Monday, October 26, 2020

Performance of the VIX in the Two Weeks Before and After Presidential Elections

A convergence of concerns related to stimulus, elections, COVID-19 and earnings (courtesy of a big SAP earnings miss) caused the VIX to jump 17.8% today.  How much of that was related to the election?  Well…the 9-day VIX9D spiked 47.8% today, now that the election is within the 9-day measurement window for the first time.  The bottom line is that election uncertainty and anticipated volatility is currently a huge factor in the mindset of the investor.

This raises the question of how jumpy the VIX tends to be in advance of elections and what happens after the election.  If you know anything about what happens to the VIX around FOMC announcement days, you will find considerable similarities when it comes to elections.  Specifically, the VIX responds to the upcoming event risk by increasing steadily into the event, dropping sharply on the day of the event and declining even more as the event recedes in the rear-view mirror.

Of course, most think this election is different.  While that is certainly true, all elections are unique in their own way and yet the same general principles apply.

Note that in the graphic below I normalized all the VIX readings from 1992-2016, with the exception of 2008, which just happened to fall at the height of the Great Recession, so the 2008 data is excluded, as it would otherwise skew the results.

 

[source(s):  CBOE, Yahoo, VIX and More]


Further Reading:
The VIX and the Pre-FOMC + Post-FOMC Trades
VIX Trends Around FOMC Announcement Days
VIX Price Movement Around FOMC Meetings
Post-Election Risk Trending Up in Treasuries and the Euro, Down in U.S. Stocks
VIX Sets New Record with Nine Up Days in a Row
Top VIX Crushes in History
How to Trade Options Around Volatile Events (Barron’s)
A Conceptual Framework for Volatility Events
Volatility During Crises
Fear Poll: Fiscal Cliff Fears Spike, Concerns About Excessive Central Bank Intervention Rise
Fiscal Cliff Worries Grow As Election Nears
The Hollande Discount
Chart of the Week: Intrade and the Midterm Elections
Chart of the Week: Intrade and Control of the House of Representatives

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): none

Sunday, October 25, 2020

Updating the Current VIX-Based ETP Landscape

There is a lot going on in the markets, with several themes weighing on volatility or the potential for more volatility.  COVID-19 cases are spiking to new highs in Europe and the U.S. and could be at an inflection point in the U.S.  Election uncertainty is also unnerving investors with the election only nine days away.  Lasts and not least, markets are strongly influenced by the Pelosi-Mnuchin stimulus dance, which appears to have migrated from a tango to a polka – but at least the music is still playing.

In the time since I was a regular contributor in this space, a lot has happened in the volatility world and the VIX ETP space has also changed dramatically.  For this reason, it seems like a good time to update a favored VIX ETP graphic to reflect the many products that have closed, matured and been moved to the pink sheets.  In keeping with tradition (this graphic has been published many times in various incarnations since 2010), I have plotted all of the VIX ETPs with respect to their target maturity (X-axis) and leverage (Y-axis).

It has taken more a decade, but the bottom line is that the VIX ETP space has essentially been narrowed down to two dominant products:

VXX (iPath Series B S&P 500 VIX Short-Term Futures ETN) – the pioneering +1 long volatility ETN that launched back on January 30, 2009 and has been the dominant product in the VIX ETP space throughout its lifetime

UVXY (ProShares Ultra VIX Short-Term Futures ETF) – the +1.5x ETF that spent most of its life as a +2x product and moved to +1.5x following the February 2018 Volmageddon event which resulted in the termination of XIV

Both VXX and UVXY trade an average of over 30 million shares per day and both are regularly in the top 5-10 highest volume ETPs as well as ETP options volume leaders.  The remaining VIX ETPs have been largely relegated to niche product status.  Additionally, Credit Suisse delisted and suspended its VelocityShares ETNs, meaning that the former TVIX, VIIX and ZIV now trade in the OTC market under the symbols TVIXF, VIIXF and ZIVZF.  For this reason and because of low liquidity and the increased risk with trading on the OTC “pink sheets.” I have highlighted these tickers in red.


[source(s):  VIX and More]


Further Reading:
VIX ETPs Flash Some Green in 2016
Every Single VIX ETP (Long and Short) Lost Money in 2015
Performance of VIX ETPs During the Recent Debt Ceiling Crisis
Expanded Performance of Volatility-Hedged and Related ETPs
Performance of Volatility-Hedged ETPs
Performance of VIX ETP Hedges in Current Selloff
Slicing and Dicing all 31 Flavors of the VIX ETPs
Charting the Assets of the Volatility-Based ETPs

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX and UVXY at time of writing


Tuesday, March 10, 2020

Looking at Coronavirus Cases per Million, by Country


Further to yesterday’s Coronavirus (COVID-19), post, Tracking the Trajectory and Peak of Coronavirus Cases, I want to make sure we are thinking not just in terms of the absolute number of confirmed cases, but also cases per million. 

The graphic below highlights the countries which have been hit hardest on a per capita basis.  Using this criterion, Iceland is the country where the coronavirus is most prevalent, followed by Italy, South Korea, Iran, China and Switzerland.  These six countries stand out as having passed an inflection point.  Given the data out of Western Europe in the past 48 hours, it appears as if Spain, Sweden, France and Denmark are not far behind.  The U.S. currently ranks 41st in terms of cases per million, with just 1/100th of the penetration in Iceland.

[source(s):  Wikipedia, VIX and More]

Assuming the distribution of new cases continues to trace a parabolic path, being able to reasonably estimate the terminal penetration rate – which will no doubt vary by country – could help to set expectations about the progress and timeline of new cases.

Finally, to follow up on yesterday’s post, I am now dating the first day of 100 new cases in the U.S. at March 7th.  Using the 8-14 day window for 100 new cases to peak new cases means the U.S. could see peak new cases in the March 15th – March 22nd time frame, with an outside shot of the peak extending out to March 29th.  Of course, this projection are merely an extrapolation from the experience in other countries and will be largely dependent upon the rate at which testing is ramped up in the U.S.

Further Reading:

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s):
none

Monday, March 9, 2020

Tracking the Trajectory and Peak of Coronavirus Cases


I have seen a lot written about the Coronavirus, a.k.a. COVID-19, but I have yet to see any informed discussion about the trajectory of cases in various regions, the cycle time to peak new cases or meaningful predictions about the future course of the spread of the virus.

So here are some thoughts on the subject, using historical data from Wikipedia that is more standardized in time and collection methodology than any other data I have been able to find on the Web.  First, I examined the entire history of case data by country and found inflection points that roughly correspond to 10 new cases and 100 new cases per day.  As identification of initial cases is somewhat problematic given the variable protocols for testing, availability of testing kits, timing of nearby positive cases, etc. I elected to use the 100 new cases per day threshold.

It turns out that there have been seven countries so far that have logged 100 new COVID-19 cases in a single day.  In order of reaching that 100 new cases threshold, they are:  China (January 21st), South Korea (February 21st), Italy (February 26th), Iran (February 27th), France (March 5th), Germany (March 6th) and Spain (March 6th).  The U.S. has come close to the 100 new case threshold and may indeed hit that mark today or tomorrow.

The graphic below shows the daily number of new cases in each of the seven 100+ new case countries.  Note that it is reasonable to expect some sort of parabolic pattern for new cases with a steep jump in new cases that eventually flattens out, peaks and declines in a similar fashion.  This pattern probably would have been the case in China, except that on February 10th, China changed the methodology for counting new “confirmed” cases from relying strictly on the basis of a positive result from a lab testing kit to cases that included patients where CT scans for pneumonia allowed for a “confirmed” case clinical diagnosis for likely COVID-19 cases without having to wait for a lab test and results.

[source(s):  Wikipedia, VIX and More]

To summarize the data in the graph, three of the four countries that are at least ten days from the initial 100-case day have seen what appears to be a peak in new cases.  In China, it was 22 days from 100 cases to peak new cases, though it is possible that peak new cases might have been 14 days if China had not expanded the methodology for defining new cases to include a clinical diagnosis.

In South Korea, a concerted effort to ramp up testing as quickly as possible is probably responsible for the fact that South Korea saw a peak in new cases just 9 days after the first 100-case day.

While the peak in new case data in Iran should be considered provisional, the current peak in new cases was only 8 days after the first 100-case day, perhaps aided by the steep trajectory in new cases during the first five days.

Italy is the outlier in that there are no signs of a peak some ten days after the first 100-case day, though it is reasonable to expect that the newly implemented national lockdown and public gathering measures will help to slow the rate of new cases going forward.

The remaining three Western European countries – France, Germany and Spain are only 3-4 days into their post-100 timeline, so it is too early to talk about a peak.

The first quick takeaway is that the time from 100 new cases to peak new cases seems to cluster around 8-14 days or perhaps 8-22 days if you overlook the changes in the methodology for counting new cases in China.

Second, with the U.S. new case count hovering just below 100, it is reasonable to expect that the 8-14 day window for new cases will also apply to the U.S. putting a likely peak count in the March 17th – March 24th time frame, with an outside shot of the peak extending out to April 1st.  This assumes, of course, that the U.S. follows a similar trajectory to the other countries.  Along those lines, it will be interesting to see if Italy’s new cases peak during the next week.

Obviously, there are a number of factors that can affect how successful a country can be in containing the COVID-19 outbreak, conduct an appropriate number of tests and other factors. Japan, for instance, had its first case almost two months ago and has yet to approach 100 new cases in a day.

More to come on the COVID-19 global outbreak, the VIX, volatility and more.

Further Reading:

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): none

Tuesday, May 2, 2017

Euro Zone VSTOXX ETNs Land on U.S. Beaches!

Think the market is too complacent about this weekend’s election in France?  Worried that the euro area is going to crumble under the weight of Italy’s struggles?  Convinced that Greece, Portugal or Spain are just one more kicked can away from a disaster?

As of tomorrow, investors in the U.S. will have another way to translate these ideas into actionable trades with tomorrow’s launch of two new exchange-traded notes (ETNs) – EVIX (long euro zone volatility) and EXIV (inverse euro zone volatility) – from VelocityShares and UBS that put a European face on existing U.S. VIX-based products such as VIIX and perennial favorite XIV.

Based on the VSTOXX, the VIX-like volatility index for the EURO STOXX 50 Index of 50 blue-chip stocks from 11 euro zone countries, EVIX and EXIV should be familiar to those who are knowledgeable about VXX and VIIX on the long volatility side as well as XIV and SVXY on the short volatility side.  EVIX and EXIV are based on VSTOXX futures and have a target maturity of 30 days – a maturity that is maintained by rolling a portion of the portfolio each day and therefore subjecting both products to the vagaries of contango and backwardation.  In the event these are terms you are not familiar with, I strongly recommend that you click on the links above and educate yourself.  Believe it or not, this is the ninth year I have been talking about the VIX futures term structure, negative roll yield, contango and backwardation.  (Those who have been paying attention since the early days of VXX and VXZ have no doubt profited mightily from this knowledge.)

The beauty of EVIX and EXIV is that these products create so much flexibility for investors who maintain a global, cross-asset class view of volatility.  In the run-up to the first round of the French election, for example, VSTOXX spiked dramatically and pushed the VSTOXX:VIX ratio below 1.00, creating some interesting arbitrage opportunities and/or pairs trades in the process.  Now investors can trade euro zone volatility against U.S. volatility, use targeted hedges for risk that is specific to the euro zone or speculate more easily about the direction of volatility in the euro zone.

I encourage everyone to study the EVIX and EXIV prospectus closely.

This is a huge development in the volatility space and if options on EVIX and EXIV follow later this week, as expected, the volatility trading landscape will be much richer and more diverse. 

Now if we can only get liquid volatility products for gold volatility (GVZ) and crude oil volatility (OVX), I won’t even have to set out a stocking next to the chimney this Christmas.

While I’m at it, why are there no options on XIV?  This is such a popular high-beta product that it deserves options so traders can express a broader range of opinions on volatility.  Readers, it never hurts to nudge the CBOE on these issues.  An outpouring of popular sentiment can make a difference.

As the risk of charging off into full rant mode, I feel compelled to say that I hope volatility investors know a good thing when they see it.  It is a shame that VXST futures did not attract enough attention to hang around and that VMAX and VMIN are not trading with higher volumes.  One of the best volatility products ever created, ZIV, nearly died of neglect before investors finally paid it some attention.

As I see it, EVIX and EXIV as well as VMAX and VMIN are test cases for the future of the breadth of volatility products.  If you would like a diverse tapestry of volatility products in the future, it would not hurt to “buy local” volatility ETPs rather than sticking to the handful of already successful products.  If you don’t vote with your feet, you had better be happy playing in a small and rather limited sandbox.  I am fond of saying, “In volatility, there is opportunity!” – but that opportunity is a function of the richness of the various volatility product platforms.

Last but not least, I know Eurozone and eurozone are the preferred spellings, but I am sticking to the two-word “euro zone” with as much stubbornness as I can muster.  What can I say, I am short convention…

Further Reading:

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX and VMAX; net long XIV and ZIV at time of writing.  The CBOE is an advertiser on VIX and More.

Monday, February 27, 2017

Ten Years Since the Biggest VIX Spike Ever

Ten years ago today, we witnessed that largest one-day VIX spike in the nearly three decade history of the VIX.  On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2% gain.  The move came in conjunction with a 3.5% decline in the SPX (large, but nothing like what would follow during the next two years) and followed overnight concerns related to the Chinese government raising interest rates to discourage speculation.  The fears in China were largely responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI.

In retrospect, the biggest VIX spike of all was a short-lived phenomenon whose fundamental and technical underpinnings turned out to pose no lasting threats.  As is often the case, traders who faded this move (and keep in mind there were no VIX ETPs available at that time) and bet on mean reversion cleaned up on that trade.

So, did this move in 2007 provide a hint as to what would follow in 2008?  As I see it, the timing was merely a coincidence.

It may not be a coincidence, however, that the biggest VIX spike in history helped to usher in the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all time having occurred during the past decade, as is reflected in the graphic below.  Of course, most of the spike in VIX spike activity was the result of the Great Recession and some of the “disaster imprinting” that followed such a severe shock to many investor psyches.

[source(s): VIX and More]

Some may look around at a VIX that is not too much different now than it was a decade ago and wonder what it might take to trigger another 64% jump in the VIX.  Certainly there is a huge policy uncertainty overhang at the moment, lots of political (and related economic) uncertainty in Europe and there are always some black swans lurking just out of our sightlines.

For now, however, will just have to live with that eerie, unsettling feeling that often accompanies low volatility and wait for another bump in the night before we reassess the volatility landscape.

Further Reading:


For those who may be interested, you can always follow me on Twitter at @VIXandMore


Disclosure(s): none

Sunday, February 26, 2017

The VIX Summit: CBOE RMC (March 8-10 in Dana Point, CA)

I often get asked about where to go to learn more about the VIX and volatility.  Well, if there is one event each year that falls in the absolutely-do-not-miss category, it is the CBOE’s annual Risk Management Conference, which is back in Dana Point, California this year from March 8-10.  It should be noted that while this is the 33rd annual incarnation of this event in the U.S., in the past few years, RMC-Europe (September 11-13, 2017 in Hertfordshire, U.K.) and RMC-Asia (December 5-6, 2017 in Hong Kong) now give VIX aficionados three different opportunities to gather around the globe and immerse themselves in all things volatility.

This year, Ed Thorp is the keynote speaker and as I have yet to hear him speak in person, I am very much looking forward to his talk on “Position Sizing and Relation to Risk Management.”  Another featured speaker is Benjamin Bowler, Global Head of Equity Derivatives Research, Bank of America Merrill Lynch, whose talk is titled, “Post-Central Bank Volatility: More Risk But More Alpha.”  Two of my favorite perennial speakers are back again this year:  Maneesh Deshpande, Managing Director and Global Head of Equity Derivatives Strategy, Barclays is a panelist for “Impact of Flows on Cash and Derivatives Markets: Myths and Realities,” while Rocky Fishman, Equity Derivatives Strategy, Deutsche Bank Securities Inc., is a panelist for “Options Out of This Country.”

Also, Ed Provost, President & Chief Operating Officer, CBOE Holdings, Inc. will be there to kick off the proceedings and if history is any guide, this is when we are most likely to get some insight into any upcoming or recently launched CBOE products.

For more information, check out the full agenda or register here.

While the RMC content is guaranteed to be world class, this is also the greatest gathering of volatility practitioners, academics and other manner of VIXophiles that I am aware of.  In short, if you speak VIX and are looking to find your lost tribe, here they are.  This is why I like to informally refer to the RMC as The VIX Summit.

While the CBOE has provided excellent coverage of this event on Twitter and on the CBOE blog, I will do what I can to pass along real-time and near real-time commentary as well.

I must admit that one of the most interesting conversations I have ever  had on the VIX was at with the creator of the product, Robert Whaley, who regaled me with some interesting stories related to the origin of the VIX at the 2015 CBOE RMC.  I trust this year will deliver some equally compelling memories.

Last but not least, if you see me this year, please stop and say hello.

Further Reading:

For those who may be interested, you can always follow me on Twitter at @VIXandMore


Disclosure(s): the CBOE is an advertiser on VIX and More

Clustering of Volatility Spikes

Last week, my Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) triggered a bunch of emails related to the clustering of low volatility.  Most readers expressed an interest in the phenomenon of volatility clusters occurring in both high and low volatility environments and were curious about the differences between high and low volatility clusters.

When it comes to measuring volatility clusters I am of the opinion that realized or historical volatility is a more important measurement than implied volatility measurements, such as is provided by the VIX.  When I think in terms of VIX spikes, I generally focus on two single-day realized volatility thresholds:  a 2% decline in the S&P 500 Index and a 4% decline.

The graphic below is in many respects the inverse of the graphic in Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) – and this should come as no surprise.  Simply stated:  while both high volatility and low volatility cluster in the short-term, volatility regimes tend to persist for several years, so it is very rare to see a clustering of high and low volatility in the same years.  This is exactly the principle I laid out more than ten years ago regarding echo volatility in What My Dog Can Tell Us About Volatility.

[source(s):  CBOE, Yahoo, VIX and More]

Note also that in spite of all the talk in the past few years of the potential implosion of the euro zone, a hard landing in China, central banks across the globe creating the seeds of our destruction, increasingly bipartisan politics creating deep divides across the nation, etc., etc. – volatility has been relatively mild during the past 5-6 years.

The interesting thing about volatility regimes is that they eventually transition from low volatility environments to high volatility environments and vice versa and create what I call VIX macro cycles in the process.  The volatility transition phases are some of the most interesting times in the market and can certainly be some of the most profitable.  These inflection points are sure to be a target of some of my future writing on volatility.

So, as VIX and More sails off into its second decade of publication, I vow to flesh out some of my evolving thinking on subjects I have touched upon above (some of which have lain dormant in this space for several years) at the same time I charge off into new areas.  While I will continue to have a laser focus on volatility (particularly its global, multi-asset class aspects), it is time to pay more attention to the “and More” portion of this title of this blog and make a push into new frontiers.  Said another way:  my thinking likes to cluster, but it likes to spike as well.

Finally, most posts tend to touch on one or two key ideas, so I typically put a half dozen or so links below that I refer to as “Related posts.”  Today, it seems as if I have touched briefly on so many subjects that more links (I’m sure today’s is a new record) seem appropriate and instead of referring to these as related posts, they are now officially Further Reading going forward.  Enjoy!

Further Reading:
For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): none

Monday, February 20, 2017

SPX 1, 2 and 3-Year Returns Following Top and Bottom Five (and Ten) VIX Average Annual Readings

On Saturday, I posted Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) and used that opportunity to expand upon some of the points I raised in my February 18th column for Barron’s.  Specifically, I addressed the issue of the clustering of low volatility and used a graphic to show that when the VIX closes below 12, it tends to persist in these low readings, clustering for several years, before remaining above 12 for even longer periods during high volatility regimes.  

Another claim I made in the Barron’s article (Putting Low Stock Volatility to Good Use) that I thought might benefit from a little graphical support was my contention:

“VIX data suggests the low volatility provides a foundation for extended bullish moves in stock. Look at the five highest and lowest average annual VIX readings and calculate the performance of the Standard & Poor’s 500 index one, two, and three years after the VIX extremes. After one year, the S&P performance following the low VIX is about 20% higher than after the high VIX. For two years, the difference jumps to 40% and by the third year the cumulative performance differential is approximately 90%. Wariness aside, low volatility begets low volatility and is generally bullish for stocks.”

Now there are two ways to compare percentages and the best way for me to illustrate this is with an example.  If we are comparing 5% with 4% is the 5% value 25% higher than 4% or is it 1% higher?  You can make a case for either comparison, one of which is made with division and is more of a pure percentage calculation, while the other which is made by subtraction and is perhaps best thought of in terms of percentage points.  In the Barron’s article, I used the division/percentage method, which is the norm when comparing numbers that are not percentages in and of themselves.  This time around I will try to minimize confusion and use the subtraction/percentage points approach instead.

In the first of the two graphics below I have calculated the SPX 1-year, 2-year and 3-year returns following the years with the five highest average VIX values (2008, 2009, 2002, 2001 and 1998) with a dashed black line as well as the years with the five lowest average VIX values (1994, 1993, 2006, 2005 and 1994) with a solid double blue line.  In all three time frames, the better returns followed the lower VIX readings and I used a green area series to show the (percentage point) difference.

[source(s):  CBOE, Yahoo, VIX and More]

For comparison purposes, in the second graphic below I have plotted the same SPX 1-year, 2-year and 3-year returns following the years with the ten highest average VIX values as well as the years with the ten lowest average VIX values.  Once again, in all three time frames, the better returns followed the lower VIX readings, though in this instance the performance gap between the lower VIX readings and higher VIX readings is somewhat reduced.

[source(s):  CBOE, Yahoo, VIX and More]

I offer up these graphics because I maintain that there are many skeptics regarding not only the persistent clustering of low VIX readings, but also related to the lack of robust data showing the effect of mean reversion during low volatility regimes.  As I have noted previously, mean reversion is much more predictable and tradeable following a VIX spike than after a significant decline in the VIX.

Follow me on Twitter at:  @VIXandMore

Related posts:


Disclosure(s): the CBOE is an advertiser on VIX and More

Saturday, February 18, 2017

Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)

With spring training just getting underway in Florida and Arizona, I think it is appropriate that I once again have an opportunity to pinch hit for Steve Sears in his The Striking Price column for Barron’s.  Today’s column is called Putting Low Stock Volatility to Good Use (my title suggestions always seem to end up on the cutting floor) and builds upon some of the ideas I presented three years ago in Low Volatility:  How to Profit from a Quiet VIX.

If my memory is correct, this is the twentieth time I have been a guest columnist at Barron’s in this fashion and in keeping with tradition, I always try to make the column topical, particularly when there are some aspects of volatility that have investors more perplexed than usual.  Lately, it has been the persistent low VIX readings (including the first sub-10 VIX print in a decade) in conjunction with a new administration and extremely high policy uncertainty that has been difficult for investors to digest.  While I too have dedicated a fair amount of effort to square low volatility with high policy uncertainty, my research related to volatility has made it easier to stick with the trend instead of trying to anticipate a market turn.

Specifically, in the Barron’s article I note:

“Statistically, it turns out that the vaunted mean-reverting aspect of volatility is much more likely to kick in with a high VIX than a low VIX. Similarly, low volatility tends to cluster and persist for extended periods, defying skeptics. Specifically, when the VIX dips below 12 for several months, the historical record shows it can be expected to continue with similar readings for two years or more.”

As Barron’s is not necessarily the best place to try to shoehorn original research into a short column, I thought I could use this space to expand upon some of the points I made.  Specifically related to the clustering of low volatility, the graphic below shows that when the VIX closes below 12, it tends to persist in these low readings, clustering for several years, before remaining above 12 for even longer periods during high volatility regimes. 

[source(s):  CBOE, VIX and More]

A corollary to the above is that while investors often focus a good deal of their VIX analysis on mean reversion, it is important to note that mean reversion is much more predictable and tradeable following a VIX spike than after a significant decline in the VIX.

There are some other interesting statistics and ideas in the Barron’s column that I will address in other posts shortly, not the least of which addresses the performance of the SPX in the years following extreme high and extreme low VIX readings.  Stay tuned.

Finally, since I enjoy being a pinch hitter so much, I thought I might highlight one pinch hitter for every new Barron’s column I write.  This time around I’d like to put the spotlight on Rusty Staub, who just happened to be at the zenith of his pinch-hitting duties when I moved to New York.  In the twilight of his career, the charismatic Rusty tied a National League record in 1983 with eight consecutive pinch hits and also tied the Major League record with 25 RBI from those (24) pinch hits.  Rusty finished his career with exactly 100 pinch hits and is currently 19th on the all-time pinch hit list.  I realize I have a long way to go to get to Rusty’s rarefied air, but 100 pinch hits is something to shoot for.

Related posts:

A full list of my (20) Barron’s contributions:





Disclosure(s): the CBOE is an advertiser on VIX and More

Wednesday, January 4, 2017

VIX ETPs Flash Some Green in 2016

Last year I shocked quite a few investors and media outlets with the publication of Every Single VIX ETP (Long and Short) Lost Money in 2015.  My intent was not to tar and feather the VIX exchange-traded products landscape, but to highlight the fact that in an environment characterized by sharp VIX spikes and other volatility extremes, the power of volatility compounding price decay can overwhelm both long and inverse ETPs. 

In sharp contrast to across-the-board losses in 2015, the performance of VIX ETPs in 2016 was much more balanced and in line with historical norms.  While there were some sharp VIX spikes, the combination moderate volatility, above-average contango and persistent mean reversion translated into a sharp down year for the long VIX ETPs and a strong up year for the inverse VIX ETPs.  The more complex multi-leg, long-short and dynamic VIX strategy ETPs were closest to breaking even for the year, with half of these posting modest gains and half posting small losses.

In the graphic below, I have plotted the performance of all twenty VIX-based ETPs with respect to leverage and maturity, using leverage on the y-axis and maturity on the x-axis.  This group includes five VIX strategy ETPs that have no easily discernible point on the leverage-maturity grid.  Depending on how finely you wish to split hairs, these twenty ETPs account for anywhere from fourteen to eighteen unique ways to trade volatility long and short, across various maturities and according to a wide variety of strategic approaches. 


[source(s): VIX and More]

On the plus side, while both XIV and SVXY were up over 80% during calendar 2016, this performance falls short of the 2012 and 2013 numbers, where each ETP gained more than 100% in both years.  Similarly, while losses of over 93% for UVXY and TVIX must sound like a worst-case scenario for these two products, losses were over 97% in 2012 and just slightly better – at -92% – in 2013.  In terms of consistent winners, while their numbers have been more modest, the most consistent gainers in the VIX ETP space have been ZIV, TRSK and SPXH.

Two new VIX ETPs entered the fray in 2016:  VMIN and VMAX.  While these products have not yet attracted the interest of investors that I believe is warranted (VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years), there is still time for investors to discover these products.  For the record, VMIN was launched on May 2, 2016 and outperformed both XIV and SVXY from the launch date until the end of the year, racking up an impressive 80.5% return in just eights months of trading.  Going forward, I would expect VMIN to regularly be the top performer in any period in which the inverse ETPs post positive returns.

For those who may be wondering, the VIX index was down 22.9% for the year, while the front month VIX futures product ended the year with a loss of 18.3%.

As is typically the case, contango was a significant performance driver during the course of the year.  Contango affecting the front month and second month VIX futures averaged a relatively robust 8.3% per month during the year (the highest since 2012), while contango between the fourth month and seventh month was slightly above average at 1.8% per month.

During the course of the year, five VIX ETPs were shuttered.  These include VXUP and VXDN, XVIX, CVOL and VQTS.  The biggest factors in the demise of these products was a lack of volume and assets.  In the case of VXUP and VXDN, the product complexity and cumbersome array of distributions also helped to quell investor enthusiasm.  Last but not least, I elected to drop XXV and IVOP from this list as these zombie ETPs both have less than 1% exposure to their underlying volatility index due to the lack of daily rebalancing.  As a result, these have become almost entirely all-cash vehicles, with a dash of volatility.  (For those who are curious about these instruments, follow the links above, click on the link to the prospectus and do a keyword search for “participation.”)

As an aside, for those who may be wondering, the flurry of recent posts is not an anomaly.  There is a lot to be said about the VIX, volatility, ETPs, market sentiment and many of my other areas of interest. With the the-year anniversary of the VIX and More blog just three days away, this seems like a good time to dive head first back into the fray.

Related posts:


For those who may be interested, you can always follow me on Twitter at @VIXandMore


Disclosure(s): net short VXX, VMAX, UVXY and TVIX; net long XIV, SVXY and ZIV at time of writing

Monday, January 2, 2017

The 2016 VIX Futures Term Structure: Extraordinarily Average

Two days ago, in The Year in VIX and Volatility (2016), I made no mention whatsoever of the VIX futures term structure.  Traders of the full range of VIX products (futures, options and ETPs) hopefully know by now that the entire VIX product landscape is based -- and priced -- off of VIX futures and one of the most important aspects of VIX futures is the shape of the term structure.

Long story short:  as the graphic below shows, the 2016 VIX futures term structure (double red line) was closer to its historical average (wide gray line) than any prior year since the launch of VIX futures in 2004, with the average term structure over the course of the year demonstrating a relatively modest upward sloping term structure, also known as contango.


[source(s) CBOE, VIX and More]

By way of explanation, the graphic above shows the average (mean) normalized term structure for each year since the VIX futures were launched. In normalizing the data, I have set the average front month VIX futures contract to 100 and have expressed the averages of the second through seven months as multiples of the front month.  Note that the terms structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact that the CBOE did not implement a full complement of consecutive monthly futures until October 2006.

In terms of takeaways, since I have not posted this graphic in two years, note that the term structure for 2015 was slightly flatter than average.  Looking back a couple more years, note that 2012 and 2013 saw the steepest term structure on record.  In the thirteen-year history of VIX futures, only two years saw a downward sloping term structure, also known as backwardation2008 and (barely, depending upon how one measures) 2009.

During the course of 2016, the VIX futures term structure moved into backwardation on four separate occasion and closed in backwardation on a total of 37 days – with 31 of those 37 days running consecutively from January 4th to February 16th.  These four instances and 37 days are just slightly below the average year, as can be seen in the graphic below.


[source(s) CBOE, VIX and More]

Last but not least, the average term structure for the year as well as the frequency and magnitude of the contango-backwardation dance is a strong determinant of the annual performance of the VIX ETPs and in my next post I will detail why 2016 was unlike the previous year, where Every Single VIX ETP (Long and Short) Lost Money in 2015.

Related posts:


For those who may be interested, you can always follow me on Twitter at @VIXandMore


Disclosure(s): the CBOE is an advertiser on VIX and More

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2017 Bill Luby. All rights reserved.
 
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