i figured you did... sorry i was just trying to figure out what you were getting at otherwise... ive read that page from the link you have posted many times... i get what your saying somewhat... but as time and price evolve there are so many other risks in the spy/x calenders against the vix futuress... im just saying you have to like those other risks.... the other risks with distro are so much more prominent i couldnt see much profit being accounted for with the actual vol arb.... all the pnl would come from the distro mainly no?
In the replicating strategy, one locks an implied forward volatility which can be compared to the VIX futures price. When the strategy is in place, one has to manage the short gamma and to maintain the vega neutral which both are costly to implement.
what I learned is every small move is a big move in option. like 3% move in underlying may be 100% to 500% even 1000% move in corresponding option. while 1 to 3% move is very normal move in the underlying, so basically I hold options very short, half moths are the longest. most are just one or two days, some are just 10 minutes to half hours. I must act very decisviely, must have fast fingers. no hesitation, otherwise, opportunities "puff" in blink of eye. think/plan/prepare beforehand, way before hand. plus, FOCUS, total focus. need be highly discplined.
give me an example of a replication strategy that locks forward vol.. i'm not putting you on the stand.. sorry if it seems that way.. i'm learning myself.. thats why i phrase alot of things as questions..
Trading philosophy: Options are just different, Why? http://www.elitetrader.com/vb/showthread.php?s=&threadid=167441 Interview question: how do you make money with options? http://www.elitetrader.com/vb/showthread.php?s=&threadid=167056
Be flexible, and set reasonable goals for the particular market environment you are in. My year end % return goal of 25 - 30%, when the VIX was in the 30's and higher, is NOT the same with the VIX in the low teens. Those who do not adapt to a changing market environment, will likely be changed by it. Just out of curiosity,... I noticed SPINDRO, xlfat, and dagnyt all dissappeared shortly AFTER the USA debt rating got downgraded a couple of years ago,....and the market subsequently dropped about 2,000 points over the next several weeks. Coincidence??? Has anyone herd from them, or know why they all left within a few months after the event? I never got along with any of them, but thought they were all valuable contributors of information to the board.
Anyone who shorted naked puts during that period, probably ended up buying the stocks,.... assuming they were not on excessive margin. Soooooo...... sell covered calls, collect dividends, and wait for recovery. Really no big deal. I say buy the stocks, as it would have been expensive to close the trade. (Spike in IV and VIX). On the other hand, those who sold bullish credit spread type strategies, probably could NOT consider buying 90% of their stocks, and were thus "forced" to close their trades for losses..... either partial or near total. (The severity of the loss depending on the timing of the close,... as no one knew the drop would end up being 2,000 points). That seems like more of a big deal to me than selling naked puts,.... trades which the investor can afford to buy and hold for a while.
I'll give it a try b/c it's an interesting and basic question. A calendar spread that is vega and delta neutral. Say the 2 expiries are T1 and T2. The forward implied volatility (IV) refers to T1 -> T2. Being vega neutral means (in theory) that your spread's value is not changing when IV changes i.e. you've "locked" the forward IV that you entered the trade with. So your P/L is mainly sensitive to gamma and the difference between RV and IV (ignoring any higher order greeks)
So with typical equity skew that's long more backs then short fronts...ratio to equalize Vega across the terms of the Calender trade...