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I've been playing with TVIX for a few weeks now. I don't understand why it's been going down. Does anyone have any insights on this? Why isn't volatility continuing to skyrocket? Any tips on how to invest in this?
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No specific insight, but as you probably know, vol funds have an underlying that is VIX futures and not VIX.
And TVIX is levered as well, further complicating things.
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Actually, TVIX is an ETN not ETF.
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I heard that the 2X long volatility instrument has gotten shockingly large & shockingly expensive over a very short period, and there has been danger of major long VIX forced liquidation in the event of a downturn in volatility.
I have had a long medium-term volatility futures ETF holding for months as a hedge; it has worked out well, but I'm selling some today, & partially "hedged the hedge" a few weeks ago with a short [short-term VIX ETF] position.
Maybe some of the big money is as crazy as me.
:-)Shawn
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I've been playing with TVIX for a few weeks now. I don't understand why it's been going down.

The VIX is down over the last week. It is now down about 26% from its very high highs. TVIX is now down 52% (more or less) so the 2x fund is tracking. VVIX (the volatility of the VIX) is down about 20% from its peak last week.

FFIW, there is only less big player playing inside the VIX market. Last week things got away from Ronin Capital, a proprietary trading firm in Chicago.

Ronin Capital assets auctioned
https://www.chicagobusiness.com/finance-banking/ronin-capita...
Assets of Chicago trading firm Ronin Capital were auctioned off earlier today, said futures exchange operator CME Group. Ronin, which traded at CME, “was unable to meet its capital requirements going forward,” CME said in a statement.

DB2
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Ronin Capital, which traded at CME, “was unable to meet its capital requirements going forward.”

Ronin: A samurai without a master. A samurai became masterless upon the death of his master.


RC's master was short vega.
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RC's master was short Vega.

So they figured volatility would go down but were too early? Or bad hedges?

DB2
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Ronin Capital, which traded at CME, “was unable to meet its capital requirements going forward.”

Ronin: A samurai without a master. A samurai became masterless upon the death of his master.

RC's master was short vega.



The VIX is interesting to look at as a "fear gauge", but trading it with options or leveraged instruments is tricky - so tricky that I have never tried.

The weird thing is that while it is definitely mean reverting, you can not just take advantage of it since that fact is built into the option prices and futures. Otherwise it would be easy...

Also this seems to be playing field with a lot of pros and their models.

I remember when the VIX was very low for a long time during the steady rise in 2017. There was someone putting on a big call position every week for a nickel or a dime, maybe an 18 call. It never paid off. Gotta wonder if it eventually paid off.

If Ronin Capital was short volatility, it's also interesting. Before the last month a VIX above 40 was something temporary for a day or two, only in the deepest crisis. But in this crisis it has been above 40 for almost 3 weeks. Today still at 56. A LOT of people must be short volatility hoping for it to go down! What that means for the markets is anyone's guess, maybe the tail is wagging the dog?
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I remember when the VIX was very low for a long time during the steady rise in 2017. There was someone putting on a big call position every week for a nickel or a dime, maybe an 18 call. It never paid off. Gotta wonder if it eventually paid off.

I was thinking about something like that the other day. When the VIX is low just put on a small call position about three months out and then roll it over if nothing happens in the interim.

DB2
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When the VIX is low just put on a small call position about three months out and then roll it over if nothing happens in the interim.

DB2,

This strategy is interesting. What range of VIX values might be considered low? How long would you look for the VIX to be in this range before implementing the call position?

Many thanks!
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I was thinking about something like that the other day. When the VIX is low just put on a small call position about three months out and then roll it over if nothing happens in the interim.


Anecdotally: this is a fun way to waste time.
(you come up with a way to print free money, then realize it won't work and go back to what you were doing)

The problem is that you can't buy or sell VIX, only VIX futures.
Everybody who does so knows that VIX is mean reverting.
For index futures, the current price is very close to the index level, but not with VIX futures.
They don't behave at all the way you think they will be based on the history of the VIX itself.
They follow what people think VIX will be soon, after the current excursion away from expectations wears off.
So the current price is probably very close to what YOUR model thinks it will be soon.

Sure, on a big VIX spike the futures will spike too, but not nearly as much.
And because this is so rare, you lose a whole lot of money waiting for it.
So the spike won't do you all that much good.

Jim
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The problem is that you can't buy or sell VIX, only VIX futures.

FFIW, Fidelity lists VIX options, weekly and then monthly out to November.

DB2
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FFIW, Fidelity lists VIX options, weekly and then monthly out to November.

Yes, but they are in effect just options on the future value.
Their current "intrinsic value" is in effect the futures price (which embeds mean reversion expectations), not the current VIX figure.
A given move in the VIX might not cause much of a move in the option value.

Admittedly it works for options or futures expiring more or less immediately.
No time for mean reversion.

Jim
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The problem is that you can't buy or sell VIX, only VIX futures.
---
FFIW, Fidelity lists VIX options, weekly and then monthly out to November.


TD Ameritrade has a trading platform available called thinkorswim. For several years they have been capturing several terabytes of market data every day, and thinkorswim makes it available in a feature called On Demand. You select a day and a symbol and it will give you all the available info. For intraday traders you can even step through a given day in real time (or speeded up) and execute paper trades.

I was interested in what would happen if one bought calls on the VIX when it was low -- six months until expiration, out-of-the-money calls. They could be sold when the VIX spiked or after three months (a 6/3 type of strategy). This post has a couple of recent results, but before going deeper I wanted to solicit comments.

Back on September 23rd, the first Monday after option expirations, the VIX was at 14.9 and these are the prices for a couple of call strikes with six months until expiration and then after three months (December 23 with the VIX at 12.6):

September December Change
Mar 16C 4.20/4.40 2.50/2.60 -43%
Mar 30C 1.05/1.15 0.55/0.65 -52%

And then comes the next round.

December March Change
Jun 14C 4.30/4.50 26.10/26.70 + 480%
Jun 30C 0.80/0.90 13.60/14.20 +1411%

Thoughts and suggestions?

DB2
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Those Jun 14C and Jun30 call option performances are down to 397% and 10033% as of now , as a result of volatility coming down which is not in favor of call buying.

The current spike in VIX up to 100 is very rare situation and if you apply this method every quarter majority of your trades will be similar or worse than the March Call example 
you showed.



Since 2005 occurrence 

Vix 0-10  2% 
VIX 10-20 69%
VIX 20-30 21%
VIX 30-40 4%
VIX 40-50 2%
VIX 50-60 1%
VIX 60-70 0.7%
VIX 70 and above 0.3% 

of the days. (Source Tastytrade Research)

As shown above the current situation reflects (above 50) only 2.0% of the days since 2005 which is the reason applying this way will be detrimental , unless like a lottery you 
estimate the  possibility of this much volatility spike in the future
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My intuition is that this kind of approach is very much like taking the other side of the bet from the people piking up pennies in front of steamrollers.
Consider that ill-fated short-vol ETN that blew up recently in the Volmageddon.
They have a series of small wins that feel great then one whopping loss that wipes it out, and more.

Your strategy would be the reverse. I think you'd have a LOT of small losses over time, but then a whipping big win once in a while.
Aside from being an emotional drain, which is fine as long as you make money in the end, the thing you have to evaluation is the relative size of those outcomes.
If you lose $1 ten times then make $25, it's a good idea.
If you lose $1 ten times then make $8, it's not a good idea.

Then there is the question of whether, given the expected profile of returns, it's the best return you could get on those funds.
Short index calls might work better, as might any number of things.

If you want to make some good money in the next few years with low risk by doing something fancy, do I have a trade for you!
I'll put it in a separate thread.

Jim
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The current spike in VIX up to 100 is very rare situation....
Since 2005 occurrence

Vix 0-10 2%
VIX 10-20 69%
VIX 20-30 21%
VIX 30-40 4%
VIX 40-50 2%
VIX 50-60 1%
VIX 60-70 0.7%
VIX 70 and above 0.3%

of the days. (Source Tastytrade Research)

As shown above the current situation reflects (above 50) only 2.0% of the days since 2005 which is the reason applying this way will be detrimental , unless like a lottery you estimate the possibility of this much volatility spike in the future.


Understood that the current conditions are quite unusual. The strategy I had in mind involved only buying when the VIX was below, say, 20 (70% of the time). Do you have any info on how many VIX spikes above 25 there are per year on average?

DB2
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Do you have any info on how many VIX spikes above 25 there are per year on average?

Just doing a quick scan of the VIX chart, there appear to have been nine or so in the last five years.

DB2
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This would be a good hedge to a long portfolio esp if leveraged. Say you are X % leveraged, you could protect Y % of your portfolio with long VIX futures. Presumably the leveraged portion of your portfolio would more than make up for the cost of the hedges. You could play with X and Y to optimize the risk/return ratio with which you are comfortable.
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Do you have any info on how many VIX spikes above 25 there are per year on average?
...
Just doing a quick scan of the VIX chart, there appear to have been nine or so in the last five years.


Again, just a reminder of what you already know: that you can't buy VIX, only VIX futures.

When the VIX spikes you don't get that size of return by being long volatility.
You'll profit, but not nearly that much. VIX futures do not move rapidly like that.
To evaluate it even for the past, you need a history for futures data rather than VIX itself.

In case anybody is interested---

My disaster hedges are simpler than that: I buy out of the money index put options.
I prefer IWM versus SPY these days, since the giant tech/data firms are so insanely profitable and entrenched.
The weakness seems concentrated in the smaller firms.

Once we're down in the bear it's harder to tell which way things will go next.
I'm sort of targeting a certain percentage of my portfolio in market value of put options.
When things tank the percentage soars, so I trim the puts and take profits.
This also happens to be days that time premium is high, and the puts may be near the money, extra tail winds.

When things rise the percentage falls, so I top up the hedges.
This tends to be when I can go out-of-the-money cheaper options, and time value is cheaper when markets are cheery.

The main things is you want to do this rebalancing not too often, and, as far as possible, try to
do it at short term peaks and troughs rather than on the way down or on the way up.
That's impossible, but a fella can try.

The other tip:
Have a pre-decided trigger to close all remaining positions when you think the bottom is in.
No sense giving back all that profit in the subsequent rally.

The best use of a "disaster hedge" is not to get a smooth portfolio value, but to raise cash
at the precise time that you can invest the money in things that are so cheap they'll go up a lot.
Something like 18% of my portfolio value is in cash solely from disaster hedge profits I closed in the last couple of weeks.
I'm shopping for deals.

Jim
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The best use of a "disaster hedge" is not to get a smooth portfolio value, but to raise cash
at the precise time that you can invest the money in things that are so cheap they'll go up a lot.
Something like 18% of my portfolio value is in cash solely from disaster hedge profits I closed in the last couple of weeks.
I'm shopping for deals.

Jim


This whole post is great advice on how to make some cash under these market conditions. Thanks...doc
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This whole post is great advice on how to make some cash under these market conditions. Thanks...doc

Sure, it's easy!
Just spot a big market drop not long before it happens.
Unfortunately, most types of insurance are expensive right now.
It's hard to buy fire insurance once the town is on fire.

I believe my hedges, despite my magical skills, have probably reduced my long run returns.
There have been some very emotionally satisfying moments, but you can't spend emotions.
On the other hand, the ultimate purpose of the money is to buy happiness, so I could get desperate and chalk it up to that...

Jim
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My disaster hedges are simpler than that: I buy out of the money index put options.
I prefer IWM versus SPY these days, since the giant tech/data firms are so insanely profitable and entrenched. The weakness seems concentrated in the smaller firms.


Sounds similar to mine, except the name. Mark Spitznagel (www.universa.net/riskmitigation.html) will point out that abrupt corrections are far more common than option prices often reflect. Admittedly, bleeding hedge money is not fun during good times. A disaster to me is when my house burns down. Volatile corrections are more common.

I started out using SPY, then moved over XLF for the same reasons. Pretty sure I looked at IWM at the time, but I guess looking at volume and correction volatility I went with XLF puts. (Being recently impressed with some of our short screens I decided to add some puts from one of those pics. Unfortunately those pics tend to be biotech firms, which are not correcting as much for obvious reasons.)

I believe Spitznagel's model is to own puts that will deliver a 10x return on corrections of >15%. To keep my numbers small, I decided to go much further out of the money than he does. At the moment my return is 5x with XLF down 37% from the peak for puts I put on Nov 5, 2019. So I guess that is something of a fail, though these are pretty inexpensive out of the money options expiring Jan 2022. They were a bit higher when the VIX was near 80, and my plan to be selling is in a next leg down.

To your point, I need a pre-decided trigger to close and yes, shopping for deals is next. :-)
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