How to take advantage of the high back end in vol? - Turn it into a bond that pays 20%

How to take advantage of the high back end in vol? - Turn it into a bond that pays 20%

Using the SPY options table below, we can see the different combinations of call spreads and the “coupon” (via capital growth pa) they will return if the market stays above the upper strike.  This is an excellent way to use the current high vol in the market to create a bond type return.  

• 3M SECTOR CORRELATION IS @ .94.  10Y AVG = .67  20Y AVG = .58
• RETURNS CORRELATION IS    @ .75    10Y AVG = .49

This market has plenty of edge in it, that is clear from any metric.  However, what is going to guarantee fresh selling of long term vol?  Our thesis and metrics are only parts of the puzzle for this trade to align, we also need to have the “need” for long dated vol in the market to be absolved, the supply/demand dynamics currently don’t line up well for being short long dated variance swaps.  However, PFG believes that using near term vol (1y-2y) and trading in bond format provides an excellent return for a respectable level of risk.