Short Vol / Options Stategy

I am a big fan of shorting volatility as a strategy. There are many traders who are deathly afraid of what they deem “naked” risk and these traders are the same that tend to buy lots of weekly options or to buy options with no regard to the price they pay for the option. I believe there are ways to both “time” volatility and to trade short with defined risk. It’s not to say I always have defined risk positions but I am very vigilant in my positions when I do!

It’s been discussed and researched to death the positive expectancy of selling OTM index vol, or ATM straddles, or Var Swaps so I won’t bother going into that detail. I did however come across some interesting performance data from some CTA’s that are far more explanatory then a random white paper.

I am not affaliated nor do I endorse any of these funds. I’m not sure why i feel it’s necessary to have a disclaimer but there it is 🙂

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One of the most common pitfalls and criticisms of short options CTA programs tend to be they make great money until they blow up. And many did in 2008, a CTA program called Zenith comes to mind. But there are others that survived, one of the above funds actually traded throughout most of 2008 and delivered positive returns. It is also easy to see the difference in short vol returns in different regimes. These funds are on the relatively small side as far as funds go, between 50-100MM AUM though this should encourage most of us except for a small few, that this strategy is liquid and scalable. I’ll include links for my own reference in the future and yours of course though the site may require registration:

BlueNose

NewPort

 

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~ by largecaptrader on February 7, 2013.

9 Responses to “Short Vol / Options Stategy”

  1. Also check out Blackheath Fund Management’s Volatility Arbitrage Fund- http://www.managedfutures.com/program_performance.aspx?fundtype=&productId=75367

    There’s also Maple Leaf Capital, and they too have a short vol bias:

    Many short vol funds would have absolutely killed it after weathering through the revelations of 2008.

    • Thanks for the links! I was quite impressed with Newport returns since they traded a short volatility position through 2008. Despite the fact it says delta-neutral, I would assume they had some directional bias as well. Just my opinion…

  2. I find it interesting that Bluenose’s track record starts in Nov 2008 and Newport blew up and closed a program in Oct 2008.

    The bottom line the only way to trade naked short options over the long term is to do it with little or no leverage. They all get blown out at some point….never fails. I trade SP options in the futures market and have seen so many CTA’s get put out of business doing this. That’s why you will never see a large or even mid-sized firm do the naked trade….they just don’t live long enough.

    It’s also important to note that sharpe ratio is meaningless for deep-OTM option sellers…totally masks risk.

    • I did not know Newport closed a program in Oct 2008, very interesting and great marketing trick.

      I found this interesting paper on put selling strategies but as you’ve pointed out, they only placed a portion of the AUM “at risk”:
      http://www.acrn.eu/resources/Journals/JOFRP0101/201201a.pdf
      Also another paper on the Put write index:
      http://clothiersprings.com/cscm_website_collateral/papers/JAI_SP_09%20UNGAR_PUT_Paper.pdf

      Unfortunately I can’t seem to find Ansbacher Put investment returns since the end of the period in the paper. I don’t have Ansbacher numbers in front of me but I don’t believe his long running CTA program did all that well (could be wrong?) I wonder if there IS a put writing CTA that has survived and has a long term track record? One that uses little or no leverage? I would love any suggestions.

      And agree 100% on Sharpe Ratio for option sellers.

  3. I work for Globevest Capital an Investment firm in Canada. We’ve been using the Put-Write strategy since 2006 and we had great success since the start. Our fund is called the Alternative Growth Fund. The return are in Canadian dollar. We sell Put on stocks that trades on the SP500 and TSX.

  4. No problem. In 2008, the strategy did -7.8% which is not shown in the document.

  5. […] More info on short vol funds here and here. […]

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