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Oct 5, 2016

Long Premium or Long VIX?

By:Sage Anderson

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:

  1. When a trade management approach was implemented (straddle managed @ 25%, call spread managed @ 50%, short puts managed @ 50%)

  2. 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 support@tastytrade.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.


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