, the few dislocations that still occur are largely due to capacity constraints. There is no fungible spot so any trader/shop worth a damn will cap their size at a certain level. No one would trade a 15 cent dislocation flat and end up holding 2000 flies. Then August 24th comes around and you give up 30 cents just in slippage and thats assuming you are offsetting against the trend. Try closing that much short vol into a spiking vix and tell me how the algos treat you when the market goes 10up.
rally, i think vix trading will end its 3 yr run of horrible..but i don't see trades like we did way back then reappearing. there will be new patterns to uncover.