We Could Strangle the VIX
The Cboe VIX Strangle IndexSM (STRG) is inspired by the option strangle strategy.
According to Cboe, the objective of a strangle is to capture the volatility premium inbedded in option prices, but with less risk than in a straddle, another established premium capture strategy.
Whereas a straddle is short at-the-money put and call options, a strangle is short out-of-the-money put and call options.
In that vein, STRG tracks the value of a hypothetical portfolio which overlays a short strangle of VIX® options and a long VIX call on one-month Treasury bills.
The short VIX put and call have strikes set at the 5th and 95th percentile values of the forward distribution of VIX.
The long VIX call has a strike set at the 99th percentile.
The Treasury bills together with the long call limit risk relative to a naked option strangle.
Furthermore, the number of capped short VIX strangles is set to ensure that 80% of the value of the portfolio at the previous rebalancing date is preserved.
The VSTG portfolio is rebalanced monthly, typically on the Wednesday of the month when VIX options expire.
New VIX options are then sold and bought.