Vol arb or short vol CTAs

rickyvic · Post by **rickyvic** » Thu Feb 04, 2016 11:37 am

Not a volatility guy but I was wondering why most volarb programs are focused on US equity indexes, then they normally end up with drawdowns 20 times their annual volatility (extremely low before the drawdown).

Just wondering isn't it better to do many different asset classes to diversify, at least stocks and bonds...?

EspressoLover · Post by **EspressoLover** » Fri Feb 05, 2016 1:45 am

I don't think 20 sigma drawdowns are characteristic of a well-designed volarb program. A lot of people may sell naked puts and call it "volarb", but a lot of people also call Michelob Ultra "premium beer".

rickyvic · Post by **rickyvic** » Sat Feb 06, 2016 1:07 am

That is a good one .... I know but some legitimate businesses that run a few hundreds mln do this on one freakin market. Their answer is there are already a lot of opportunities so no need to look elsewhere. That puzzled me.

cordura21 · Post by **cordura21** » Sun Feb 21, 2016 1:03 pm

Maybe because volatility on the S&p has the implied vs realized premium, yet blowup risk is less pervasive if you know how to adjust you leverage. Index diversification also reduces risk, although less than people think.

Also there are lots of competitive products o implement it.

HitmanH · Post by **HitmanH** » Mon Feb 22, 2016 10:56 am

Maybe also because the S&P Vol market is on-screen, liquid and with capacity - whereas many others aren't?

(not my thing - but just a guess)

Martinghoul · Post by **Martinghoul** » Mon Feb 22, 2016 12:03 pm

I have heard that there's a lot of new activity in this space (programmatic/systematic "vol arb") of late, from a variety of different mkt participant types. Moreover, from what I have been told, it's now quite broad in terms of asset classes involved.

rickyvic · Post by **rickyvic** » Mon Feb 22, 2016 1:48 pm

That makes sense.

If you trade fixed income you need to know a bunch of things, but tbh not a lot to prevent you to apply the same logic (you can calculate carry the same way).

Last thing that comes into my mind is minimum account size for SMAs. Options should be more capital intensive than futures I suppose... ?

radikal · Post by **radikal** » Mon Feb 22, 2016 4:30 pm

It's generally because S&P skew is perpetually the best carry. (Both due to steepness, cheap to fund, reasonable to backdoor margin-reduce through ladders etc)

Sometimes emerging skews spike and they'd theoretically finance well to be short, but then you realize those exchanges have margin calculators developed by total morons.

On the convexity side, US is middle of the pack usually, so you'd try to not have much on here.

And lastly, US is clean. There's cleaner expiration, basis, etc issues than some other places so the risk is a bit better specified.

I mean, if I could get paid $ to just keep rolling down "safe"-ish skew trades in SPUs, I'd do nothing else. Except pour champagne on top myself every morning. And yeah, it'll probably eventually end in tears, but doesn't everything good?

rickyvic · Post by **rickyvic** » Thu Oct 13, 2016 1:52 pm

....I mean, if I could get paid $ to just keep rolling down "safe"-ish skew trades in SPUs, I'd do nothing else. Except pour champagne on top myself every morning. And yeah, it'll probably eventually end in tears, but doesn't everything good?....

Yeah that's what it is... if I have a high sharpe I just sit on it and think I am gonna make the same money for the next 10 years, if I default after 5 I am already rich.

Oh we are good for now... there is no need to add markets...

I was meaning to recommend a client to invest a little in a good small volarb fund but all I found is BS....

I am planning to build something highly diversified myself in this field, it will probably take years but it is not acceptable to me having a high risk of ruin on a strategy, I prefer volatility tbh.

fomisha · Post by **fomisha** » Thu Oct 27, 2016 5:25 pm

in general, when someone says "arb" I assume a zero beta strategy. short vol funds are usually just levered index funds with a twist.