“Going Long Volatility”

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DoctorB
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“Going Long Volatility”

Post by DoctorB » Fri Oct 13, 2017 2:26 pm

As the markets continue to reach new highs while volatility stays low, I keep coming across articles and posts from time to time recommending to “go long volatility.” Sticking with my 80-20 Stock/bond allocation for now given my younger age, but curious what the Bogleheads perspective would be on this, and what Vanguard offers in this regard, if anything?

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oldcomputerguy
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Re: “Going Long Volatility”

Post by oldcomputerguy » Fri Oct 13, 2017 2:28 pm

Sounds like investment porn to me. Switch it off and stay the course.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

dbr
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Re: “Going Long Volatility”

Post by dbr » Fri Oct 13, 2017 3:04 pm

What attracts you to this particular suggestion in the sea of dozens of other suggestions for things you can/should/might/ought-to do?

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nisiprius
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Re: “Going Long Volatility”

Post by nisiprius » Fri Oct 13, 2017 3:57 pm

I don't even know what it means. I don't claim to be sophisticated, but if I actually don't understand it, it's probably some kind of trendy thing or some meaningless slogan.

On doing a Google search, I think it means "go long on the VIX index."

For me to try to do this would be a really bad idea, for five reasons, which might not apply to everyone.

1) I don't know much about the VIX, and I don't invest in what I don't understand.

2) I could be wrong but it don't believe the VIX reflects any economic activity that earns money, and I don't believe there's any reason to expect it to have a long-term positive real return. It doesn't look as if it has had a positive return. So I can't make money with it just by buying it and holding it without paying attention to it. It looks as if the only way you can profit from the VIX is predict, correctly, and in the short term, when one of those nasty spikes is going to happen and buy just before it happens and sell while it is happening.

Image

3) On further Google searching, all the places that talk about investing in the VIX warn you that you can't. Most of the indexes we discuss in this forum can be tracked with high accuracy, low cost, and very little tracking error; take an S&P 500 index fund, anybody's S&P index fund, do a Morningstar growth chart along with the S&P itself and you'll find it hard to see that there are two different lines. The VIX apparently uses math that can't be replicated with long and short positions in traded securities.

4) The situation with VIX-related thingies-you-can-buy-from-a-brokerage looks much much worse than with that of the VIX itself. The biggest exchanged-traded thingie that claims to have something or other to do with the VIX is VXX, the iPath S&P 500 VIX Short-Term Futures ETN. (Notice that it's not an ETF, which is a problem, too, but I won't get into that). VXX pays no dividends, so we don't need a growth chart. Here's how VXX has "performed" since inception:

Source
Image

An investment of $100,000 in VXX on 4/1/2009 would now be worth $35.34. That's a stunning CAGR about -60% per year. That is to say, on the average this investment has worse than cut your money in half every year. And that's just about what it's done, it's fairly close to a steady straight line, loss, loss, loss, loss, loss, interrupted by relatively small upward spikes.

There is no period as long as a year, anywhere on the chart, during which an investor could have made money. An investor who bought and had to wait more than a year for the upward spike lost more money while waiting than he made on the spike. You have to see a VIX spike coming along in less than a year and you have to be right. Yep. Market timing.

Clearly, this ETN doesn't track the VIX at all, and probably has the same terrible problems that leveraged and inverse ETFs have.

5) I haven't done the search yet, but if it is true that there are people saying "go long volatility," this feels like the kind of situation in which there are probably also people saying "go short volatility." Let's see. OK, not exactly, but here's someone saying that Everybody's short VIX these days. So someone must think they are right to be going short volatility.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nisiprius
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Re: “Going Long Volatility”

Post by nisiprius » Fri Oct 13, 2017 4:03 pm

DoctorB wrote:
Fri Oct 13, 2017 2:26 pm
...curious what the Bogleheads perspective would be on this, and what Vanguard offers in this regard, if anything?...
Nothing from Vanguard itself.

I imagine you can buy VXX and other exchanged-related-whatzzisses through Vanguard Brokerage Services, of course.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: “Going Long Volatility”

Post by lack_ey » Fri Oct 13, 2017 4:04 pm

There's not any Vanguard product you could use for this purpose.

FWIW this is one of those market timing kinds of hot tips. Historically this has been a very losing strategy. Think of it as akin to a type of pseudo insurance or hedging of the underlying. Usually if not given further clarification, people mean volatility of stocks (the stock market, probably the US stock market), though more generally you could be talking about volatility of other assets as well. Usually you tend to make money here when the stock market tanks, and sometimes at other junctures, though not 100% reliably. But overall expect to lose money unless your timing is good.

In fact, there are investment products and institutional money designed to do the opposite as a long-term strategy, going short volatility and being on the other side of the trade generally.

I don't think it's worth elaborating further if this was intended as strictly a "investing - help with personal investments" subforum inquiry. The answer is no, nope, don't.

nisiprius wrote:
Fri Oct 13, 2017 3:57 pm
Clearly, this ETN doesn't track the VIX at all, and probably has the same terrible problems that leveraged and inverse ETFs have.
It's a different and bigger problem than the usual daily rebalancing issues you reference with the leveraged and inverse ETFs: significant contango in short-term VIX futures. If you're willing to accept worse tracking with VIX, there are long medium-term futures products that don't lose money as fast. Or you could trade the actual futures rather than taking counterparty risk and fees with the ETN. Or just, you know, actually buy the options rather than ETNs trading derivatives on derivatives. All options fairly bad but straight-up owning something like VXX for a longer period of time is one of the worst.

MittensMoney
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Re: “Going Long Volatility”

Post by MittensMoney » Fri Oct 13, 2017 4:17 pm

I have play money on a RobinHood account. I wouldn't suggest going 'Long Volatility' unless you're versed in using options. What I do regularly is buy XIV every time VIX spikes, once the hysteria dies down and volatility returns to 'normal' you earn money - XIV is an inverse VXX product.

DoctorB
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Re: “Going Long Volatility”

Post by DoctorB » Fri Oct 13, 2017 6:39 pm

MittensMoney wrote:
Fri Oct 13, 2017 4:17 pm
I have play money on a RobinHood account. I wouldn't suggest going 'Long Volatility' unless you're versed in using options. What I do regularly is buy XIV every time VIX spikes, once the hysteria dies down and volatility returns to 'normal' you earn money - XIV is an inverse VXX product.
Thank you for the info. How do you time it? Do you have to buy the XIV before VIX spikes or while it is at the peak of it spiking?

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Re: “Going Long Volatility”

Post by DoctorB » Fri Oct 13, 2017 6:45 pm

nisiprius wrote:
Fri Oct 13, 2017 3:57 pm
I don't even know what it means. I don't claim to be sophisticated, but if I actually don't understand it, it's probably some kind of trendy thing or some meaningless slogan.

On doing a Google search, I think it means "go long on the VIX index."

For me to try to do this would be a really bad idea, for five reasons, which might not apply to everyone.

1) I don't know much about the VIX, and I don't invest in what I don't understand.

2) I could be wrong but it don't believe the VIX reflects any economic activity that earns money, and I don't believe there's any reason to expect it to have a long-term positive real return. It doesn't look as if it has had a positive return. So I can't make money with it just by buying it and holding it without paying attention to it. It looks as if the only way you can profit from the VIX is predict, correctly, and in the short term, when one of those nasty spikes is going to happen and buy just before it happens and sell while it is happening.

Image

3) On further Google searching, all the places that talk about investing in the VIX warn you that you can't. Most of the indexes we discuss in this forum can be tracked with high accuracy, low cost, and very little tracking error; take an S&P 500 index fund, anybody's S&P index fund, do a Morningstar growth chart along with the S&P itself and you'll find it hard to see that there are two different lines. The VIX apparently uses math that can't be replicated with long and short positions in traded securities.

4) The situation with VIX-related thingies-you-can-buy-from-a-brokerage looks much much worse than with that of the VIX itself. The biggest exchanged-traded thingie that claims to have something or other to do with the VIX is VXX, the iPath S&P 500 VIX Short-Term Futures ETN. (Notice that it's not an ETF, which is a problem, too, but I won't get into that). VXX pays no dividends, so we don't need a growth chart. Here's how VXX has "performed" since inception:

Source
Image

An investment of $100,000 in VXX on 4/1/2009 would now be worth $35.34. That's a stunning CAGR about -60% per year. That is to say, on the average this investment has worse than cut your money in half every year. And that's just about what it's done, it's fairly close to a steady straight line, loss, loss, loss, loss, loss, interrupted by relatively small upward spikes.

There is no period as long as a year, anywhere on the chart, during which an investor could have made money. An investor who bought and had to wait more than a year for the upward spike lost more money while waiting than he made on the spike. You have to see a VIX spike coming along in less than a year and you have to be right. Yep. Market timing.

Clearly, this ETN doesn't track the VIX at all, and probably has the same terrible problems that leveraged and inverse ETFs have.

5) I haven't done the search yet, but if it is true that there are people saying "go long volatility," this feels like the kind of situation in which there are probably also people saying "go short volatility." Let's see. OK, not exactly, but here's someone saying that Everybody's short VIX these days. So someone must think they are right to be going short volatility.

Thank you for the wisdom and information! I’m not seriously contemplating using the method yet, but mainly asking out of intellectual curiosity and getting the boglehead perspective. Much better array of wisdom on this forum than most of the others!

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Re: “Going Long Volatility”

Post by stlutz » Fri Oct 13, 2017 7:17 pm

Other ways to go long volatility are to buy call and put options. If you want to short volatility you should sell such options.

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Re: “Going Long Volatility”

Post by Taylor Larimore » Fri Oct 13, 2017 7:34 pm

Bogleheads:

"Going Long Volatility" is something I never heard of. I'll guess it is some rare marketing phrase. In any event, it would be helpful to have a link to the
DoctorB wrote:
Fri Oct 13, 2017 2:26 pm
As the markets continue to reach new highs while volatility stays low, I keep coming across articles and posts from time to time recommending to “go long volatility.” Sticking with my 80-20 Stock/bond allocation for now given my younger age, but curious what the Bogleheads perspective would be on this, and what Vanguard offers in this regard, if anything?
Bogleheads:

"Going Long Volatility" is something I never heard of until now. It would be helpful to have a link to the "articles and posts" mentioned.

Nisiprius has given us another one of his wonderful Replies that will probably be as good an answer as we'll ever get. Thank you Nisi!

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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nisiprius
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Re: “Going Long Volatility”

Post by nisiprius » Fri Oct 13, 2017 7:37 pm

lack_ey wrote:
Fri Oct 13, 2017 4:04 pm
nisiprius wrote:
Fri Oct 13, 2017 3:57 pm
Clearly, this ETN doesn't track the VIX at all, and probably has the same terrible problems that leveraged and inverse ETFs have.
It's a different and bigger problem than the usual daily rebalancing issues you reference with the leveraged and inverse ETFs: significant contango in short-term VIX futures. If you're willing to accept worse tracking with VIX, there are long medium-term futures products that don't lose money as fast. Or you could trade the actual futures rather than taking counterparty risk and fees with the ETN. Or just, you know, actually buy the options rather than ETNs trading derivatives on derivatives. All options fairly bad but straight-up owning something like VXX for a longer period of time is one of the worst.
Thanks, lack_ey. What about my surmise that the VIX index itself has zero expected return in over the long run? Am I right about that?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: “Going Long Volatility”

Post by SpaceCowboy » Fri Oct 13, 2017 7:41 pm

stlutz wrote:
Fri Oct 13, 2017 7:17 pm
Other ways to go long volatility are to buy call and put options. If you want to short volatility you should sell such options.
This is the most common way to play volatility.

lack_ey
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Re: “Going Long Volatility”

Post by lack_ey » Fri Oct 13, 2017 8:12 pm

nisiprius wrote:
Fri Oct 13, 2017 7:37 pm
Thanks, lack_ey. What about my surmise that the VIX index itself has zero expected return in over the long run? Am I right about that?
Um... I'm not confident in saying zero, but that would be the natural and reasonable starting point.

The VIX index is just a statistic computed on S&P 500 options prices, a kind of weighted average of options prices at different strike points for front-month and second-month contracts to generate a kind of market-based estimate of implied short-term future volatility (estimate for the 30 days). The resulting figure is scaled to produce the implied one-standard-deviation range of S&P 500 movement in percentage points within the next year. e.g. VIX of 10 implies stock market returns between +/-10% of the current value for the next year with a 68% probability. Roughly. Though again, it's a measure of the next 30 days, so it's really more that the next month should be within 10/sqrt(12) percent with that probability. Returns are of course not normal and historically we see realized volatility being on average higher than implied volatility based on options pricing for reasons discussed earlier (there should be a price paid for some kind of hedging in general and volatility typically having negative correlation with equities).

Roughly this is akin to asking if the volatility of the stock market should over the long run not change. Though actually VIX is based on options pricing so again that's not quite the same thing. If the vol of the stock market decreases then VIX should decrease if anything so the long-run return might be slightly negative. There could also be changes in how options pricing and the options market—perhaps a shift to more speculators rather than hedgers, or the reverse.

If you could actually allocate to VIX or have an investment that perfectly tracked VIX, this would be a good investment even with around zero return because the correlation with equities is typically negative and with high volatility (which then becomes very good).

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Re: “Going Long Volatility”

Post by MotoTrojan » Fri Oct 13, 2017 8:41 pm

VIX is purely speculation and as discussed has no expected growth in any direction. One interpretation of "going long" could be instead of day-trading it, a trader is assuming that the VIX (or overall market volatility) will continue the current trend of staying low, and is getting relatively long options that pay-out if this materializes?

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Re: “Going Long Volatility”

Post by JBTX » Fri Oct 13, 2017 10:38 pm

nisiprius wrote:
Fri Oct 13, 2017 3:57 pm
I don't even know what it means. I don't claim to be sophisticated, but if I actually don't understand it, it's probably some kind of trendy thing or some meaningless slogan.

On doing a Google search, I think it means "go long on the VIX index."

For me to try to do this would be a really bad idea, for five reasons, which might not apply to everyone.

1) I don't know much about the VIX, and I don't invest in what I don't understand.

2) I could be wrong but it don't believe the VIX reflects any economic activity that earns money, and I don't believe there's any reason to expect it to have a long-term positive real return. It doesn't look as if it has had a positive return. So I can't make money with it just by buying it and holding it without paying attention to it. It looks as if the only way you can profit from the VIX is predict, correctly, and in the short term, when one of those nasty spikes is going to happen and buy just before it happens and sell while it is happening.

Image

3) On further Google searching, all the places that talk about investing in the VIX warn you that you can't. Most of the indexes we discuss in this forum can be tracked with high accuracy, low cost, and very little tracking error; take an S&P 500 index fund, anybody's S&P index fund, do a Morningstar growth chart along with the S&P itself and you'll find it hard to see that there are two different lines. The VIX apparently uses math that can't be replicated with long and short positions in traded securities.

4) The situation with VIX-related thingies-you-can-buy-from-a-brokerage looks much much worse than with that of the VIX itself. The biggest exchanged-traded thingie that claims to have something or other to do with the VIX is VXX, the iPath S&P 500 VIX Short-Term Futures ETN. (Notice that it's not an ETF, which is a problem, too, but I won't get into that). VXX pays no dividends, so we don't need a growth chart. Here's how VXX has "performed" since inception:

Source
Image

An investment of $100,000 in VXX on 4/1/2009 would now be worth $35.34. That's a stunning CAGR about -60% per year. That is to say, on the average this investment has worse than cut your money in half every year. And that's just about what it's done, it's fairly close to a steady straight line, loss, loss, loss, loss, loss, interrupted by relatively small upward spikes.

There is no period as long as a year, anywhere on the chart, during which an investor could have made money. An investor who bought and had to wait more than a year for the upward spike lost more money while waiting than he made on the spike. You have to see a VIX spike coming along in less than a year and you have to be right. Yep. Market timing.

Clearly, this ETN doesn't track the VIX at all, and probably has the same terrible problems that leveraged and inverse ETFs have.

5) I haven't done the search yet, but if it is true that there are people saying "go long volatility," this feels like the kind of situation in which there are probably also people saying "go short volatility." Let's see. OK, not exactly, but here's someone saying that Everybody's short VIX these days. So someone must think they are right to be going short volatility.
Interesting. I have always wondered if there was an index that somehow tracked it, because it definitely seems like it is a mean reverting index. From your research it appears you really can't.

As somewhat related but not terribly helpful aside, 30 years ago, in grad school, for one day I had as an investments instructor Bob Whaley, the eventual creator of the VIX. This was before he invented it and hit the big time. I transferred out of the class for various reasons. :oops:

VaR
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Re: “Going Long Volatility”

Post by VaR » Fri Oct 13, 2017 11:42 pm

"Going long volatility" is trader jargon that makes for good press. In the past 10 years or so, there's been a lot of financial press focus on market volatility as a measure and a product - in particular after the explosion on popularity of the CBOE VIX index. I was surprised to learn that it was created back in 1993. I suppose it really exploded in popularity after CBOE started trading VIX options and after people started calling it the "fear gauge".

I only started supporting an options market-making desk back in 1997 but the traders would say they were "going long volatility" if they were going to run their [options] book with positive vega (volatility sensitivity) because they expected volatility to increase in the short term.

As an individual investor, I try not to read too many distracting articles that talk about things that I shouldn't act on.

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