The Market Measures from September 19, 2016, "Short Premium or Short VIX", examined a premium selling strategy of short Straddles in the SPY (S&P 500 ETF) and short Vertical Call Spreads in the VIX. Both strategies were profitable with varying risk-reward relationships. A table displayed the profitable details when managing winners and filtered for occurrences when the VIX was above 20 which produced the best results. Could buying the Straddles and buying the Call Spreads ever make sense? What about short Puts in the VIX?
Our study was conducted using data from 2006 to the present. Using options with the cycle closest to 45 Days To Expiration (DTE) we compared long Straddles in the SPY to long Vertical Call Spreads in the VIX in which we were long the 60 Delta Calls and short the 45 Delta Calls. We also compared a strategy of shorting the VIX at-the-money (ATM) Puts.
The results were displayed in three separate tables. All the tables listed the percent profitable, top 25 percentile P/L, median P/L, bottom 25 percentile P/L and largest loss. The first table showed trades without management and simply held to expiration. The long Straddles and the long VIX Call spreads were losers with success rates as low as 33% The short ATM VIX Puts were slight winners.
The second table displayed the results when we managed winners (Straddles at 25% of max profit and Call Spreads and short ATM Puts at 50%). This clearly improved results but the long SPY Straddles and VIX Call Spreads were still losers and the short ATM VIX Puts still didn’t make much. The third and final table included filtering for occurrences when the VIX was below 15. Waiting for low IV improved the overall results for the long VIX Call Spreads, which were finally profitable, and the Short ATM VIX Puts, but worsened the median P/L for the Straddles. Though short VIX Puts seem to work with more consistency, the strategy suffers from reduced premium (in low IV) and inverse skew in VIX options.
For more information on the VIX see:
Market Measures from March 22, 2016: "Relationship Between SPX and the VIX"
Options Jive from April 26, 2016: “Volatility Environment: Market Moves”
Market Measures from June 17, 2016: "Fading Fear | Trading After Large VIX Moves"
tasty BITES from June 21, 2016: "Getting Long VIX with Limited Capital"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed results of our study comparing long SPY Straddles to buying VIX Vertical Call spreads or shorting ATM VIX Puts.
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