The Short Vol Trade: What the hell am I doing with my life?

When people ask me how I make money, it’s difficult even to know where to begin. As a seller of UVXY calls, I’m trading a derivative (call options) of a derivative (M1 and M2 VIX futures contracts) of a derivative (S&P index options). The underlying asset, volatility, isn’t tangible like gold or oil, and I’m only trading it very indirectly. So when people ask me how I make money, I just tell them that I “trade stocks” and that’s usually enough to end the conversation. Heck, a couple of times I’ve just told people that I work at an ice cream shop. (Sometimes lying is socially expedient, and besides, who doesn’t like ice cream?)

A favorite saying that I came up with a few years ago is that I sell options to people who are bad at math. This quite succinctly sums up what I do, and what all option sellers do, VIX-based or otherwise. Even when I do purchase options, I will typically make the transaction a spread by also selling options in order to reduce my cost basis and alleviate the painful effects of theta decay and implied volatility decline. The point is that I make money by leveraging the power of probability, not unlike companies that sell insurance or lottery tickets.

But at least insurance salespeople provide a necessary service, and lottery ticket sellers provide a fleeting feeling of fun, excitement, and hope. I, on the other hand, gleefully capitalize on overstated market fear, providing nothing to society in my option-selling activities — not even the brief joy of scraping a coin across the surface of a scratch-off ticket. What good am I, anyway?

I suppose I can assuage my contrition (let’s pretend that I actually have some, shall we?) by telling myself that I’m mostly ripping off algo-based institutional traders, who have plenty of capital and are fully aware that their long-equities hedges (such as UVXY calls) aren’t value-added investments. I can also insist that I’m providing a measure of liquidity to the options market by selling these pieces of junk. Junk salesmen are an indispensable cog in the wheel, ya know?

In the final analysis, what I’m doing with my life is not dissimilar to what the rest of us are doing with our lives: I’m a hustler, plain and simple. Lest ye judge, bear in mind that we all have our own hustles, our own angles; we’re all selling something to someone, and that something is worth less than what it’s being sold for, for otherwise there would be no profit and no livelihood.

So be loud and be proud, short vol traders. Or, just tell people that you sell ice cream. It’s all good either way.