Is shorting volatility still a good investment?

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Is shorting volatility still a good investment? 2017-03-03T15:27:35+00:00
  • Author
  • Frank Grossmann
    Post count: 147
    More and more articles like the following SeekingAlpha article question the short volatility trade.
    This short volatility trade was extremely profitable during the last  years.

    Most of the short volatility traders however trade VIX front month using ETFs like XIV or short VXX. I agree with the author, that it becomes difficult to make money on the VIX front month. For the front month the return to risk ratio is not acceptable anymore and this even more, if you trade XIV which is the inverse front month VIX ETF. XIV has quite high rebalancing losses compared to a VXX short position. This reduces XIV performance a lot.

    For the midterm volatility (ZIV and VXZ ETFs), I think the return to risk ratio is still ok and better than for SPY investment, even if you look only at the 2014 result. It is +7% for a short VXZ and +6% for a ZIV portfolio.


    Contango is still about 2% per month for midterm VIX Futures, which is still quite good. It is lower than a year ago, but VIX futures now have again Treasuries as a competitor for hedging portfolios. So normal thinking investors would rather buy Treasuries as a hedge, than VIX futures.
    Anyway at the moment Treasuries as a hedge are important. This way the risk of a ZIV investment is not too big.

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