VIX instruments
SVXY
ZIV
VXX
VXZ
VRP
Tendency of implied volatility of S&P 500 options to overestimate realized volatility, and in the tendency of VIX futures to overestimate future spot VIX.
Theses premiums are collectively referred to as “volatility risk premiums”, or “VRP”.
In the stock market, hedgers effectively pay speculators VRPs to compensate them for assuming the volatility risk of the S&P 500.
Systematic swing trading strategy (holds positions overnight). Trades SVXY, ZIV, VXX, and Cash based on the Roll-Yield and VRP. Tactically switches from SVXY and ZIV (when short volatility) based on changes in the volatility risk premiums.
Systematic swing trading strategy (holds positions overnight). Trades ZIV, VXZ, and Cash based on the Roll-Yield and VRP. Gains exposure to the mid-term VIX futures (rather than the front-end).
Swing trading strategy (holds positions overnight). Primarily systematic, but may use discretion from time-to-time. Trades SVXY, VXX, and Cash based on the Roll-Yield and VRP.
Buy a put option on a market ETF — like the PowerShares QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq-100 Index — and get paid out when the stock market drops.
(Since the Nasdaq-100 is a little more volatile than, say, the S&P 500, we’ll use that as our example. After all, our put will pay out more with an index that takes a bigger hit)
Insuring Against a Crash
To insure against a crash, you need to buy a put option with two characteristics: it’s got to be cheap, and it’s got to have plenty of time to play out.
The best way to do that in one step is by buying a long-term put that’s way “out of the money”…
Remember, you want to minimize the cost of your portfolio’s “insurance policy”. That cost has two factors: time value and intrinsic value. We need plenty of time on our “insurance policy” — so unfortunately, our time value is going to cost more.
To make up for that higher time value, we’ll use a put option that has zero intrinsic value. That way, our insurance policy only pays out on a really big move down, but it’s cheap to buy.
So, let me show you know that would work with out QQQ example…
As of this writing, QQQ trades for around $73 per share. Let’s say we want our “insurance policy” to kick in if the index crashes — in that case, we could buy the QQQ $50 January 2015 put. That put gives us the right to sell the ETF for $50 per share anytime between now and January 2015. (In the real world, we’d use a little more analysis to pick our strike price and expiration, but this put will get the point across.)
That option currently costs $1.25, which means a total investment of 1.25 per share times 100 shares in a contract). That $125 cost is what you’re paying to insure your portfolio…
Here’s what the profit and loss graph looks like for that put option:
In the graph above, you can see how you’re out a flat $125 if QQQ stays above $50. But if the market does crash, and QQQ falls through $50, your insurance policy starts paying out:
• If QQQ hits $48.75, you’re at breakeven for the trade (you’ve made enough to cover the premium)…
• If QQQ falls to $45, you’re sitting on gains of $375…
• And if QQQ drops all the way to $25 (like it did in 2008), you’re up a whopping $2,375
I should note that your gains could actually be much bigger than that. Remember, the graph above only shows your profit from the put option’s intrinsic value. If QQQ crashes with enough time until expiration, this option’s time value could get huge — and you could sell your option well before expiration for a big profit.
Just like a regular insurance policy, if you don’t use it you’re only out what you paid for your premiums.
If you do use it, then it helps to offset the losses in the rest of your portfolio
From <http://dailyreckoning.com/use-options-to-protect-against-the-next-market-crash/> > From <https://keep.google.com/u/0/#NOTE/1qpBd2jRQ3aPLoX4iZM5I73zxMKjB_ypKF7alIH_18ZE3XiEH5oy0ZceYVsKPB_o6JZ62>
