Shorting Volatility, Really.

[Northern boy 10]

I'm looking for a way to short volatility in a quantifiable manner, (so not just writing strangles or straddles earning fixed premiums).

 

I'm not looking to simply short volatility either, it would need to be in the nature of an option. In essence, I want to profit from an improbable(<5%) decrease in volatility in order to hedge a strategy which is successfully long volatility most of the time(>95%).

 

Buying puts on the VIX would be lovely, but as far as I can tell the VIX is garbage and just negatively correlates the indexes more than anything... it doesn't seem to care much for volatility in price to the upside.

 

My knowledge of options is limited but if you know what I'm looking for go ahead and say it and I'll understand. If it's doable on an intra-day level, even better. If this method isn't common knowledge then I'll just get creative. thanks.

Edited September 14, 2008 by Northern boy

[Frank 10]

You should check out VIX futures -- and more specifically, study the fascinating relationship of VIX vs VIX Futures.

 

Larry McMillan has done some excellent work on this topic. Read the first few pages of this piece he did for a primer on the 'term structure of VIX'...

 

http://www.quickfilepost.com/download.do?get=183daccf71022a894ab24962f03732b3

 

you can get end of day VIX futures data here:

http://cfe.cboe.com/Products/historicalVIX.aspx

[Northern boy 10]

Thanks for the reply Frank. I don't believe the purpose of the VIX as a 30-day fear gauge is what I need though...

 

I'm beginning to think that writing a strangle deep in-the-money is in fact an option with the odds I'm looking for.

Edited September 15, 2008 by Northern boy

[Northern boy 10]

more ideas welcome

[brownsfan019 17]

NB - not sure how many option traders are here to be honest. Might be able to find a few more at elitetrader.

[james_gsx 16]

What exactly are you trying to hedge? There are plenty of ways to short volatility, especially in terms of hedging. But I think writing straddles and strangles on the SPY might be a good start.

[Northern boy 10]

What exactly are you trying to hedge? There are plenty of ways to short volatility, especially in terms of hedging. But I think writing straddles and strangles on the SPY might be a good start.

 

yeah I think a short strangle near-the-money works... I'm not used to options :doh:. I'm just using the options simulator at http://www.888optionsnet.com and that strategy so far fits best for me.

 

I'm hedging an improbable stochastic... for example the probability that a stock trades between 30 and 32 ten times before it breaks to touch 33 is very low. So I wanted a low risk, low probability, high reward trade to hedge against this.

 

See, a far otm "VIX" put would work too if it actually did index volatility.

[Northern boy 10]

Ok I found it, was a long butterfly call. I was looking for something that went positive on theta exponentially. B-E-A-utiful .

 

thanks for the help .

[darthtrader2.0 10]

Ok I found it, was a long butterfly call. I was looking for something that went positive on theta exponentially. B-E-A-utiful .

 

thanks for the help .

 

nice!

how accurate was the assumptions in frequentist black scholes nonsense on vega in what you can price now on the instrument compared with when you posted this? oops...if vega doesn't make sense all the other greeks are just random.

I didn't come to this via a stochastic process. A random number generator didn't just pick me to most this.

[Northern boy 10]

what the hell are you talking about?

[darthtrader2.0 10]

what the hell are you talking about?

 

Go back to the day you started this thread and compare it to today....

How much more could you possibly be wrong about shorting vega?

You did not do anything wrong as far what you know...the problem simply sits in what you do not know. Frequentist stats and probablity are nonsense.

Markets are Bayesian, I've bet my life on that idea. If you want to read about stochastic process being ripped to shreads then get E T Jaynes book.

It is literally the bible if your interested in the "quantification of market data".

[Northern boy 10]

but you don't know what I'm doing. I'm not just shorting volatility on its own... I was looking for an option as a hedge for a strategy I want to improve. What's wrong with using options (particularly a butterfly) to bet against price finishing where it started? I think my sharpe ratio is better off with it than without.

 

You really think that probability is useless? That, with enough data, the stochastic process doesn't break even. The distances for price to travel and the frequencies in which they should occur relative to one another don't matter? On what time frames even? Maybe the larger the time frame, the less efficient. But how much less efficient? The market isn't random, but it's not stupid either.

 

I'm not leaving behind that logic unless you prove me wrong. I'm not driving myself crazy trying to debunk my common sense either for something that would be a pain in the ass to prove lol.

Edited September 20, 2008 by Northern boy