Thread by @AnthonyLeeZhang

@lukestein @ben_golub @bennpeifert Agree essentially on all points, I'm just saying you shouldn't expect to make money if you sell the near-term options underlying the VIX. The market basically seems to expect a lot of vol in a short time frame

@lukestein @ben_golub @bennpeifert Also VIX squared forecasts variance for any jump-free process, it doesn't rely on Black-Scholes assumptions (it used to, but they switched to the model-free formula summing across strikes at some point)

@lukestein @ben_golub @bennpeifert from the white paper cboe.com/micro/vix/vixw…

And Demeterfi, Derman, Kamal, and Zou (1999)

@lukestein @ben_golub @bennpeifert Sorry I should say vix squared equals (up to integral approximation error) risk-neutral variance for jump-free processes, is my understanding

@lukestein @ben_golub @bennpeifert Question is whether you think the elevated VIX is mostly risk premium or physical probabilities -- of course there's no way to tell, I guess a more precise way to make my point would be:

@lukestein @ben_golub @bennpeifert If I could sell 1-year maturity at-the-money puts at an Black-Scholes implied vol of 76%, yes I think I'd do that -- that's crazy high

@lukestein @ben_golub @bennpeifert But I wouldn't necessarily make that bet on 22% in a month, or even 11% in a week, so I think I could believe these are physical probabilities and not risk premia :) although of course that's not testable

@lukestein @ben_golub @bennpeifert Vol cone link: cmegroup.com/tools-informat…

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