Aug 10, 2011

Trading VIX Derivatives by Russell Rhoads

     I just finished reading Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes by Russell Rhoads. The book belongs in the trading office because of its detailed coverage of US volatility derivatives such as VIX futures and options, and volatility ETFs and ETNs.
     There are two main themes / parts in the book. The first one reviews fundamental concepts of implied volatility, volatility index calculation, and contract specifications for volatility products. All topics are covered thoroughly including weekly VIX options, and binary options on the VIX, and volatility strategy indexes. There is a lot of information, and while most of it is available on CBOE website and various prospectuses the book provides a good summary.
     The second theme in the book is about practical trading aspects of VIX derivatives trading. Chapter 9 starts off with discussions of various hedging strategies, concluding with the summary of U of Massachusetts study on superiority hedging performance of VIX derivatives during the 2008 financial crisis. I think it would have been nice to include a somewhat counter position in The Hazards of Volatility Diversification but I don't think the second paper was available at the time of writing. Mr Rhoads covers different spreads strategies with VIX futures and options, starting with calendar spreads. Trading calendar spreads in the VIX is very difficult because of non-linear relationship between different VIX futures contracts. Instead of mathematical model the author focuses on examples of profitable and non-profitable spreads, how they tend to work on average and during the time of crisis. The idea is to give the reader some common-sense wisdom about behavior of calendar spreads, intuition about when they can be traded profitably, and potential risks. The last topic covered in the book is on vertical spreads which are not that different from other options. The author covers basic spread strategies like Condors and Flies and how they trade in VIX options. 
     Overall I think it is a high-quality book, but let me clarify one thing about the intended audience. If you're completely new to options this is definitely not the book for you. If you are a highly experienced VIX trader, then you probably already know most of the material in the book, but may enjoy it as a review. If you're experienced (non-VIX) options trader and want to learn more about volatility derivatives and how they are different from other equity options then Trading VIX Derivatives is a great non-quantitative book that will provide you with all the information you need. 

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