Jul 12, 2012

TVIX Vol & Applets

One of the blog readers emailed me the following question: [What is the] amount of vol in every 10k shares of tvix. Is it possible to break it down to spx terms (straddles) or what you are buying along the curve?

I answered as follows: There is no simple answer ... but I'll try to provide so rules of thumb without a formal model . To compare TVIX with SPX straddle, let's consider the simplest case where straddle has 30 days to
expiration, so the same maturity as VIX. VXX , which holds VIX futures interpolated to 30 day maturity will have about 0.5 β to the VIX, and TVIX will have β about 1 (that is actually when I get from regression) . [Edit: to clarity VIX has maturity of SPX + 30 and beta ≈ 1, VXX SPX + 60 and beta ≈ 0.5]

Since ATM straddle is approximately linear in vol, % change for 30-day ATM straddle would be about the same as % change in the TVIX. This is of course a "local" relationship. As the straddle moves around it will no longer be ATM and will lose or gain Γ, so the relationship will change.

To generalize this to any maturity you would have to figure out how vols move. Again, without having a formal model the rule of thumb is that vol changes are inversely proportional to sqrt(T). So if 1 month straddle has β = 1, 4 month straddle will have β = 0.5, and half-month straddle will have β of about 1.4.

About 2 years ago I published few posts (1,2,3) about VIX future movements, and used few applets for interactive illustrations. These applets use Adobe Shockwave, and do not work on all browsers. I created them using a product called Xcelcius that was taken over by SAP and as far as I know has been deprecated. Can any of the readers suggest a way for me to create interactive applets to demonstrate non-linear features of VIX products, something simple that would not require significant programming?

No comments:

Post a Comment