Selling Volatility Safely:  VIX, VXX, and Other Short Volatility Option Strategies

Investors who sell VIX-based products often keep a close eye on contango, and the VIX was in contango on 248 days in 2012 and 219 days in 2014.

On Friday at the 31st Annual Risk Management Conference presentations on – Selling Volatility Safely:  VIX, VXX, and Other Short Volatility Option Strategies – were delivered by David Burchmore, Portfolio Manager, Ontario Teachers’ Pension Plan, and Rocky Fishman, CFA, Equity Derivatives Strategy, Deutsche Bank Securities.


As an introduction to the topics covered by the expert speakers, investors who roll short positions in VIX-related products often prefer that VIX be in contango (futures priced higher than spot) rather than in backwardation (futures priced lower than spot). As shown in the chart below, if we compare the daily closing prices of the spot price of the VIX Index and the second month of VIX futures, VIX was in backwardation 111 days in 2008 and 33 days in 2014. In 2014 VIX was in contango 219 days.

11Ch-2015-03-06-1100-VIX Index & VIX futures112Ch-2015-03-06-1100-Table VIX Index & VIX futures


Topics covered at the Friday presentations included —

  • The essence of VXX: a volatility trade for short time horizons, a term structure trade for longer horizons
  • The VXX’s path dependence
  • Economic differences between VIX and VXX option strategies
  • Divergences between realized and implied volatility strategies
  • Sizing & managing short volatility trades: managing risk versus premium outlay
  • Impact of volatility ETPs on the volatility market


Mr Fishman made a number of points, including –

  • Short volatility trades can capture rapid drops in volatility; the month of November 2014 had an SPX realized volatility of 4.5, the lowest monthly number since 1966.
  • Volatility spikes have become more intense – a trend we expect to continue.
  • VIX Futures fall more often than they rise, and most VIX futures drop in price over their final weeks.
  • VIX futures usually trend downward – even when volatility levels do not.
  • VIX ETP space trending toward more VIX-based products with 2-times exposure, and inverse products.
  • A key driver of high vol-of-vol is the growth in VIX-based ETPs with 2-times exposure, and inverse products.
  • VIX and VXX put options are core tools for selling implied volatility; VIX and VXX put options both target VIX futures but their economics differ.
  • VIX futures do not frequently fall significantly more than ex-ante expected roll-down when the VIX is low


Mr. Burchmore delivered a presentation that covered many advanced topics, including —

  • There are many ways to sell volatility, including —
    • Gamma (var swaps, delta-hedged options)
    • Vega (VIX futures, fwd-start var swaps)
    • Range (non-DH straddles, range accrual, butterfly)
    • Overwriting
    • Underwriting
    • Structured, exotic products (risk transfer)
    • Inadvertent short vol bets (f/x carry)
  • What is vol risk premium?  Equity risk premium, Skew premium, Jump risk
  • Historically, the volatility risk premium has paid higher return on risk than traditional betas
    • Tougher to access
    • Skewness of returns (including liquidity)
    • Premium on risk management
  • Does “safe” mean:
      • Max drawdown
      • Volatility of strategy
      • Skewness of returns
      • Diversified from other strategies
  • Any endeavour to make volatility selling safer is a constraint and it can lead to a less optimal solution
  • “Safer” strategies  (with less volatility and lower returns)
    • Structure using optionality, e.g., buy VIX puts instead of selling futures
      • Sell higher, longer-dated volatility
      • Trade relative value (RV)
        • Country/index vs country/index
        • Term structure
        • Dispersion
  • What is the optimal structure for an investor?
    • A question of utility
    • Choice of structure, strikes, term  should largely depend on this
    • How frequently (diligently) can you manage a trade?
    • At our pension fund we can look at the long term for purposes of optimal investing
    • Is vol-of-vol the goal, or just an input?
    • Beware the fallacy of known losses in long options – Typically investing is a process, not just a trade or series of trades; you need to look at your objectives
  • There should be constant reassessment as a path to being safer
    • Multiple studies / indicators to monitor risk
    • Multiple time frames
    • Adaptive and reactive
    • Beware of the power of market positioning
    • Ask yourself every day if your book accurately reflects your view; with options your exposures often change.


David Burchmore is a Portfolio Manager of Equity & Derivative Products within the Tactical Asset Allocation and Natural Resources (TAA&NR) Department at Ontario Teachers’ Pension Plan (OTPP).  David has worked at OTPP since 2000, and focuses on alpha-driven derivative strategies involving VIX, variance, correlation and dividends. David has a Bachelor’s degree in Commerce from Queen’s University in Kingston and is a CFA charterholder.

Rocky Fishman is an equity derivatives strategist with Deutsche Bank in New York, where he focuses primarily on VIX and US index options and volatility.  Rocky joined Deutsche Bank in 2009.  Rocky has also worked at Platinum Grove Asset Management and Goldman Sachs Asset Management in various roles in equities, rates, and credit.  A CFA Charterholder, Rocky has Bachelor’s and Master’s degrees in Computer Science from Harvard University and an MBA from Columbia Business School.


Here are links to CBOE webpages with more related information –