I recently looked at some VIX derivatives of US stocks. Based on my subjective judgment, since the cognitive threshold is relatively high, there will be good trading opportunities for option players, so I will write a brief article.

1. VIX Definition

You can check Chat gpt yourself. The IV index is not unfamiliar to option players. For non-amateur option trading players, it can be simply understood as: the market's estimate of the future volatility of the underlying asset.
A high implied volatility or a high VIX indicates that the market is concerned about the large actual volatility of the underlying asset.
However, there are often some deviations between market estimates and reality, which is a little deeper and we will not go into details.

2. VIX product context

VIX is an index, and since the index cannot be traded, in order to allow players to fully enjoy the fun of trading, Wall Street institutions have studied many complex financial derivatives for buyers and sellers to bet against each other. However, many complex derivatives and the various mathematical calculations and derivations behind them have discouraged retail players. I have made a simple summary, as shown in Figure 1:

3. VIX skyrocketed in 2018, and XIV stopped trading

In February 2018, the Fed unexpectedly raised interest rates and VIX surged to over 350% as shown in Figure 2. At that time, there were two mainstream ETFs that shorted VIX futures on the market, XIV and SVXY. Large funds that heavily shorted volatility strategies suffered heavy losses. XIV had achieved an 8-fold return in the previous two years, but it only took one day to return to zero.

The other ETF was not much better. SVXY directly evaporated more than 90% of its market value. Many players who had previously increased their positions in SVXY with floating profits experienced a huge retracement, as shown in Figure 3:

Later, the total volume of short volatility strategies was less than half of the overall capacity before 2018.
This strategy is actually very similar to the excess double-selling strategy. There are many hedge funds that have encountered problems in the three major markets.

4. Analysis of Several Current Mainstream Short-Selling VIX ETFs

According to the risk situation, there are currently three ETFs with relatively large capacity in the US stock market, as shown in Figure 4:

The most stable one among them is Svol (not investment advice, please use your own discretion)
The overall yield curve is shown in Figure 5:

I checked Svol's product manual and found the transaction logic is as follows:

Use short-term U.S. Treasury bonds as a base position
Buying call options on VIX futures can hedge some of the tail risks of a sudden surge in VIX.
Controlling short VIX futures positions
The overall profit and loss target is to lock in a 33% decline if the VIX extreme surge in February 2018 occurs.

5. How to use VIX ETFs in your investment portfolio?

From a deeper level, the implied volatility of options and VIX actually represent different volatilities, but the implied volatility of SP500 index options and VIX move in the same direction most of the time, both representing the market's view on future expected volatility.

Therefore, if we have an account that mainly buys options on ETFs or individual stocks, betting on events such as earnings season or interest rate cuts, it is actually a good idea to allocate some ETFs that are short VIX. Even advanced option traders can directly form positions by using SPY Gamma scalping + VVX bear spread.

Or to put it more simply, buy a straddle strategy + SVOL/SVIX product position. The overall short Vol position is relatively effective in hedging and protecting the long option position.

Conclusion:

Shorting VIX strategies are high-certainty, high-return trading strategies, but high-risk strategies with poor ability to combat black swans.

Simply buying it doesn't make much sense, it's more suitable for allocation in an investment portfolio.
Because of its special mean reversion (compared to stocks and ETFs), VIX derivatives can significantly smooth the return curve if we allocate some VIX-type ETFs in our portfolio or do some VXX trading strategies.

Players who delve into options can even build advanced 0-cost Gamma scalping positions, which are very suitable for some interested players or large-capital position operations on funds.

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