Long Premium or Long VIX?
Oct 5, 2016
After a fairly subdued summer, the VIX picked up a little steam in September and jumped from 12 to 18...before dropping right back to 12 in the wake of the Federal Reserve's decision to leave key interest rates unchanged.
If you think the volatility crush came too soon, and believe that the VIX has room to run this fall, then a recent episode of Market Measures probably deserves a spot on your viewing schedule.
This particular episode investigates the relative performance of several different strategies that benefit from an increase in volatility.
Specifically, the Market Measures team examines whether a long straddle in SPY would be an effective way to leverage an expected spike in volatility, or whether a long VIX call spread, or short VIX put might more appropriate.
A long straddle in SPY obviously benefits from a large move in the S&P 500 (either up or down), while a long VIX call spread benefits from a move in VIX. A short VIX put does well if the VIX stays where it is or goes higher.
In order to best understand the relative performance of each of the 3 strategies over time, the team backtested each of them using data from 2006 to present. The study therefore included the following 3 unique strategies:
long SPY straddle
long VIX call spreads (long 60 delta call versus short 45 delta call)
short VIX puts (at-the-money)
As you can see from the consolidated results below, the only strategy exhibiting a consistent profit (albeit small) over that time frame is the short VIX put:
While the returns were limited under the conditions of the original backtest, the Market Measures team decided to rerun the backtest using more specific criteria, including:
When a trade management approach was implemented (straddle managed @ 25%, call spread managed @ 50%, short puts managed @ 50%)
When deploying the 3 strategies only when VIX was sub-15 (i.e. an environment of relatively low volatility)
Interestingly, the performance of the 3 strategies improved when managed/filtered according to the above criteria. As discussed in greater detail on the episode itself, waiting for lower volatility environments (sub-15 VIX) appeared to improve the performance to an even greater degree than instituting a trade management approach (according to historical data).
If you are considering deploying a strategy that benefits from an overall increase in volatility, we recommend watching the entire episode of Market Measures entitled "Long Premium or Long VIX" when your schedule allows.
If you have any questions related to the aforementioned topics, or any other content on the tastytrade network, we hope you'll reach out at email@example.com.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.