Thin value bets- flattening VIX delta

 Another poker metaphor, the thin value bet:  you might have top pair/ two pair on a potential straight or flush board, get checked to on the river and make a small 'value' bet in position.  If the opponent has nothing, they probably fold and you get no value, they could also be trapping with a big hand and giving you the rope to hang yourself with.  They could even call with a better 'hand that can't call' like a pair with better kicker.  The key case and point of this VIX trade is when they call with a slightly worse hand, and pay you off with the 'thin value.'

I think it was Phil Galfond who said 'if your thin value bets never get called, then you aren't thin value betting enough.'  This is where I'm starting from in this trade idea: yes we are adding some risk, but over thousands of hands (or trades), we are trying to boost expected value/yield/pot odds/whatever metaphor you're on.

This goes back to a post I made recently with VIX still in the 9s, I was examining the max monthly SVXY up moves for the product's history, looking to kind of bet on the decay 'cap' given the mechanics of /VX rolling to spot:

My finding was that with spot VIX under 10, SVXY never had a monthly gain topping 15%, which is coincidentally right around where the option chain ends on a lot of cycles.  (Almost like they are trying to tell us something).  That being said, the last strike is usually at the 15% mark, but with no strike after that, you can't create a spread to reduce buying power reduction, and for SVXY nosebleeds the liquidity/spreads are horrible so you would have to probably hold til expiration and take the hit either way.  (And obviously this 9 handle soft cap trend might not continue going forward)
On the BPR point, I was again looking at SVXY calls today and even though I have a couple hundred long deltas, it looked like there was no BPR offset (on Tastyworks at least), so a 150 short call was like 20k bpr.  (this was around the 15% mark if you are reading this in the distant future).

In the search for yield I went back into the more liquid VXX to look at the numbers with us now in the 11 handle:

Obviously there are more 15% breaches when you go from 9 to the 11 handle, but when looking further at the roll yield/roll premium/contango (/VX to spot, whatever you want to call it) for some of these days, the front month difference was more pronounced than now with usually over $1-1.50 between spot and /VX for ~30 days.

Here is one such day from the above spreadsheet where 1 month from this date VXX lost ~20%

Given the current term structure, the roll yield has been around $1 or less for the average 30 days, so that lowers the mechanical chance of an insane 15% breaching run.


Given all this I bit the bullet on VXX Feb 23 23.5/22.5 short put spreads for .12c credit, this being my thin value bet. (on 1/25/18)  Given the data its a marginal ish trade (right on the 15% decay edge and the %ROI takes a hit due to commissions at the low total premium levels unless you have some insane volume with a specific broker), but is effectively flattening my total short VIX delta at a credit.  If I have all this short VIX delta, I'm at least tickled to try to squeeze a few more drops out.

Historically I've been more scared of the VIX downside than upside (or reverse for SVXY) because with spikes it will come back but if you are long VIX it might never come back, and the only adjustment when it aggressively grinds against you is to move up your short VIX strikes and add more risk for incoming spikes.  All that being said- if this is breached,
1. it is statistically unusual, and
2. the majority of the short VIX portfolio is going to be hitting max profit way sooner and compounding as I keep rolling up and out.

Again, this is a complement to the short VIX portfolio, I am still negative delta on VIX, and the max loss to the VIX downside is only ~1/15 of my VIX spike risk.  I'm just dipping the toe in the water, so this is possibly something to leg further into.
Additionally, if you care about macro factors such as the lower dollar index and increasing bond yields and think the heavy decay of 2017 with VIX in the 11 handle might not continue with these changing conditions, this might be a reasonable idea.

Overall, this is basically a very skewed iron condor structure, but more entry specific in that we're only adding the 'long' VIX deltas with a specific futures structure and won't statically keep it on if there is a VIX spike, and the max risk is still heavily skewed to the VIX spiking side, so even a max loss on the VIX downside is still OK yield for the year.

Any thoughts friends?

Low VIX Contango Thoughts

A few times over the last two weeks I noticed my trusty blade glowing blue, noting VIX had dipped into backwardation-

Tastytrade had a great discussion yesterday which pointed at some of the underlying macro VIX issues that you have to contemplate when having short VIX as a core position.  In summary, backwardation in VIX futures at such a low level has been almost unheard of and potentially reflects how much big money could be behind short VIX.  (Along with their trade idea of getting long VIX as without much contango you are getting long VIX without the roll cost which should be free money)

Is the small front month backwardation after the tiniest dip just a visual representation of buy the dip?  Conceptually the futures curve is pricing in a very short term vol contraction, which correlates with an equities rebound. 

 With this backwardation oddity I went off walking, rambling, thinking about futures curves in general.  Will the VIX curve always look the same?  As VIX products are traded more and more (and the equity options they are based on)  will these weird curve changes become more commonplace?

Would it make sense for a theoretical VIX futures curve to be a flat line at 15 or whatever the average is?  I keep coming back to the conviction that VIX futures have to keep in contango most of the time because there will always be uncertainty.  To lose the long term contango structure is saying  "the future is solved" and in finance terms there is no risk premium associated with thinking "some risk will occur in the future."

Will we see a much flatter front 2 months on the VIX curve when /VX is in the low teens?  I think this is definitely possible as more backtesting shows that periods of low VIX lead to more low VIX on average.

Going back to the actual trade ideas, the short term backwardation was a theoretical impetus to get long VIX with very little roll cost.  On paper that trade looks good but in the larger scope of assuming that the very backwardation implies a short term vol contraction, I think it is hoping for two opposite things at the same time.

Whether I end up wrong or right in the short term, the whole event was a time to contemplate conviction in your beliefs and process.  If I believe in the structure of VIX contango, then I have to be short VIX. (with risk management/ cash position)  Is this what religion or faith feels like? Is this the church of SVXY?

  

Life Probability of Touch

As I'm writing these we have a little action with S&Ps down 15 and the VIX contango at 0.0, and it even touched negative for a minute.

I went to get a screenshot on vixcentral and we were already back to slightly above 0 contango.

Am I happy, sad, crestfallen?  In short vix land, specifically with half reserved in cash for those big dips, we are always hoping for a real action day to kick it off.  When we get these slight down days its just a tease, not giving a real entry point but instead your account of short SVXY puts just showing really angry red numbers at you. (with no strikes even breached)

Last week or two we had a similar down day where I was getting careful possibly too early, selling calls against my position and then having to cover them on the quick rebound.
The options/life lesson here is really taking a step back when it comes to probability of touch.

Just after my little overtrade with the calls and stock, I had the classic work experience of waiting to hear from someone before some project/task needed to start.
(If someone emails back after some meeting, then we will need to finish something by the end of day, whatever- just fill in your own office hell here and flavor to taste)

One person could start preconfiguring things immediately and emailing around just to find out later that everyone else is an idiot and never responds, and it was all for nothing.
I'll give you the spoiler for my day- no one emailed back AS USUAL and a less seasoned version of myself would have had a lot of extra fluster.

So why am I getting nervous in the exact same trading equivalent situation?  In life and work with idiots I already have the conceptual probability of touch baked in, and in options where its about 2x your chance of expiring in the money, I'm guessing the work probability is actually higher.

It comes back to muscle memory and staying mechanical.  One of the takeaways I'm hoping to create in this blog (and mostly for myself) is to intuitively get better at crossing over life/poker/etc experiences into options trading to bring down the learning curve.  Here I already have a great intuitive life experience to know how to chill out and let the options positions and theta just do their own work instead of freak out at the first red tick.  Maybe next time I'll take a bigger breath.

Position sizing, bankroll management, stay mechanical, don't get hit by a bus.