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On my drive home from work today I was musing generally about buying low and selling high. But the only thing I can think of that is low right now is the VIX.
Anybody ever trade VIX options, futures, or ETFs and have any experience to share?
I could dress it up and call it a hedge with the S&P seeming so stable at these high prices, but really it would be speculation -- I would only be placing a tiny side bet that volatility will increase at some point.
Terrible idea?
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I've looked at that, because it seems like it should be too easy. The VIX just goes up and down and up and down in a range... so why not trade it?
Turns out options are priced accordingly to cancel out the free lunch. Calls are extremely expensive and puts are extremely cheap. Calls only go out to November right now, but the price pro-rates to about 100% premium per year, as in if you could buy a $12 at-the-money call for 1 year from now, it looks like it would cost $12. That means the call loses 8.33% of its value per month, which is quite a headwind. The near term calls probably lose 10% per month.
Puts are extremely cheap, so there is almost no premium to gain by selling them.
What I want to know is, since you can't actually own the VIX, what sort of right or obligation goes along with the options? What would I get assigned if I am short puts in the money?
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Just a quick follow-up, I bought a tiny amount of an ETF with the ticker TVIX. It is a 2x leveraged long ETF that tries to track forward VIX expectations. Lots of drawbacks to it, but there does not seem to be a great way to play the VIX, and I really wanted to have a little skin in the game on my hunch. Seems like the smarter play is to SHORT the VIX when volatility is really high -- the other end of the range from now.
I use the VIX as a market panic indicator, to help with long term buy and hold bargains. You can look at its long term history and see those times when the markets were in a panic and thus presenting superior buying opportunities. Late 2008 to early 2009, and mid 2011, the VIX went over 40. Any time it is over 40, money is being given away and you can back up the truck.
It is not such a good indicator when it is very low. It can stay very low for a long time.
