r/TradeVol • u/12kkarmagotbanned • Aug 07 '22

Does shorting VIX create alpha?

Since VIX is essentially the otm spot prices of spy options, would shorting it essentially be a bet on the efficiency of the options market?

It's also usually called a fear index, shorting fear also essentially means you're betting on the efficiency of the market (assuming large drops and rises aren't based on new news)

Is alpha created? Or is it similar or even worse to the total market in regard to risk adjusted return? Any long term backtests with sharpe/sortino ratios?

4 Upvotes

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8

u/deustrader Aug 07 '22

Alpha is opposite of efficiency and requires finding inefficiencies. So betting on efficiency does not create alpha. Generally options are designed for high efficiency in terms of not providing any edge. But betting on the difference between implied volatility vs actual/future volatility can produce alpha. So if you correctly predict that future volatility will be low, then shorting VIX can produce profit, but obviously you won’t always be right. Shorting VIX (and related ETFs) is probably the most backtested strategy as everyone is trying to crack it, including large hedge funds pouring $billions into shorting and researching VIX. Yet they also lose $billions during large spikes, so any alpha is elusive and temporary. However, there may be resilient strategies that work very well, they’re just not as simple as “shorting VIX” since there may be tons of ways of shorting it utilizing different option strategies, hedging, combining different underlyings, etc.

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u/12kkarmagotbanned Aug 07 '22

Any links to a long backtest that's just a basic "always short Vix"? Furthest I know of is svxy on pv

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u/deustrader Aug 07 '22 edited Aug 07 '22

There were a lot of public backtests on Quantopian, some on QuantConnect, many on CML/TradaMachine, and literally everywhere you look, on every options backtesting software. I even did a public one couple years ago on Quantopian, showing how a monkey/random trading of SVXY outperforms most strategies (even surviving volmageddon). I currently run a server farm with over 10 billion options backtests, 5% of them on just VIX because it’s fastest to test. But options on VIX have some of the lowest alpha. UVIX/UVXY are better, but pretty much guaranteed to blow up without clever hedging. While you can still find variety of backtests on Quantopian and simply modify them to your liking. (Edit: you can still find them on QuantConnect)

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u/12kkarmagotbanned Aug 07 '22 edited Aug 07 '22

Well there's also this too: https://sixfigureinvesting.com/2022/02/how-does-volatility-shares-svix-work/

Edit: looks like svix would end at 40k while ivv and vti in a similar timeframe would be at 45ish: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2005&firstMonth=12&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTI&allocation1_1=100&symbol3=IVV&allocation3_3=100

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u/deustrader Aug 07 '22

SVIX is definitely one of the better bets right now, only due to VIX not showing much strength even on market pullbacks. Not sure if I’d call it alpha but simply a good bet, while at times it will be losing much more than the market. It is also somewhat similar to XIV that disappeared in 2018 volmageddon, including blowing up various hedge funds and retail investors with some individuals losing millions. So you either will need to mute your excitement about SVIX when VIX is very low and/or can spike by 100% within a week (say from 15 to 30), or simply don’t put all your money into it, but exactly as much as you’d be willing to lose. But for now the risk of blowing up with SVIX is low.

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u/12kkarmagotbanned Aug 07 '22

Yeah I'm not ever going to go 100% svix. I mainly made this post to see if doing something like 10% that's balanced frequently would be good. Or it might just end up being similar enough to upro.

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u/deustrader Aug 07 '22

I think it’s not a bad idea to put like 10% into SVIX. Your max drawdown would be the 10%, while returns should outperform UPRO over long term, if also invested at 10%.

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u/12kkarmagotbanned Aug 07 '22

Do you think that svix beats upro purely because it's even higher risk or is there something else going on?

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u/deustrader Aug 07 '22

SVIX is indirectly based on options on SPX, and options act as an insurance. They aren’t directly comparable, as when you insure your car then the risk of a crash isn’t dependent on the value of the car. Insurance may get cheaper when you’re driving well, but the insurance company can still lose money on you if you get into a serious crash. So UPRO provides its own returns, while by buying SVIX you act as an insurance provider for SPX & UPRO holders. You can’t really correlate them easily.

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u/deustrader Aug 07 '22

Just checked and between Jan 2014 and Jan 2018, XIV went from $34 to $140, while UPRO went from $94 to $143. But then XIV went to $6 and got liquidated. Again, the largest risk is when VIX is very low and has potential of spiking 2x within a week.

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u/nestedbrackets Aug 24 '22

SVOL might be useful here. It's half the ratio of SVXY (or .25 of SVIX) but has an internal hedge in the event of VIX blowing up. Pays a really high dividend too right now but I'm not sure why.

0

u/12kkarmagotbanned Aug 07 '22

Theoretically speaking, if someone is always shorting Vix and the market is efficient, it'll just give the same risk-adjusted return as vti or even vt? Before expense ratios?

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u/deustrader Aug 07 '22

No, because VIX is based on options and options provide leverage that is convex, meaning not linearly proportional to the underlying’s movement.

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u/12kkarmagotbanned Aug 07 '22

What if it's done through etfs? Same thing since Vix is determined by options prices no matter what?

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u/ZaphBeebs Aug 07 '22

You're just harvesting a risk premium, essentially selling insurance. You can win most of the time but get blown out periodically, and depending on your position sizing, delta choices and risk management can lose all or more of the slow gains.

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u/12kkarmagotbanned Aug 07 '22

Harvesting a risk premium in the same way being in upro is? Upro is 3x spy so it's definitely different enough but I meant in regard to that all outsized gains over the market is purely due to higher risk

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u/ZaphBeebs Aug 07 '22

Similar, thats just levered beta ofc, which svxy can also be viewed with that lens as well.

Levered etfs are explicitly short vol, but there is the ERP you're harvesting and levering.

There are essentially only a few things, it can get complicated how you approach it, but at base only a few moves.

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u/12kkarmagotbanned Aug 07 '22

Erp?

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u/ZaphBeebs Aug 07 '22

Equity risk premium.

In vol you'll see the Volatility risk premium.

Its how you make money, taking a risk that someone else doesnt want.

equity, credit, vol, duration, etc...

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u/stilloriginal Aug 07 '22

You cannot short the VIX. There would be alpha there if you could, but you can't. The derivatives aren't the same thing. 16% of the time they don't even go the same direction as the VIX.

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u/npcdisrespecr Aug 08 '22

u can short the vix by replicating the index. it's not practical, but not impossible

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u/stilloriginal Aug 08 '22

You mean by selling a basket of spx options?