
U.S. Election Priced as Worst Event Risk in VIX Futures History - xoxoy
https://www.bloomberg.com/news/articles/2020-09-01/u-s-election-priced-as-worst-event-risk-in-vix-futures-history
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smabie
The IV of options is almost always too high (by too high I mean option prices
are too high compared to mathematical fair value) and selling couple month out
Vix futures is probably a great way to make some money right now. Moreover,
the IV often fails to take into account upside volatility, effectively
reducing the vix to an index that is inversely correlated to market returns.

I doubt the market will fall regardless of who gets elected, so the obvious
trade would be to sell Vix futures and profit off of the carry. If you get
scared, simply offset your position before the election and net a smallish
profit (probably).

That being said, options IV is mostly a function of supply and demand, so it's
totally possible that you could get crushed without any realized volatility at
all.

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otherjason
In broad strokes, this is similar to the strategy implemented by SVXY, an
inverse volatility ETF. It is continuously short contracts of the front month
and second month of VIX futures, weighted accordingly to give a 30-day
effective maturity. The idea is that the VIX term structure is usually in
contango (the market expects that volatility in the future will be higher, so
you can short the longer-term contracts and buy them back closer to
expiration). The fund was structured such that it attempted to give -1.0x the
return of a VIX short-term futures index on any given day. That way, as long
as the term structure stays in contango and there isn't a bulk increase in
volatility across the curve, you will profit.

From early 2016 to early 2018, this strategy was extremely effective,
returning over 700% from February 2016 to January 2018. Then "Volmageddon"
happened[1] and the fund lost over 90% in one day. Several other similarly-
structured inverse volatility funds closed after that day; from what I can
tell, SVXY is the only one left, and ProShares later changed the target return
factor of the fund to 0.5x to reduce the probability of a similar event in the
future.

In more turbulent environments, where volatility is either in backwardation
(the front month volatility is higher than later months, often during some
kind of market shock), or if the whole volatility term curve just shifts
upward (an overall increase in volatility across all expirations), this
strategy will lose money. And, as always when trading futures, it can lose
lots of money very quickly if you aren't careful.

~~~
smabie
SVXY just sells short term vix futures, so it won't capture this particular
effect. There was a mid-term short vol ETN called ZIV, but Credit Suisse
recently discontinued it for whatever reason.

