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One would have to assume that the VIX futures trade at a premium to the
index, with that premium decaying at essentially the same rate as the
combination of straddles and strangles that make up the option
components of the index. Otherwise, there would be a big arb, and there
is no free lunch in trading... People would just buy VIX futures, short
OTM puts and have a risk free return.
Also, the volume in VIX futures has never really taken off, so you are
probably better sticking to a more liquid instrument and just using the
underlying options...
While it may cost a little more to use OTM puts to hedge event risk
rather than simply taking that random few and far between hit from
external events, the volatility adjusted returns of the hedged trader
should be better than the unhedged trader... (This is coming from
someone that has been been buying OTM protection for many years. I look
at it as the cost of doing business and put it in the same category as
life insurance, etc...) It has definately cost me money over the long
run, but it has also kept me from jumping out a window once or twice...
Good luck trading,
Seth
-----Original Message-----
From: rftonto@xxxxxxx <rftonto@xxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Sent: Thu, 28 Jul 2005 09:57:22 -0700
Subject: VIX Futures Vs Terriorists
I am a stock trader of many years but have only read about futures. I
have learned to manage risk under all "stock" market conditions except
for a quick catastrophic loss such as would result from a terrorist
nuclear attack. A situation like that may force the market to close for
several days and once it opened again it could be significantly below
any stops placed.
I have backtested option techniques for long side risks suggested by
option gurus and determined that the cumulated cost of options for
downside protection over several years could be as great or greater
than a single catastrophic loss. Therefore, I am not interested in
protection with options. My attention has turned to VIX futures because
they seem to spike the opposite direction as stocks during very
volatile periods. With the aforementioned in mind, I wonder if the
futures traders on this list can give me some advice.
I would like to determine how many contracts to buy, what cash to have
in reserve to eliminate margin calls based upon "X" number of dollars
invested in stocks. I am assuming that I should buy the VIX futures
when volatility is low as it is now and hold as long as I am timing the
market for my long positions. IOW, I would not be selling the VIX when
I sell stocks. I am assuming that if I buy when volatility is low (like
at an annual low) and hold as long as I am timing stocks, my risk for
additional capital required for margin calls will be minimized. I would
hold the VIX until some day when volatility is high and I no longer
want to use the VIX for protection for future stock positions.
I would like to see a thread based upon the VIX futures for protection
against catastrophic loss. Discussion on how many contracts and how
much cash reserve for "X" dollars of long stock would be appreciated.
In addition, is my assumption that I should by near an annual low
volatility and hold as long as I time stock correct? As my capital
increases or decreases what mathmatics should be used to determine the
number of VIX contracts for protection. IOW, if each share of stock has
"Y" volatility and I buy "X" shares how many contracts would I buy and
how much money should I have for margin protection in that futures
account?
Russ
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