Relative Value Arbitrage


 

In the previous installment, we discussed the use of a popular asset allocation/market timing rule (10M SMA rule hereafter) to size a short option position. All other parameters and rules are the same as in our previous post.

delta Hedged market position significantly SMA static timing unhedged volatility

 

Is Volatility of Volatility Increasing? [0.11]

Posted on May 22, 2017, 11:16 p.m. by Relative Value Arbitrage @ [source]

The near inversion of the volatility term structure can also be seen on the VIX futures curve (although to a lesser degree), as shown below.

With only -1.8% change in the underlying SPX, the associated spot VIX went from 10.65 to 15.59, a disproportional increase of 46%.

data etns futures normal note reflected spot spx times vix

 

Position sizing and portfolio allocation have not received much attention in the options trading community. In this post we are going to apply a simple position sizing rule and see how it performs within the context of volatility trading.

algorithm dynamics PnL portfolio position post Sizing strategy trade volatility

 

The spot VIX index finished last Friday at 11.28, a relatively low number, while the SKEW index was making a new high.

We use 10000 paths in our MC simulation.

expensive insurance means portfolio protection put reward risk skew strategy

 

Forward Volatility and VIX Futures [0.00]

Posted on Feb. 28, 2017, 6:57 p.m. by Relative Value Arbitrage @ [source]

Last week the VIX index was more or less flat, the contango was favorable, and yet VIX ETF such as XIV, SVXY underperformed the market.

As briefly mentioned in the footnotes of the blog post entitled “A Volatility Term Structure Based Trading Strategy”, VIX futures represent the (risk neutral) expectation values of the forward implied volatilities and not the spot VIX.

attempt explanation February find increased post shown spot vix volatility

 

A Volatility Skew Based Trading Strategy [0.07]

Posted on Jan. 31, 2017, 4:18 a.m. by Relative Value Arbitrage @ [source]

In previous blog posts, we explored the possibility of using various volatility indices in designing market timing systems for trading VIX-related ETFs.

In this article, we will attempt to build a trading system based on the third type of risk premium: volatility skew.

increases option outlier perceived probabilities returns similar skew tail volatility

 

However, when the market is nervous or in a panic mode, the VIX/SP500 relationship can break down, and the indices start to move out of whack.

In this post we revisit the relationship between the SP500 and VIX indices and attempt to quantify their dislocation.

calculated dislocation hedge january options portfolio residuals SP500 trader vix

 

In previous posts, we presented 2 volatility trading strategies: one strategy is based on the volatility risk premium (VRP) and the other on the volatility term structure, or roll yield (RY).

The first strategy (VRP) is based on the volatility risk premium.

arrow Aug drawdown observable portfolio red signal strategies trade volatility

 

Last month was particularly favorable for short volatility strategies.

First, the main PnL driver of a delta neutral, short gamma and short vega strategy is the spread between the implied volatility (IV) and the subsequently realized volatility (RV) of returns.

area IV mark october position returns RV shows strategies volatility

 

In previous 2 articles, we explored a volatility trading strategy based on the volatility risk premium (VRP). This strategy is based on the volatility term structure [2].

August avg bars held months profit SP500 strategy structure volatility

 

Last year, we presented backtested results for a VXX trading strategy.

All trades Long trades Short trades Initial capital 10000 10000 10000 Ending capital 3870.55 9095.02 4775.53 Net Profit -6129.45 -904.98 -5224.47 Net Profit % -61.29% -9.05% -52.24% Exposure % 100.00% 14.67% 85.33% Net Risk Adjusted Return % -61.29% -61.68% -61.23% Annual Return % -60.50% -8.86% -51.48% Risk Adjusted Return % -60.50% -60.42% -60.33% All trades 11 5 (45.45 %) 6 (54.55 %) Avg.

August avg bars drawdown equity held loss portfolio profit volatility

 

Volatility Trading through VIX ETFs [0.10]

Posted on July 31, 2015, 11:24 p.m. by Relative Value Arbitrage @ [source]

It is well known that persistent biases exist in various markets.

All trades Long trades Short trades Initial capital 10000 10000 10000 Ending capital 727774.91 -74688.89 812463.8 Net Profit 717774.91 -84688.89 802463.8 Net Profit % 7177.75% -846.89% 8024.64% Exposure % 99.02% 6.58% 92.44% Net Risk Adjusted Return % 7248.42% -12868.01% 8680.57% Annual Return % 93.38% N/A 96.68% Risk Adjusted Return % 94.29% N/A 104.58% All trades 43 21 (48.84 %) 22 (51.16 %) Avg.

avg bars bias held market premium profit RV vix vrp

 

Pricing Convertible Bonds-An Example [0.01]

Posted on May 17, 2015, 8:16 p.m. by Relative Value Arbitrage @ [source]

In the previous post, we outlined the main steps in pricing a convertible bond using the Binomial Tree approach. In this follow-up post, we provide a hypothetical example of a straight convertible bond.

bond call convertible follow hypothetical options post provide put up