No pure arbs here, not until the options are trading. You can trade the convergence to the cash index, but it involves going long spx index option premium. A texas hedge would involve selling otm calls and selling vix futures -- if the vix rallies you inavariably would be looking at a declining call premium. Regarding the backwardation situation in the futures: it's a linear relationship to the gamma curve along the time series, due to the fact this is a proxy for trading option volty. I'll be getting my feet wet in this contract today, we'll see. riskarb
Sold 12 of these bad-boys at an average a bit above 203.40 for the May contract. I'm gonna trade my Texas Hedge right now! riskarb
Arb, it seems the new contract can be used to hedge vega risk, and rather imperfectly at that. But would serve as a rather crude gamma hedge.
The VIX is calculated from the near two contracts months for the SPX options. It is possible to arbitrage the VIX futures versus the SPX options strips (all the various strike prices for a given expiration date) that will be used to calculate the VIX when that VIX future settles. It is possible, yes, but in practice probably only profitable for market maker types like Goldman Sachs. While I'm not aware of any relationship between the forward VIX curve and the treasury yield curve, there is a high correlation between the spot VIX and credit spreads. (Credit spreads are the higher interest rates paid by, say, corporate bonds to compensate for default risk.)
Right HD -- was responding to the large futs premium over cash, but you're correct. Gamma and vega position are same-sign and behave rather predictably, unless you're very close to expiration. The best play seems to be the convergence-trade, but I'm sure most of my VIX trading will be from the long-side, hedging my volty and (soft)gamma in short index puts. FWIW, I foresee the VIX futures trading at a significant premium to the index -- seen as an analog to the +skew seen in index puts. But it should cotract a bit here -- I'd gather a 200basis premium will be seen within weeks. riskarb
Yea, that makes a lot of sense. I'll be interested to see how the play develops for you. Good luck with it (though after yesterday's ES call, unlike the rest of us, luck is obviously the last thing you need).
Why would it be that there is a relationship between the VIX curve and the yield curve? I dont understand that. How does the treasury yield curve predict forward volatility in the SPX? If they ever make options on the VIX futures contract, you could make a VIX of the VIX!
Typo: the backwardation reflects the term-structure of Implied Volty, not the gamma directly. riskarb
Will do, I was going to sell some calls, but decided to swing the VBI solo as I am short some delta. I am short 12 of the May futs. riskarb