Cart (0)
VIDEOA Two-Part Bet on VIX and SPX
By
Adam Warner
Jul 16, 2009 9:30 am
A play with many moving parts.
 |
|
Lawrence McMillan (one of the great ones in this business) recommends a play wherein you buy modestly in-the-money (or ITM) August VIX puts versus buying at-the-money (or ATM) August SPX puts.
it's an interesting thought. Let's break it down a bit.
The SPX (or SPY, if you're like me and prefer it) part of the trade essentially gives you a 2-part bet. One is on the implied volatility of the options (you could simply short futures or SPYs instead); the other is directional. Now McMillan (and Jason Goepfert, for that matter) note the bearishness of the big VIX futures premium, so perhaps that's a bet worth making.
Click to enlarge
The VIX part is both a directional bet and bet on the volatility of the VIX itself (a confusing concept: volatility of volatility). Remember that ATM in August is roughly 30, so you're talking strikes above there.
I don't love that aspect of the trade, though, partly because I'm totally uncomfortable owning volatility on volatility. I'd replace the the VIX puts with shorting VXX if possible (not a certainty by any stretch), with VIX futures, or with a put-call combo on the Augusts that gets me synthetically short them.
By and large, some variation of this concept is probably as close as you can get to trading this spread. But keep in mind: It'll be tough to effectively "own" the VIX via SPX premium without making a directional bet in addition to the volatility bet. You could buy SPX (SPY) straddles, and then hedge with E-Mini or SPY trades. But that adds even more moving parts to the whole play.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
