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I think most of the guys on this board or looking at realized vol rather than implied vol (VIX).
Not interested in options so this implied vol discussion seems like voodoo.
For most people that's the case. VIX is output from a mysterious mathematical box and it moves in mysterious ways.
This is one of the reasons why SPX puts are much more popular than VIX calls. The suits that manage the funds that use options to hedge are not comfortable with that mysterious VIX box.
So why pay attention to VIX at all?
Well, if you make it a habit of checking the VIX term structure at vixcentral.com as part of your premarket routine, you get a very important leading indicator of what could be about to happen.
To put it another way, your stock charts and your realized vol are statistics. History.
Options prices and VIX are probability, they are sentiment that look to the future. What smart people are betting will happen.
When realized volatility and implied volatility get way out of line, that's an opportunity, and it represents a chance for you as a trader.
What I have seen in the five or so years I have been following VIX and the futures term structure is that usually it gives you a heads up when the market is about to make a big move. Which may not be apparent from looking at just realized vol.
Certainly that has been the case over the last five years. Each time there was a big move downward, it was foreshadowed by the term structure flattening out and then moving to backwardation. This time I called it in late January and again in early February.
And each time it moved into backwardation, you had a brief period of hours or days to get into position, when you could still buy OTM VIX calls for fitty cents or ATM UVXY or VXX calls for a buck. Back in February those same calls were 8 cents.
These trades return 5x or 10x or in this recent case 100x. Trades of a lifetime.
PROTIP: do not look at VIX in isolation. Wrap it in the context of the VIX futures term structure, and then you have a potent forecasting indicator. Learn to read that term structure. It tells you what the sharp money sees happening at various points out into the future.
When you see a bump in the term structure, find out what that means. When it flattens out, pay attention, and when it goes into backwardation, take risk off.
Part of your premarket routine.
[*NOTE: this discussion deliberately leaves out TVIX, which does not have options and which went from $36 to over $1000 during March. It's a tainted product.]
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
Answer: VXX usually goes down during contango and up during backwardation.
The last time there was a huge vol spike like this was in Feb 2018, and VXX went over 50. After that it kept chopping around for a long time, back to 50 then down to 25 level. It took around a year for it to get below the ATL of around 25.
The same scenario could play out again this time around. Note that the current 50 level is the same 50 level from 2018, that is, VXX has not done a reverse split since 2017 -- extremely unusual for VXX to go so long without a split.
Still too much Vega in VXX options, so you may find more edge in SPY or SPX options at the moment.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
On the subject of backwardation and VXX, with -12% backwardation at this moment why isn't VXX going up?
OK, let's review a couple important structural facts about VXX:
1. APR VIX rolls at the monthly VIX options settlement on Wednesday morning. At the moment of settlement, spot VIX and M1 futures must coincide exactly, that is how the product is designed. (while settlement is early Wednesday morning, end of trading is Tuesday).
2. Currently VXX holds 0% of the APR VIX futures (check the current holdings of VXX here: Trading [AUTOLINK]Volatility[/AUTOLINK]: [AUTOLINK]VIX[/AUTOLINK] Futures Data) so that means all the weight is on the MAY futures. In other words, that -12% APR contango is meaningless. What you should be looking at is the -3% contango for MAY.
That is, they proportion of M1 to M2 futures held in the VXX fund changes on a daily basis, and we are currently at an extreme point in the cycle for that ratio.
In short 3% of backwardation is not much of a tailwind, and the rest of the curve is pretty flat now, so the vol products aren't moving much.
PROTIP: Never, ever, ever hold VIX options into settlement. Absolutely be sure to close out your position on the Tuesday before. Very bad people sometimes do very bad things at VIX settlement, so you want be out of there.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
(I hope the link works ok, I attach also an image of the chart)
I would be grateful to hear your opinion/critics to this trade.
Especially what type of adjustment to implement in case there is a spike high in vix well in advance of its expiry.
Since I am a resident of Italy, I do not have access to TOS so I found this simulator !
Does anyone know know of a better (free) simulator that this optioncreator, for example one which accepts Interactive Brokers options data feed?
I guess also IB must have somewhere an option simulator for analysing multileg options spreads pnl profiles, but IB - TWS features are so many that I find almost impossible to find where its simulator could possibly be (... I am not referring to the too simple right click performance profile, but just to a decent and simple data-fed option strategy builder and pnl simulator).
TBH if you are not really expert with your platform yet, I would advise trying a something simpler. You can analyse this trade using TOS in the "Analyze Tab".
There's enough juice in VIX for short call spreads, as an example of a simpler trade, provided you should hedge it somehow.
Right at this moment there is perhaps less edge in the vol products, and I advise you to take a look at your strategy using SPY or SPX. More edge there in terms of vol and liquidity.
Also, as for your directional assumption, pay attention to VVIX, it's just entered the 120 handle. I think there a good chance that M1 futures could be back in the 20 handle next week, and in that case you would want to rethink the assumption on your trade.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
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Yeah I'm long Put spreads and they are not going up in value (as much as you think) because I'm now negative vega and the vol increase is eating my delta profits!
