a dirty long vol vix trade
america, hell yeah!
hi!
allow me a brief interlude from sports gambling content...
today i’m going to show you a dirty long vol trade in vix futures or etps.
it takes advantage of sticky customer positioning and dumb tourist trading in vix products.
. . .
lopsided positioning can lead to predictable under or over-reaction effects that we can exploit.
one place that this can play out is in vix futures (and ETPs.)
vix futures are a lot of fun because:
they are volatile and positively skewed
customer positioning tends to be concentrated on one side, and sticky
which can lead to tradeable inefficiencies. . . .
. . . as we are about to see.
this trade revolves around a simple core idea, which is summarized by this fine piece of art:
the vix complex, despite being relatively high profile, sure attracts a lot of dumb trading.
in particular, when really bad unexpected stuff happens, vix futures often trade too cheap.
there are a few reasons why this is the case but one of the most compelling is “idiots love systematically slamming vix futures esp on an uptick of vol.”
we can quantify this by using spx options to determine whether vix futures look cheap or not. (it’s all spx vol at the end of the day innit.)
and we are going to turn this into a dead simple long volatility trade that gets long vix futures or etps when they look super cheap.
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