Wednesday, October 20, 2010
Volatility arb still ripe
As discussed earlier at Uptrending Equity: Volatility arb, volatility futures are still trading at a steep contango. Since the monthly incremental contango in the VIX futures term structure is almost just as steep going forward several months, rather than tapering off less steeply as you go deeper into the term structure (which would be more normal and expected), I reached out to short the Jan VIX futures and bought Nov SPY puts with IVs of 16% to hedge, rather than shorting VXX, which is currently holding mostly Nov VIX futures. I'll roll the puts over once we approach expiration more so that I'm not bleeding too much time value.