Hi all,
the current mVIXY is a futures-based ETF, the fund must buy more expensive longer-dated VIX futures contracts while selling cheaper short-dated ones to roll its position, effectively buying high and selling low. Over time, this creates downward pressure on the ETF’s price, cause it has a poor correlation with the real VIX index, and long-term holders always lose money, it’s unreasonable to choose this as a mirrored underlying asset.
Instead, we should choose the VIX continuous future index (the ticker usually called VX.1!) as the underlying asset to track real S&P volatility.
The interesting thing is people can’t really buy this index in the traditional market for this index refers to the nearest expiration date VIX future contract, there is always rolling fees and position holding fees in CBOE futures market if anybody wanna keep up with the index, but in the synthetic asset world, we can creat an mVIX token to track the index, while people can always arbitrage when price mismatch between the index an mVIX, it’s better than track the VIX index itself for the index is not tradeable.
Also, it may attract those real large professional investors who desperately needs a low-cost way to hedge market volatility.
VIX ETF is one of the most ‘expensive’ financial product, we can also create many more mAssets which links to the continuous futures, like oil, gas, etc. basically all commodities, these mAssets don’t have rolling and holding and managing fees like commodity ETFs, will be better for investors to hold.
hi , I dont think there must be a funding rate mechanism like CEX’s perpetual contract, because just like normal mAssets don’t have a strong reward and punishment mechanism for users to balance the supply and demand of the mAsset, traders works more by consensus to eliminate price deviations.
I like where you are going with this, but this would be a problem because you would have the same instrument here by making a continuous syntenic based on the future. It would have to roll and those minting would have to roll to the next future would cost money, that’s exactly what the these ETFs are and why they drag as you mentioned. One idea here would to have options on VIX index.
The VIX is an index, not an asset, just as the SPX which is why futures and options exist on them. That’s why there are futures and why it has settlement dates, to create an asset and price to be delivered at. If you could hold them in perpetuity then the market would price them different. Creating a VIX perpetual future, the holders the would eventually be right at some point in time, therefore the couterparty, i.e. the market makers, or here minters, would have to price for that - think VX futures one year out taking into account the risk free rate and the probability the VIX rises in the future are priced much higher for this reason. A VIX continuous would have arb from the market putting the price way higher than the actual VIX, baseed on market forces. So this would create in essence the same type of cost associated with VX future rolling, but compounded over a period of time. Just estimated and in very simple terms, if the VIX was at 20 and you wanted to buy the theoretical continuous future it would be much higher, say 80 or more for any minter to take the risk of writing it. Therefore, you lose most the time still and risk free rate eats away at your money.
So ideally, here there would be VX futures and options so you can spread the risk by creating the type of calendar spread you want, or buy the opions on the VIX outright.
Yeah I was excited when I realized that there will finally be a product that tracks VIX 1:1 thanks to synthetic mirror. I was surprised/disappointed to find that we chose VIXY instead of VIX. If we could track VIX 1:1 it would be REVOLUTIONARY. As mentioned the VIX products are perpetually headed to 0. Being able to hold VIX with out such downward pressure would be a GAME CHANGER. I guess I’m not understanding what the issue is though.
Taking a look at the VX future curve would probably help understand what I stated. VX Jan 2022 futures are at 25 (no where near a perpetual), today with the front month VIX up 15% and and back dates futures hardly changed. So if you were long the Jan 2022 you didn’t get paid for the move and actually if VIX contracts after this spike, you will start to take a loss…
Backwardation of futures would pay anyone holding long front, short back month way better than any perpetual. It’s all about timing. Really no one should be trading VIX without understanding VIX futures convexity and how that affects prices and what they are actually buying if they don’t want to lose money.
So again, we should be looking to get the VIX options listed here over UVXY, VXX etc. We are spending time talking about something that already exists in the VIX futures market as anyone can buy VX 1-2 year dates futures that’s pretty much a perpetual
I’m well aware of how the the financial instruments that track/create VIX work (at least from a VIX for dummies level), I just don’t understand how a synthetic tracker of VIX is effected in the same way that a real financial instrument is effected. Why not just oracle the INDEXCBOE: VIX? Synthetics have 0 impact on the market right? (If you already explained the impact I’m probably too dumb to understand I guess lol)
lol Well I guess the one things to stress again is the VIX is not an asset and synthetics track assets. So you tracking a non-asset based on Orcale that would have conflict by making it assets because Arb does exist and as mentioned, those that mint and buy the synthetic would bid it over VIX value to compensate for real market conditions. Understand that everyone would be right, less the cost for time value of money by holding VIX with no drag or futures convexity, as if held in a vacuum that real markets don’t allow for, meaning eventually the perpetual would settle at a market price similar to a complex market force of far dated VX futures.
, I dont think there must be a funding rate mechanism like CEX’s perpetual contract, because just like normal mAssets don’t have a strong reward and punishment mechanism for users to balance the supply and demand of the mAsset, traders works more by consensus to eliminate price deviations.
Well I guess the one things to stress again is the VIX is not an asset and synthetics track assets. So you tracking a non-asset based on Orcale that would have conflict by making it assets because Arb does exist and as mentioned, those that mint and buy the synthetic would bid it over VIX value to compensate for real market conditions. Understand that everyone would be right, less the cost for time value of money by holding VIX with no drag or futures convexity, as if held in a vacuum that real markets don’t allow for, meaning eventually the perpetual would settle at a market price similar to a complex market force of far dated VX futures.