When the VIX is in contango - second-month futures higher than front-month futures, as is often the case - shorting volatility via exchange-traded notes (ETNs) like VXX provides an additional return via the roll yield.
However, the last volatility shocks pushed some players away from short-vol bets, according to Rocco Longo (pictured) and Francesco Fedele, global markets structurers at Intesa Sanpaolo. In this environment, vanilla options are preferred to variance swaps and other instruments (ie ETNs like the XIV) while ‘sold-put-options’ are the choice for yield enhancement payoff – sigma certificates where the short out-the-money put vanilla funds the long call option. Vanillas are even e
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