I've noticed an apparent trading opportunity that I'd like the forum's opinion on:Using Bloomberg BETA function, I see the VIX is twice as volatile as the VIXY and VXX ETFs, which tracks the excess/total return from a daily rolling long position in the first and second VIX futures contracts.But when I look at options on the VIX and on the VIXY/VXX, I see 30 day ATM implied vols to be around 105% for VIX and about 72% for VIXY/VXX. And the ratio between the two implied vols seems to have been pretty stable over the past.Assuming the implied vol ratio remains constant, does this constitute an trading opportunity, e.g. sell 2x calls on VXX (or VIXY) and buy 1x call on VIX?Is my reasoning off? Thanks for looking at this.

The ETF options *should* have significantly lower implied volatility. Those ETF's are tracking, roughly, VIX futures with 30-days to maturity [$]\tau[$], while VIX is the spot for those futures. In general, the volatility of the VIX futures is decreasing in [$]\tau[$] because the volatility of the SPX is a mean-reverting process. To confirm it, just create a time-series of constant maturity VIX futures and measure its volatility vs. VIX. To do this, like the ETFs, you will need to take a weighted sum of (at least two) VIX futures bracketing 30-day-to-expiration.

Yes I agree the ETF options should have lower implied volatility than VIX index implied vol.However, since the ratio of implied vol of the VIX index to implied vol of the ETF is not close to 2.0 while the historical beta is 2.0, I'm wondering whether there is an opportunity to be short VXX options and long VIX index options?

I see, over the last 5 years, vol(VXX)~62, vol(VIX)~118,while at today's close: atm-bid-29days-impvol(VIXY)~56, atm-ask-33days-impvol(VIX)~96so perhaps the trade has pos. expectation, but not wildly "mis-priced", IMO. Also the closing costs of the trade need to be factored in, esp. given the maturity mismatch.

how would you propose to trade the gamma on the VIX options? that answer will answer your question