One of the problems with getting long volatility using volatility exchange traded products when the VIX is 10 is that they still hold a significant premium to spot VIX. And when vol is low and it has been low for a while, these ETPs and their options are stubborn to accept that vol may or will move higher. The market has reason to be skeptical, no mini-dip in recent times has turned into a majo-dip in as long as the new short-VXX-everyday geniuses can remember being on the short-vol gravy train to profits-apalooza.
That doesn’t mean that long vol traders need to sit there and suffer all the time. While you wait for the perma-bulls to take a pie in the face for a change and the short-vol tourists to try to wrangle out of their short UVXY leap calls for a 50% daily loss one day, you can make friends with theta’s evil step-brother…gamma.
Take today for example, a mere 9 point drop in the SPX did this to an option that was already in-the-money at the start of the day. If you wanted to be long some vol without paying for decay, you could have owned this Wednesday 2390 SPX put off and on all week and kept riding it to gains:
Meanwhile, this is what price action you got with a VXX in-the-money $14.5 put that expires Friday:
Not much meat on that bone, especially after paying your round trip fee and commission tickets to TD Ameritrade for 20 cent options. Because a VIX at 10 has SPX at-the-money options at 6 implied volatility, the gamma works fast, whereas VXX still has the futures near 12, a buffer of premium that is not kind to the long option deltas.
So, something to consider when you want to get long some vol cheap, do it the ole fashioned way and hit the indices up for a change.