When selling premium we are usually concerned about an outsize move to the downside (especially in a stock index) which is why we like to be short some Deltas. The VIX has a high negative correlation to the SPX (and other indices) which gives it and other Volatility Products a unique risk profile. When the market declines Implied Volatility (IV) spikes The sharp spikes to the upside result in a reluctance to sell naked short Calls in volatility products such as the VIX. Calls in the VXX (Volatility ETF) have a downward drag. Perhaps there is an advantage in selling Calls in the VXX rather than selling Calls in the VIX because of the downward drag?
Tom explained the situation. “[The ETF managers] are buying back month /VX Futures which are higher priced and selling out front month Futures (which are lower priced), so you are essentially buying premium.” We generally believe that markets are efficiently priced. Is this true?
Our study was conducted in the VIX and VXX using data from 2010 (the year VXX options began trading) to the present. We compared selling 50 Delta VIX Calls to 50 Delta VXX Calls. We chose the option expiration cycle closest to 45 days to expiration (DTE). We placed orders everyday and managed at 50% of max profit if possible. We then measured their cumulative performance.
A table of the results comparing short VIX Calls to short VXX Calls was displayed. The table included the average credit received, win rate, average P/L per trade, average winner and average loser. The table showed that selling calls in VIX was virtually the same as VXX, even though you might think the VXX drag would help more than the VIX. A chart comparing the cumulative performance of the VIX Calls to the VXX Calls showed almost no difference, meaning there is no edge in selling VXX over VIX short Calls. The VIX actually had a slightly better credit received which Tom and Tony attributed to the superior liquid and better Bid-Ask Spreads.
For more information on VIX, VXX & Drag see:
Options Jive from December 16th, 2015: “Different Types of Drag”
Market Measures from May 3, 2016:"Getting Long Volatility by Selling Puts in VXX"
Market Measures from May 20, 2016: "VXX - A Difficult Product to Get Long"
Options Jive from November 15, 2016: "Trading Volatility, Not Price"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing short Calls in the VIX to short Calls n the VXX to determine whether VXX’s inherent drag gives us an advantage.
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