Malandrino/NajarianWEBINAR: Sector Selection and Trading Strategies 6pm ET CLICK HERE FOR INVITE AND TO REGISTER.
In the past, it has been profitable to be short vol-of-vol at a short-time horizon. Consider the performance of a strategy that sells VIX option straddles in the first two months and rebalances option exposure daily to maintain a constant one-month horizon. The strategy also hedges any delta exposure daily using VIX futures. The strategy is effectively short the (realized) volatility of (implied) volatility, since the principal risk is from periods when VIX futures move sharply in either direction.
The performance of this strategy was excellent throughout the second half of 2012, with almost no drawdowns to speak of and a smooth equity curve (fig. 1). However, short VIX straddles have seen a bout of weakness in the last several months. Those drawdowns coincided with the large spikes higher in VIX related to the U.S. "fiscal cliff" around the turn of the year and the Italian election in late February. Those two rallies in implied vol were faster than the norm, and given the event-driven nature of the strategy drawdowns, I think it would be too hasty to extrapolate forward from this quarter's weakness. We will keep monitoring the performance of this and related strategies; my suspicion is that short vol-of-vol strategies will return to form this year.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Jared can be followed on Twitter at twitter.com/CondorOptions
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas