Short Vol / Options Stategy
I am a big fan of shorting volatility as a strategy. There are many traders who are deathly afraid of what they deem “naked” risk and these traders are the same that tend to buy lots of weekly options or to buy options with no regard to the price they pay for the option. I believe there are ways to both “time” volatility and to trade short with defined risk. It’s not to say I always have defined risk positions but I am very vigilant in my positions when I do!
It’s been discussed and researched to death the positive expectancy of selling OTM index vol, or ATM straddles, or Var Swaps so I won’t bother going into that detail. I did however come across some interesting performance data from some CTA’s that are far more explanatory then a random white paper.
I am not affaliated nor do I endorse any of these funds. I’m not sure why i feel it’s necessary to have a disclaimer but there it is
One of the most common pitfalls and criticisms of short options CTA programs tend to be they make great money until they blow up. And many did in 2008, a CTA program called Zenith comes to mind. But there are others that survived, one of the above funds actually traded throughout most of 2008 and delivered positive returns. It is also easy to see the difference in short vol returns in different regimes. These funds are on the relatively small side as far as funds go, between 50-100MM AUM though this should encourage most of us except for a small few, that this strategy is liquid and scalable. I’ll include links for my own reference in the future and yours of course though the site may require registration: