Catching Up On Reader Mail

Thanks to all who have commented and e-mailed me in the ten months the blog has been up and running. Readers have been a great source of ideas for my research and have helped to sharpen my thinking about the markets and ultimately my ability to trade them successfully.

Some interesting comments and mail have been coming over the transom lately and I thought I’d address a couple of these in public.

There have been a couple of questions about VIX futures. I have not traded them to date, but it is something that I will definitely play with in the coming year. Even though I do not trade them, I certainly watch VIX futures closely, particularly the spread between the front month and the six month futures. Anyone interested in getting a sense of my emerging thinking in this area should check out posts with a VIX futures label. Also, note that the fifth and sixth links from the top in the “VIX and Sentiment Links” in the upper right hand corner of the blog both concern VIX futures.

Straying only a little from VIX futures, someone mentioned VXV, a new product from the CBOE which was launched on Monday and calculates the three month implied volatility in the SPX. The VXV may provide an interesting contrast to the one month IV in the SPX that is reflected in the VIX. I will certainly be taking a close look at the VXV and post my thoughts about it in short order.

Another reader asked if there is any way to invest in the cash or spot VIX directly. Unfortunately, the answer is no, though it is possible that a VIX ETF may be on the horizon. Some technical aspects of creating a VIX ETF (or ETN) are fairly daunting, but given the demand for volatility products, I would expect that it is only a matter of time before we see the launch of at least one volatility ETF.

Finally, one question concerned whether it is possible to replicate the spot VIX by buying a basket of delta-hedged SPX options to essentially re-create how the VIX is calculated. This is certainly possible, if a little complicated. A simpler approach would be to use SPX or SPY options, where you could go long or short volatility with straddles and strangles. If you prefer to hedge your short volatility positions, as I do, you might want to stick to butterflies and condors.