Category: Interviews

Bill is a private investor who also authors the VIX and More blog and an investment newsletter from just north of San Francisco. His research and trading interests focus on volatility, market sentiment, technical analysis, and ETFs. Prior to becoming a full-time investor, Bill was a business strategy consultant for two decades and advised clients across a broad range of industries. Bill has a BA from Stanford University and an MBA from Carnegie-Mellon University.

Bill and I started blogging almost at the same time.  Bill has been spending considerable time on VIX and related products. He has done tremendous work in this area. Recently I requested him if he could share his knowledge/ insights on VIX with OP readers. I am thankful to him for sharing his opinion and providing quality answers to OP reader’s questions.

I asked many of the questions on behalf of OP readers. In the interview text below  “OptionPundit” means OP/ OP reader.

OptionPundit: Bill, Thank you for accepting the offer. It’s a pleasure to have you.

Bill: Thank you.

OptionPundit: Tell us how a new user could use VIX-and-More blog  that is full of rich content. Assume the user doesn’t have much time. What are the top 10 posts that one MUST READ?

Bill: A lot depends on your knowledge base.  By far the most popular post I have ever written is an introductory one, Ten Things Everyone Should Know About the VIX.  I have tagged some of my personal favorites with a “Hall of Fame” tag.  I have also archived the top 25 most read posts for 2010, 2009, 2008 and 2007.  You can also search for your favorite subject by label.  Since the launch of VIX-based exchange-traded products, the issues related to these products have by far the most popular.  You can look for keyword and subject matter tags for these and other subjects.  Some of the more important ones, in my opinion, are term structure, contango, VIX futures, VXX, etc.

OptionPundit: What is the best way to hedge a short or long position in VXX?

Bill: A VIX futures position is probably the most accurate way to hedge a long or short position in VXX, but my answer depends partly on the term structure of the VIX futures at the time you intend to hedge your position.  If you have roll yield in your favour (long VXX while in backwardation, short VXX while in contango), then a front month VIX futures or options hedge is usually a good bet.  If the term structure and roll yield are against you, consider looking at some of the further out months or using a mid-term VIX ETP like VXZ.

OptionPundit: What is the best way to hedge the IV component in an options spread?

Bill: This is an interesting question for me in that typically the IV component in an options spread is where I am looking to make my money rather than hedge, so I am not sure I am the best person to answer this question.  My general answer depends on whether your IV exposure is long or short, the shape of the skew, etc. — so you can hedge by going farther OTM or into more distant months; you can also mix vertical and horizontal spreads.

OptionPundit: How do you think volatility best compliments an equity portfolio?

Bill: In my own investing, I treat volatility as a separate asset class that is largely uncorrelated to other asset classes in the long run. For most investors, volatility is a good balance to equity positions, since it generally moves more sharply in the opposite direction, at least in the short term.  For some ideas on hedging with VIX products, check out Edward Szado’s  VIX Futures and Options:  A Case Study of Portfolio Diversification During the 2008 Financial Crisis.

OptionPundit: If you thought the VIX was oversold, would you rather buy an SPX straddle or long VIX calls?

Bill: Given the choice between buying SPX straddles or VIX calls, I generally prefer to buy VIX calls, but that is largely a matter of personal preference.  SPX/SPY straddles have even greater liquidity than VIX options, so you could certainly make a case for preferring these to VIX products on the grounds of liquidity.

One instance where the difference between long SPX straddles or long VIX calls would be in the case of distant options and/or LEAPS, where you can make the argument that a big move in the SPX is more likely to turn into a trend, whereas a big move in the VIX is more likely to revert to the mean.

OptionPundit: Is it cost effective to duplicate VXX with futures.  Commission, spread etc.

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Adam Warner is the author of Options Volatility Trading: Strategies for Profiting from Market Swings, released in October 2009 from McGraw Hill. Adam has guest-written Barrons Striking Price, and regularly contributed to several sites over the last 7 years, including Street Insight, Trading Markets, and Minyanville. He is also a co-founder of Expiring Monthly magazine. Adam writes a popular “Daily Options report” blog.

When not writing, Adam is a proprietary option trader with Addormar Co, Inc. Previously Adam traded as a member of the American Stock Exchange from 1988-2001.

I asked many of the questions on behalf of OP readers. In the interview text below “I” and “OptionPundit” are interchangeable for the purpose of conversation with Adam.

OptionPundit: Adam, It is a pleasure to have you with us.

Adam: Thank you.

OptionPundit: Adam, is there a KEY MESSAGE you would like to share with the readers before we begin our discussion.

Adam: Markets have dramatically changed during the past 10 years. You will find sideways actions for a while when nothing is happening and everything seems calm; suddenly violent volatile moves starts. VIX Trading in teens goes past 20, 30 or 40. We are more globally connected now and what happens in Asia overnight, at times, governs how US markets will react to. There is much more automation, high frequency traders and then there are weekly options. Bid/ask spreads have moved into pennies. It is much more difficult for retail traders to survive these days as opposed to few years ago.

OptionPundit: What do you think are the key success drivers for making money “consistently” via trading options?

Adam: I wish I knew, I’ve done this for 20+ years, and there’s really no one winning strategy. Net-selling options will produce a better winning percentage than net buying, but you will have to sidestep some major accidents. The volatility explosion of the past few weeks is Exhibit A.

OptionPundit: What kind of trading strategies would Adam recommend as most suited for these (now and say the next 6 months) volatile times?

Adam: I would stick to spreads, perhaps selling put spreads if you’re bullish (or conversely call spreads when you’re bearish). Spreads are very capital efficient, and they define your maximum risk. If you have no strong directional opinion, but just want to sell volatility, Iron Condors work well.

OptionPundit: If Adam were to trade directionally, which technical indicators would he use? Under what circumstances will Adam take directional trades?

Adam: It is easier to pick direction on Volatility (IV) than on stocks. In options world, I like watching VIX vs. its 10 Day Moving Average, as well as against Bollinger Bands. VIX tends to mean revert, especially when it breaks out to the upside. And since it goes inverse to the market, it can give a decent timing signal for bullish trades. You really want extremes though, like 20% above the MA, or a clear break above the BBand. And keep in mind, like any indicator, this can go WAY past the station. Again, as in the past week, VIX actually peaked at a record 74% above the 10 day SM).

After you formulate an opinion on direction, it is better to scale-in/scale out vs. all-in-one investment.

OptionPundit: There are many volatility related indicators, could Adam pls suggest a few that one can use effectively?

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