VIX and More

Slaying the Natural Gas Contango Dragon

2012-02-02T09:57:00.001-08:00

Yesterday’s post on Natural Gas, Contango and UNG appears to have generated a fair amount of interest across a broad base of readers, so for an encore I have decided to forego the typical collection of dazzling Liszt miniatures and skip directly to more on the ways to benefit from the persistent contango and negative roll yield in natural gas.

Starting with the graphic below, I have plotted the performance of natural gas (red line) and three natural gas ETPs since June 16, 2011:

United States Natural Gas Fund (UNG) – blue line
United States 12 Month Natural Gas Fund (UNL) – green line
UBS ETRACS Natural Gas Futures Contango ETN (GASZ) – pink(ish) line

The reason the graph begins in June 2011 is that it marks the launch of GASZ; the other two ETPs have a much longer track record.

First, note that UNG does not attempt to minimize its exposure to contango. Like many other futures-based ETPs, its objective is to hold a one-month weighted average constant maturity in its portfolio and it does this by buying second month futures and selling front month futures. UNL, launched after UNG, was an attempt by the same issuer to minimize contango by holding twelve months of natural gas futures contracts on the assumption that contango is likely to be steepest at the front end of the futures curve and flatter in the more distant months. As the chart below shows, the recent performance differential between UNG and UNL has been minimal.

The UBS ETRACS product, GASZ, takes a completely different approach and is based on a natural gas futures spread index that shorts the front month and is long some of the more distant months. In other words, this ETP is specifically designed to take advantage of contango. According to UBS:

“The ISE Natural Gas Futures Spread™ Index, through a series of investments in natural gas sub-indices, effectively provides short exposure in front month natural gas futures contracts and long exposure in mid-term natural gas futures contracts. This is achieved by taking a 100% long position in the components of the ISE Short Front Month Natural Gas Futures™ Index, which provides short (or inverse) exposure to the ISE Long Front Month Natural Gas Futures™ Index and an aggregate 100% long position in the components of the ISE Twelfth Month Natural Gas Futures™ Index, ISE Thirteenth Month Natural Gas Futures™ Index and ISE Fourteenth Natural Gas Futures™ Index (33.33% per index), which provides long exposure to the mid-term Henry Hub Natural Gas Futures (NG) futures contracts. The index is rebalanced monthly before the Sub-Indices’ roll process to maintain the 1:1 ratio.”

For more information, check out the GASZ web site and prospectus.

The results, at least as seen in the chart below, show that the GASZ approach has some promise insofar as the last eight months are concerned. To be fair, GASZ is very thinly traded and has yet to inspire a broad group of investors, but here is an approach that is not likely to be correlated with any strategies investors are currently running and has been racking up profits in a sideways (at least for equities) market.

Of course investors can always short UNG, but I believe that in much the same manner that ZIV is undeservedly neglected as an inverse VIX futures contango play, so is GASZ overlooked for the same reasons. These are two ETPs with a lot of potential that deserve a broader audience.

Finally, as a side note, UNG announced late yesterday that it will undergo a reverse 1-4 split following the market close on February 21. Here is a product that is down more than 40% in each of the last three years and is already down more than 21% in 2012. Don’t be surprised if this is not the last reverse split.

[source(s): United States Natural Gas Fund]

Disclosure(s): long GASZ and ZIV, short UNG at time of writing

Natural Gas, Contango and UNG

2012-02-01T12:06:00.001-08:00

I have talked at length in this space about the contango and negative roll yield issues that plague VXX. Periodically these discussions trigger a question from a reader about the impact of contango on some of the other ETPs.

Just to be clear, as far as ETPs are concerned, contango and backwardation issues are limited solely to those products which hold futures in their portfolio. The large majority of futures-based ETPs are in the commodity space, but in theory at least, any security for which there are futures could end up with a futures-based ETP. Fortunately, ETFdb keeps a handy list of these products at their Futures-Based ETF page.

The main reason why I talk so much about contango in the context of VIX-based ETPs is that the VIX products have a tendency to produce huge levels of negative roll yield (at a rate of 11% per month at the moment in the front two months of the VIX futures) relative to the other products.

Outside of the VIX product space, contango is probably most notorious in crude oil and natural gas – and the two most popular ETPs for these commodities, USO and UNG. Still, contango in these products is generally much smaller than it is with VXX, but right now contango is unusually high in UNG. While contango (front two months) in USO is only 0.4% right now, it is actually at 7.6% per month in UNG.

Note that unlike VXX, which has a daily roll, UNG rolls its entire portfolio over the course of four days per month. Better yet, UNG publishes a schedule of their roll dates, reprinted below, though it does come with the disclaimer, “Roll Dates are projected and subject to change without notice.”

So…while it has already been a great year for those who are short natural gas, it is possible that persistent contango will make short UNG positions even more profitable going forward.

Finally and perhaps most important of all, it is critical to keep in mind that steep contango does not happen willy nilly. Instead, contango is essentially a reflection of where the market expects prices to be headed (net of the cost of carry) in the future. Looked at in this context, UNG contango of 7.6% means that the reason shorts are receiving a 7.6% benefit from the negative roll yield is that the market anticipates prices will rebound 7-8% or so over the course of the next month. Contango and roll yield are not a free lunch by a long shot, but over the long term, if risk can be properly managed, positions that benefit from contango should be able to finance at least a few lunches.

[source(s): United States Natural Gas Fund]

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

CBOE Adds Options to Emerging Markets Volatility Index (VXEEM)

2012-01-31T15:57:00.001-08:00

Earlier this month, the CBOE launched futures on the CBOE Emerging Markets ETF Volatility Index (VXEEM) and barely three weeks later, VXEEM options began trading today.

For more information on VXEEM options, which are based on the popular EEM emerging markets ETF, a good first stop is the CBOE’s VXEEM options product specification page. Of particular note is the fact the options expiration cycle is the same for VXEEM options as it is for the futures products. Additionally, VXEEM futures and options have the same expiration cycle as VIX futures and options, meaning that they will expire on Wednesdays (February 15, March 21, April 18 and May 16), with the options last traded on the Tuesday immediately following the expiration. For more information, check out the CBOE’s VXEEM splash page and information circular.

In the graphic below, courtesy of LivevolPro.com, I have collected closing data for some of the primary U.S. volatility indices, including those which are volatility indices for ETPs and single stocks. The indices are sorted from highest to lowest and provide a good sense of the market’s perceptions of relative risk across various stocks, groups of stocks (sectors and geographies) and asset classes.

Partly due to today’s earnings announcement, VXAZN, the volatility index for Amazon (AMZN) tops the list, with volatility indices for silver (VXSLV), Goldman Sachs (VXGS) and gold miners (VXGDX) rounding out the top four. VXEEM ranks eighth of the twenty volatility indices at 27.97 and currently carries a 43.8% premium to the VIX. Is that 43.8% premium too high? Too low? With VXEEM options (and futures) now you can not only express your opinion, but benefit financially if you are correct.

[source(s): LivevolPro.com]

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

A Monthly Comparison of VXX and VXZ

2012-01-30T12:05:00.001-08:00

Three years after their launch, VXX has about four times as many assets as its mid-term sibling, VXZ. When it comes to public relations and media column inches, I imagine the ratio is more like 50-1 in the favor of VXX. In many ways VXZ is the unloved stepchild of the duo.

I recently opined that when it comes to the inverse variants of these two ETPs, ZIV is Undeservedly Neglected. I believe the same case holds for VXZ. One of the great difficulties in trading VIX-based ETPs is that while the potential returns are enormous, when things move in the wrong direction, a bad trade can spiral out of control and trigger an extremely painful loss with surprising speed. This is a large part of what makes VXZ more attractive than VXX. Even though VXZ is relatively volatile, with a current 30-day historical volatility of 39.5, it pales in comparison to the 70.1 30-day HV of its rocket-fueled short-term brother, VXX. In this case, the slower the train wreck, the more easily it can be avoided and position risk becomes much more manageable.

In addition to the lower volatility, VXZ is also much less susceptible to the contango and roll yield issues that plague VXX. In fact, on average VXZ is only subjected to about 1/3 of the negative roll yield that impacts VXX, which is a large part of the reason why the long-term performance of VXZ is much superior to the numbers put up by VXX. To illustrate this point, the chart below shows the month-by-month performance data for VXX and VXZ going back two years.

In summary, if you are impatient and you like action, VXX is the better bet, but if you have some patience and want better odds, VXZ is often a better long volatility play.

[source(s): ETFreplay.com]

Disclosure(s): long ZIV and short VXX at time of writing

VXX Celebrates Third Birthday

2012-01-30T09:57:00.001-08:00

It does not seem too long ago that I was the only person who thought VXX was worth mentioning.

Known formally as the iPath S&P 500 VIX Short-Term Futures ETN, VXX was launched three years ago today, alongside of its sibling, the iPath S&P 500 VIX Mid-Term Futures ETN, VXZ. Together these were the first VIX-based exchange traded product to be hit the market.

I have discussed in detail in this space the factors driving the performance of VXX (VIX futures, contango, roll yield, etc.) and the underlying causes of the persistent underperformance of VXX.

To bring the accounting up to date, VXX was down 68.4% in its first year, then lost 74.6% in its second year. During its third year of trading, VXX fared much better, but still managed to decline 18.6%. Of course there were pockets of excellent performance (notably a 66.4% jump in August, as the graphic below outlines), but over the course of a full year, the roll yield drag was more than the volatility spikes were able to overcome. In fact, VXX is now down 94% from its split-adjusted launch price.

Even with the above facts, it is still possible to trade VXX successfully from the long side, particularly if one keeps the holding periods as brief as possible and/or pays close attention to the VIX futures term structure.

[source(s): ETFreplay.com]

Disclosure(s): short VXX at time of writing

Expiring Monthly January 2012 Issue Recap

2012-01-30T00:34:00.001-08:00

I may have been away on vacation for the last two weeks, but that doesn’t mean my brain was entirely at rest.

In fact I was particularly busy in the January 2012 edition of Expiring Monthly: The Option Traders Journal, which was published last week and is available for subscribers to download. As the table of contents below shows, this time around I penned three articles, all with a distinctive VIX flavor:

Reflections on 2011 and Thoughts on 2012
Using VIX Exchange-Traded Products as Hedges (Part Two)
Follow that Trade: A Seasonal Synthetic VIX–VXX Arb

As noted here last week in The VIX-VXX Minotaur Trade, the last of those three articles advances some of the thinking I first presented in the December 2010 issue of the magazine.

Since a number of readers have expressed some interest in a listing of all the titles of my articles for Expiring Monthly, I intend to post a full list of all those at the end of the week.

Finally, now that I am back on the grid, I can devote some research and analysis to some of the developments that transpired while I was away – so expect regular posting to resume later today.

For those who are interested in subscription information and additional details about the magazine, you can find all that and more at (the newly redesigned) http://www.expiringmonthly.com/. More information on prior issues (and some of my research interests) can be found by following all the posts tagged herein with the Expiring Monthly label.

The VIX-VXX Minotaur Trade

[source: Expiring Monthly]

Disclosure(s): short VXX at time of writing; I am one of the founders and owners of Expiring Monthly

The VIX-VXX Minotaur Trade

2012-01-24T23:44:00.001-08:00

[The following first appeared in the December 2010 edition of Expiring Monthly: The Option Traders Journal. I thought I would share it partly because I have an article, “Synthetic Seasonal VIX-VXX Arb,” which appears in the just published January 2012 issue of Expiring Monthly that expands upon some of the ideas presented below.]

Rationale

In Greek mythology a Minotaur was a hybrid creature with the body of a man and the head of a bull. Such a creature provided the inspiration for a pairs trade involving short VXX at-the-money calls and long VIX at-the-money calls.

The holiday season has a shortage of trading days and a history of a bullish bias. As a result, December VIX futures have a tendency to remain relatively muted when compared to January VIX futures. Assuming I am able to establish this position for a net credit, a seasonal play on volatility involving short VXX calls paired with long VIX calls has an opportunity to profit if any one of three critical factors dominates:

volatility declines and both options expire worthless
the VIX futures remain in contango
volatility spikes and the VIX is more sensitive to the spike than VXX

It is possible to back test this strategy, but sometimes I like to put the trade on, see how it develops and get a sense of some of the potential hurdles. I fully understand that the results will not be statistically significant and making any inferences about a strategy from one trade is dangerous, but I do find some value in what I call these “proof-of-concept” trades with real money.

With most trades, achieving maximum profitability at minimum risk is the only goal. With a proof-of-concept trade, profits are important, but so is information. For this reason, I have a tendency to leave proof-of-concept trades on longer than I would when trading with an established strategy.

In terms of ratios, my intent is to keep this simple. The VIX is trading at just under 49% of the VXX at the moment and my research indicates that VXX generally moves about 48% as much as the VIX on a daily basis, so with the VIX at about 22 and VXX at about 45, I elect to do this pairs trade on a 1:1 ratio basis, using 10 contracts of each to keep the math simple.

Setup and Entry

In a world of maximum profitability, I would probably wait for some sort of relatively high VIX level before entering this trade, but because I am also focusing on the informational value of the trade, I choose to open the position early in the trading day on November 22^nd, with the VIX at about the middle of its 10-day range.

With the VIX at 22.03 and VXX at 44.98, there is a strong temptation to stay strictly at the money and short the VXX December 45 calls while going long the VIX December 22 calls. For ten contracts, the potential profit should both options expire worthless is less than $1000. Given my expectations for seasonally low volatility and also given the high level of contango in the VIX futures, I elect to shave the odds a little and short the slightly in-the-money VXX December 44 calls and go long the VIX December 22 calls. This raises the potential profit if both options expire worthless by another $200. After trying to work the order a little, I relent and take what the market gives me, recording slippage of $175 on the VIX side of the trade and $100 on the VXX side of the trade. I still manage to pocket $800 on the trade, which leaves me long VIX December 22 calls for 2.30 and short VIX December 44 calls for 3.10.

Position Management

The first important point to keep in mind while managing these two positions is that they run on different expiration cycles. The VIX options expire on December 17^th and the VXX options expire five days later on December 22^nd. For that reason, I anticipate that I will exit the position no later than December 16^th, which is the last day the VXX options are traded.

Monday, November 22 – As luck would have it, the VIX fell 8.3% between the time the trade was executed and the end of the day, pushing both calls out of the money and securing a $500 profit for the position.

Tuesday, November 23 – The VIX reversed to the upside today and is now 0.60 higher than when the VIX calls were purchased. VXX lagged during today’s spike and is 0.06 below where it was when the VXX calls were sold. The relative weakness in the VXX sounds positive for my position, but VXX calls jumped 64% today while the VIX calls rose only 39%. The profitability of trade has turned from +$500 to -$175 in 24 hours.

Monday, November 29 – After some seesaw action immediately before and after Thanksgiving, the weekend saw the Irish bailout formalized and tensions heating up on the Korean Peninsula. Both the VIX and the VIX December (front month) futures closed near the 21.50 level, while VXX spiked up to 46.10. The VIX calls and VXX calls are both in the money and my position is now down $475 in one week. I am now the beneficiary of $36 of theta each day, but I am disappointed that the VIX spike has had more of an impact on the VXX calls than the VIX calls.

Tuesday, November 30 – The VIX closed at 23.54, its highest closing level since September, as concerns lingered about the future of the euro zone and the Koreas. My VIX long calls are now 15% in the money and my VXX short calls are 10.7% in the money, yet the VXX calls continue to be more sensitive to increases in volatility. Today the VXX calls jumped 62% while the VIX calls rose 54%. The position lost $975 today and is now down $1450 in aggregate. If this were not a proof-of-concept trade I would either be exiting the trade or making adjustments to limit risk at this stage. As it is, I will let the trade ride, as my preferred indicators suggest the VIX is ‘overbought’ and is ripe for some mean reversion. My $36 of theta is just a drop in the bucket now.

Wednesday, December 1 – Today was a huge turnaround. The VIX fell 10.2% and VXX declined only 5%, yet the VXX calls lost 50% of their value while the VIX calls dropped only 27%. The result saw the position swing $2000 to a gain of $550.

Friday, December 3 – After falling more than 10% on both Wednesday and Thursday, the VIX fell another 7.7% today, as geopolitical and macroeconomic concerns faded and were replaced by a rising sense of optimism. Over the course of three days, the VIX has fallen 23.5% from 23.54 to 18.0 while VXX has fallen 16.2% from 49.29 to 41.30. With both calls well out of the money and the aggregate gain in the position up to $825 (above the $800 profit target), here is where I would exit the position and lock in profits, but this is a proof-of-concept trade, so I will let it ride…

Friday, December 10 – The graphic below details the full lifecycle of this trade, which is coming to an end today. Of notable interest, during the last week the VIX was relatively steadfast, while VXX lost significant value due to negative roll yield and a general drop across the VIX futures term structure. The result is that VXX, which was 2.1% in the money when the calls were shorted is now 15.4% out of the money, with the calls fetching only 0.15. The VIX has fared much better, starting out 0.1% in the money and now 13.6% in the money. Due to the greater volatility of VIX options and also the extra five days in the VIX expiration cycles, the calls still hold a value of 0.55. For the last three days, the position has been registering a profit in the $1150-$1200 range. As this is almost certainly going to be whittled back to $800 in the 1 ½ weeks until expiration, I am electing to pull the plug on this trade.

Epilogue and Takeaways

The first key takeaway is that with a little patience, a VIX Minotaur trade with a net short VXX position can indeed be profitable. On the flip side, this trade can be highly volatile and requires that significant attention be given to risk management. In anything other than a proof-of-concept environment, I would have exited this trade for a loss long before it had a chance to work its way back to profitability.

I was a little disappointed that the VIX spike did not provide the same lift to VIX options that it did to VXX options. This was due to the fact that VXX options turned out to be much more sensitive to changes in the underlying than VIX options, which is a key learning. Future trades should attempt to establish whether this is a persistent theme.

Another important consideration is the timing of the two expiration cycles. In this instance the position benefitted from the fact that VIX options expiration was after VXX options expiration. In August and September VIX options expired before VXX options, so I would have expected a more challenging environment for this trade during those two expiration cycles.

Future efforts may wish to tweak the degree to which both the VIX and VXX options are out of the money and also adjust the units in the ratio to give a higher weighting to VIX options.

Finally, score one point for the proof-of-concept trade. When real money is on the line, perceptions are more acute, emotional responses and their interaction with the trade are more realistic and ultimately any lessons learned are more deeply etched in the trading psyche.

Disclosure(s): short VXX at time of writing; I am one of the founders and owners of Expiring Monthly

ZIV Undeservedly Neglected

2012-01-20T09:10:00.001-08:00

Much to my amazement, next week will mark the third anniversary of the launch of the first two VIX ETPs: the S&P 500 VIX Short-Term Futures ETN (VXX) and the S&P 500 VIX Mid-Term Futures ETN (VXZ).

Some may recall that investors were slow to warm up to these ETNs (see Charting the Assets of Volatility-Based ETPs), but these two products are now #1 and #5 in the very successful volatility ETP space, with assets of $700 million and $188 million, respectively.

It is no secret that VXX has always been the darling of short-term traders, while VXZ has struggled at times to find a broad audience. As investors have become better educated about the influence of the VIX futures term structure and resulting roll yield on returns, interest in VXZ relative to VXX has picked up, but the latter, with its target maturity of five months, continues to play second fiddle to its short-term (one month target maturity) sibling.

I was curious see how this dynamic played out when VelocityShares rolled out two products that are essentially the inverse of VXX and VXZ in November 2010. Once again the short-term product captured the bulk of the interest of traders, as XIV quickly established itself as the #2 product in the VIX ETP space. While the love for XIV is certainly understandable, due to the history of persistent contango and negative roll yield in VIX futures, this product suffered a huge drawdown as the European sovereign debt crisis and resulting record backwardation wiped out 75% of the ETPs value from July through November 2011.

Against this backdrop, I am frankly surprised by the lack of interest investors have shown in ZIV, the VelocityShares Daily Inverse VIX Medium-Term ETN. In a nutshell, ZIV has many of the same benefits of long XIV and/or short VXX positions, with much less risk. Specifically, ZIV benefits from negative roll yield about 65% of the time, with VIX futures data going back to 2004 indicating that the annual benefit due to negative roll averages out at more than 20% per year. With XIV getting all the attention, I wonder if investors are aware that XIV is down and ZIV is up since the two products were launched.

Of course, like XIV, ZIV is exposed to sharp spikes in the VIX, as the chart below reflects. It is worth noting, however, that when the VIX spikes, ZIV can be expected to lose value at about half the rate of losses in XIV. For example, while XIV was falling 75%, ZIV was down 42%. It bears repeating that one of the key features of inverse volatility products is that the potential for large short-term losses is significant, even though the long-term prospects are promising.

Finally, for those who are investing in or trading VIX-based ETPs, it is important to keep in mind that short-term returns are most likely to be a function of changes in the VIX and VIX futures, while long-run returns will be dominated by the VIX futures term structure.

[source(s): ETFreplay.com]

Disclosure(s): long XIV and ZIV, short VXX at time of writing

VIX Views

2012-01-19T08:45:00.001-08:00

Yesterday, I learned that the people at S&P 500 Indices and the CBOE have collaborated on a new blog with the name of VIX Views.

The best news about VIX Views is the high quality of contributors and content. The most recent posts, all of which have appeared since January 7, include the following:

Matt Moran (CBOE) – Why Are There Different Prices for VIX Spot and VIX Futures?
Matt Moran (CBOE) – VXEEM Futures: 1,106 Trading Volume on the 3rd Day of Trading
Siddhartha Oberoi (S&P Indices) – VIX ETPs Demystified: December 2011
Frank Luo (S&P Indices) – An Introduction to VIX
Berlinda Lu (S&P Indices) – Diversification Properties of VIX Futures Indices
Berlinda Lu (S&P Indices) – Volatility Benchmarks in Europe

I encourage readers to take advantage of this resource and the valuable information stored in the archives, which date back to November 2011.

In thinking about VIX and More as a repository of information on the VIX, volatility and related subjects, I am reminded that I have tagged quite a few posts with the educational label. While I consider almost every post here to be educational, those with the educational label stand out above the crowd, particularly for those who may be relatively new to the VIX and/or are in search of material which does not assume a great deal of pre-existing knowledge.

Some of these posts with the educational label have been included in the links below. I have also included several posts in which I have highlighted resources on the VIX and volatility that I thought readers should be aware of.

Going forward, I have some thoughts about how to bring together all the material on this site in a manner that is easier to browse, but for now at least, Navigating VIX and More by the Labels will have to suffice.

Disclosure(s): the CBOE and Livevol are advertisers on VIX and More; I am one of the founders and owners of Expiring Monthly

SPLV vs. XLP

2012-01-18T08:16:00.001-08:00

The more I think about it, the less I understand the need for even more low volatility ETPs. Sure, I understand that in high volatility markets many investors want a more conservative portfolio that is insulated against sharp moves in the wrong direction.

In that respect, I can somewhat understand the appeal of the hugely popular PowerShares S&P 500 Low Volatility Portfolio ETN (SPLV), which has now attracted more than $1 billion in assets in the eight months since it launched. Just last week, in Comparing SPLV and VQT, I noted that SPLV’s approach to lower volatility “is heavy on defensive stocks, with the current top sector allocations in utilities, consumer staples and health care stocks.” In fact, following its recent quarterly rebalancing, SPLV currently has approximately 31% of its portfolio invested in utilities, with another 30% in consumer staples. [see SPLV’s top holdings here]

So what is it that SPLV offers over and above an investment in a utilities ETF like XLU or a consumer staples ETF like XLP? Not much, as far as I can tell. I terms of performance, XLU trounced SPLV throughout 2011 and as the chart below shows, finding a distinction between the performance of SPLV and XLP since the former’s launch last May looks a lot like splitting hairs – though to be fair the gap may become more obvious with the recent rebalancing.

One can argue that other approaches which use low volatility stocks (e.g., XLU) are at least as effective in lowering volatility, as are those ETPs that use a dynamic hedging allocation based on an evaluation of market volatility and risk. I touched on two of these in Comparing SPLV and VQT, notably VQT and VSPY.

As I see it, jumping on the low volatility bandwagon is a lot like shunning air travel because of a fear of turbulence. While that is understandable, that cross-country train is going to make it a much longer trip to get to the same destination.

Considering the differences across the investment universe, I realize that not everyone embraces market volatility as a period in which enhanced opportunities arise, so in 2012 one of the themes I will periodically address in this blog will be how to reduce risk, hedge and generate income – though not necessarily all at the same time.

In the meantime, consider for a moment a personal motto, “In volatility, there is opportunity!

[source(s): ETFreplay.com]

Disclosure(s): none

EconomPic Data’s VIX and S&P 500 Performance Matrices

2012-01-17T09:02:00.001-08:00

Last week, Jake at EconomPic Data took up the subject of the VIX as a Predictor of Equity Returns in a post that examined the daily returns of SPY based on the level of the VIX.

Today Jake has introduced another factor into his analysis in S&P 500 / VIX Matrix, where the performance of both the SPX/SPY and the VIX are evaluated based not just on the absolute level of the VIX, but also based on the performance of the VIX over the prior month.

The results are plotted in two matrices, one for SPX/SPY performance and the other for VIX performance.

Long-term readers of this blog will not be surprised to see that the VIX spike and mean-reverting aspects of the VIX dominate the key takeaways from this table, with high levels of the VIX creating some sweet spots in terms of predictability of future returns for both the SPX/SPY and the VIX.

Also worth noting is a point that I have mentioned here on many occasions in the past: that the mean reversion characteristics of the VIX are much less compelling for a low VIX than for a high VIX.

Finally, it is important to keep in mind not just the number of data points on the chart, but the events that these encompass. A good reference can be found in VIX Sets New Records, Suggesting Volatility Near Peak, which I penned in August 2011. The data in my August post should serve as a reminder that any set of data points which include a VIX of over 50 will be limited entirely to the 2008-2009 financial crisis. In contrast, just moving the relevant bucked down to 48 (on an intraday basis) will capture six other crises from the past two decades and provide enough diversity of experience from which to draw substantially more meaningful conclusions.

Disclosure(s): none

Navigating VIX and More by the Labels

2012-01-16T22:14:00.001-08:00

Saturday’s Five Years of VIX and More received enough broad-based interest that apparently attracted quite a few new readers. Several of these new arrivals have asked me for some assistance in finding their way around the blog; and rather than continuing to respond individually, I thought making some of my thoughts public might provide assistance to a wider audience, both new and old.

First things first, if you arrived on the blog looking for information on a specific topic, the best place to start is with the Google custom search feature, which is in the right hand column of the blog, a box under which carries the label “Search the VIX and More blog” and lies just above the orange RSS feed icon.

According to Blogger, this is post #1483. If Google turns out to be too cumbersome of a way to find what you are looking for, labels may be a better and more targeted way to go. It turns out that I have applied 1065 different labels to these posts. The list of labels which I have associated with each post can be found at the very bottom of each post and serve as hyperlink filters that automatically pull up all posts which have been tagged with the same label. The labels include almost every ticker that has ever appeared on the blog, keywords, phrases and some general reference labels, such as hall of fame , archival, educational, lighter side, etc. I do my best to capture some of the recurring themes that run through the blog, but the labels are somewhat arbitrarily assigned by me and I must confess that there are times when I probably forget to use important labels or retroactively tag posts that are ideally suited for new labels.

Today I took the opportunity to examine the frequency of all the labels I have ever used on the blog. Topping the list was Chart of the Week, which refers to a feature I rolled out in November 2008 to help make sense of all the chaos of the times. This was a weekly feature through the end of 2010 and was phased out in the beginning of 2011. Now that I am increasing the frequency of my posting, I suspect I will bring back the Chart of the Week in short order.

Second on the last of most frequently used labels is VIX futures. This should come as no surprise to regular readers of the blog, as VIX futures are the foundation for understanding the entire VIX product space, including VIX options and VIX exchange-traded products.

In the third spot is VXX, which is the top ticker on the blog. Quite a few readers of this blog are VXX and volatility specialists and I take a great deal of pride in being the first destination site for that product and arguably still the best reference available for the broader list of VIX ETPs.

Scrolling down the list of labels, #4 is VIX spikes, one of my favorite subjects when it comes to trading the VIX. At #5 is VWSI, also known as the VIX Weekly Sentiment Indicator, which is the precursor to the Aggregated Market Sentiment Index (AMSI) that is featured exclusively in the VIX and More newsletter.

Looking farther down the list implied volatility comes in at #6 and historical volatility comes in at #10. This is not a big surprise, but it leads me to believe that I probably pay more attention to HV than most other traders – or at least than those who blog about the subject.

Just outside the top ten, the top index in the labels is the ISEE, a call to put ratio that is published by the ISE. The ISEE is also a component of the AMSI. It is something have not blogged about in a while – and I will be sure to remedy this soon.

Of the many ratios I track, the one with the most mentions on the blog is VIX:VXV, which was nearly flawless as a market indicator during its first 18 months following the launch of VXV, then struggled with some of the volatility idiosyncrasies that crept into the markets following the March 2009 bottom.

Also worth nothing is the top country, China, and the top options position, the strangle. China comes as no surprise, but the strangle does, as I consider myself more of a straddle guy than a strangle guy. My guess is that the ranking of options trades is somewhat distorted by that fact that when I translate some of my trading ideas for the benefit of others, I often make the trade idea a more simple or conservative one, such as substituting a strangle for a straddle.

Finally, there were three particular ‘blast from the past’ labels that remain among the all-time most used labels. These harken back to earlier incarnations and attitudes here, as well as a wider-ranging sense of subject matter:

links – before Tadas Viskanta at Abnormal Returns and Charles Kirk at The Kirk Report created a near monopoly on link collections, many bloggers had their own link fests. Mine were heavy on volatility, ran from 2007-2009 and provide for an interesting historical perspective on what people were thinking about with respect to volatility and risk before, during and after the 2008 crisis
wine pairing – imagine my surprise when I discovered that more posts were tagged with the ‘wine pairing’ label than with China, European sovereign debt crisis, VXV, VXN, etc. There was a time when a reader wondered aloud, mostly in jest, I’m sure, about how I might pair wines with the various VIX Weekly Sentiment Indicator readings. Never one to back away from a creative challenge, I jumped right in…
CNBC Million Dollar Portfolio Challenge – I have no idea how many times CNBC has tried this contest, but I’m fairly sure the March-May 2007 version I participated in was the first one. I was new to blogging when I started posting about this, but I was surprised by how many people took some vicarious pleasure in my plight and also wanted more details about my approach in order to help them find the most volatile stocks and increase their chances of landing at the top of the charts. My rise was meteoric, but I risked it all in going for the win and fell back to earth just like Icarus.

Disclosure(s): short VXX at time of writing

Five Years of VIX and More

2012-01-14T14:53:00.001-08:00

One week ago marked five years since my first post at VIX and More. Since this anniversary fell just after my Top Posts of 2011 entry, it seemed like another retrospective look at the blog might be one too many. After a week of reflection I am now convinced that The 1000^th Post is probably best left unchallenged (for now at least) as my definitive history of the ideas represented on this blog and a good reference for relatively new readers. Another link worth highlighting is the hopefully self-explanatory The Post of the Month: An Informal History of VIX and More. Last but not least, for those interested in the best of the archives, those few posts with the hall of fame label are among my personal favorites.

In order to mark the five-year anniversary, I have elected to highlight the ten most-read posts on the blog since its inception, with some commentary about each post.

Ten Things Everyone Should Know About the VIX – If there is one post on this blog that everyone could benefit from – and new readers might wish to start with – this is the one. I last updated the contents of this post in 2010 and I will be sure to revise it again in the near future.
How to Trade the VIX – This is a fairly basic explanation about how to trade the VIX that probably benefits from having a title that positions it well for Google searches. There are a number of related posts about how to trade the VIX (some of which are links in the original), but here is a case where I should also have an updated look at the subject, with some more comprehensive information.
VXX Calculations, VIX Futures and Time Decay – I find it interesting that a post which was unable to crack the top ten in the year it was written (2009) is now in the top three of all time. I believe this was the first explanation anywhere went into the details of the VIX futures roll yield and the math involved persistent contango and the resulting price decay in VXX. As so many traders have taken up the cause in trading VXX and related products, this post has become an invaluable educational resource and is frequently linked to almost three years later.
Why VXX Is Not a Good Short-Term or Long-Term Play – Written several months after the post above, this extended some of the ideas that I had fleshed out earlier in a manner that investors have found helpful regardless of the time frame in which they are trading.
Prediction: Direxion Triple ETFs Will Revolutionize Day Trading – One thing I tried to do when I started this blog was to focus on educational material instead about talking about my trades or what I was expecting from the markets. Every once in a while, however, there were some things that I saw as very likely to happen that cut against traditional thinking. This triple ETF call was one of those and also helped to attract attention to these new products.
Chart of the Week: Might Recent Volume Bottom Doom Stocks? – I was surprised to see this post on the last as the analysis is probably not among my best thinking. What I believed happened was that at the time this was written, investors had become concerned that stocks had rallied too sharply off of their March 2009 lows and were likely to run out of steam soon. As it turns out, stock sold off for about two weeks after this post, falling back to SPX 869, then resumed their bullish momentum.
What Is High Implied Volatility? – This post from 2008 helped to explain several different ways of evaluating implied volatility relative to various benchmarks, at a time when investors were becoming increasingly concerned about volatility. Questions about implied volatility continue to be big issues for new options traders.
SPX 15% Over 200 Day Moving Average for First Time in Ten Years – While I will probably never get a job writing headlines for the New York Post, every once in a while my research and analysis uncovers something that has widespread appeal and a catchy enough headline to attract a lot of attention. While this headline and the accompanying graphic sound ominous, stocks shook off the bearish warning and continued to rally.
Rule of 16 and VIX of 40 – When people try to explain to me why they like the blog, what usually comes out is some sort of variation of, “You make very technical material easy to understand.” This post is probably one of the better examples of this. Many people struggle with some of the math associated with the VIX and having read this, I know the lights have gone for a number of investors.
Lost in Translation: VXX and VXZ – This post preceded #3 and #4 on this list and was probably the first piece published anywhere that talked about the beta of VIX, VXX and VXZ relative to SPX. Most investors had not figured out what to expect with VXX and VXZ in terms of VIX moves back in April 2009 – and quite a few still struggle with this issue to this day.

Finally, one recent development worth noting is the re-launch of EVALS (ETP Volatility Analysis Long-Short) in November. EVALS is now focusing on VIX-based ETPs and this has created some confusion from readers about what content is on the blog, what is in the newsletter and what is in EVALS. For this reason, I have created a content pyramid below which should help to differentiate between what can be found where. Of course the blog is free to all, while the newsletter and EVALS are available only to subscribers.

The 1000^th Post
The Post of the Month: An Informal History of VIX and More
Top Posts of 2011
Top Posts of 2010
Top Posts of 2009
Top Posts of 2008
One Year Blogiversary! (includes top 25 posts of 2007)

Disclosure(s): short VXX at time of writing

Comparing SPLV and VQT

2012-01-13T08:51:00.001-08:00

Based on some of the questions and comments that came out of Wednesday’s Three New Risk Control ETFs from Direxion, there appears to be a significant portion of the investment community that is uncertain about just how some ETPs are attempting to dampen volatility and control risk.

Today I am going to differentiate between three types of risk control approaches and compare two ETPs that have a little performance history. The approaches and an example ETPs are as follows:

Using low beta stocks to minimize portfolio volatility (SPLV)
Using a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (VSPY)
Using a market timing mechanism that dynamically allocates between stocks and VIX futures according to measures of market volatility (VQT)

While it may be partly semantics, I would not call SPLV a hedge in the sense that it does not attempt to hold securities that are negatively correlated with stocks. Instead, this approach is heavy on defensive stocks, with the current top sector allocations in utilities, consumer staples and health care stocks (see SPLV’s top holdings here.)

On the other hand, the approaches employed by VSPY and VQT are hedges in the traditional sense in that they switch into asset classes (bonds and volatility) that are generally negatively correlated with stocks when measures of volatility such as implied volatility and historical volatility signal an environment that poses greater risk to long equity positions.

As VSPY was just launched this week, it is too early to talk about the performance of this approach, but the chart below captures the performance of both SPLV and VQT since the launch of the former on May 5, 2011.

Note that both SPLV and VQT are less volatile than SPY, had a lower drawdown, had a smaller peak to trough drawdown during the August-October selloff, and dramatically outperformed SPY during the period covered by the chart. Once VSPY establishes some meaningful historical data, I will return to this subject and offer a more detailed comparison of all three approaches to controlling risk.

For those interested in pursuing some of these subjects further, there is a good deal of information in the links below.

[source(s): ETFreplay.com]

Disclosure(s): none

Tight VIX Range Keeps Overbought Signals at Bay

2012-01-12T09:17:00.001-08:00

Yesterday’s little dose of VIX trivia (VIX Has Smallest Intraday Range Ever!) was just the kind of post that I suspected would raise quite a few eyebrows, until everyone concluded that the headline was out of proportion to the actual data point. Ironically, that was a large part of the intent of the post: to poke fun at statistical outliers and extreme readings that have dubious predictive value.

The more I thought about the tight intraday VIX range, the more I believe it is a good segue to a more important related point: that a narrow trading range for the VIX – and also for stocks in general (10-day historical volatility in the SPX is down into the 12s) is allowing for stocks to rise without triggering any overbought signals.

One way I track whether the VIX is signaling an overbought or oversold condition is to use a ratio of the VIX to its 10-day moving average. To make this easy on the eyes, I am partial to using moving average envelopes (MAEs) which quickly flag when the VIX (or any other underlying) has strayed a large distance from its moving average, similar to the manner in which Bollinger bands measure outliers.

My personal preference is to use the VIX 10-day moving average as the baseline and set the MAEs to 10%, 12.5% or 15%, depending upon the underlying volatility in the market. In the chart below, I have set the MAEs to 10 days and 12.5%. The result is a VIX that has hugged the center line (the 10-day moving average) for the past 2 ½ weeks, never threatening the dotted blue MAE lines.

In many respects, the recent activity in the VIX is a microcosm of the action in general in the markets: stocks continue to rise, but not rapidly enough to trigger many of the favored overbought alarms.

[source(s): StockCharts.com]

Disclosure(s): none

VIX Has Smallest Intraday Range Ever!

2012-01-11T13:48:00.001-08:00

If ever there was a day to be short the volatility of volatility, it was today. In fact, today established a new record for the smallest (in percentage terms) intraday range for the VIX, a mere 1.14%.

For those who are curious (and I know you are out there), the previous record of 1.24% dates from August 29, 2003.

The chart below includes weekly bars and dates from January 2003. It puts the prior small range day into context with a green arrow marking the previous record. For those who are more curious about historical precedent, in the month or so following the old record, the VIX slowly drifted up from 18.63 to the 22s, briefly touching over 23 on one day. Then, of course, the influence of the bull market took over and a VIX of 25 was not seen until 2007.

[source(s): StockCharts.com, CBOE, Yahoo]

Disclosure(s):
none

Three New Risk Control ETFs from Direxion

2012-01-11T09:16:00.001-08:00

Today Direxion announced they have launched three ETFs whose intent is to match their exposure to an underlying equity index based upon current levels of market volatility. The new ETFs are as follows:

Direxion S&P 500 RC Volatility Response Shares (VSPY)
Direxion S&P 1500 RC Volatility Response Shares (VSPR)
Direxion S&P Latin America 40 RC Volatility Response Shares (VLAT)

The launch of these ETFs expands Direxion’s stable of what they call “rules-based index ETFs,” which began with two ETFs that are based on insider trading data: INSD and KNOW. The three new ETFs also arrive just five days after S&P announced a new S&P Dynamic Rebalancing Risk Control Index Series, which provides the basis for evaluating volatility and matching equity exposure to anticipated risk.

The intent of these ETFs is spelled out by Direxion:

“The Funds embody a rules-based investment approach that uses volatility as a gauge to determine equity exposure. They operate according to the principle that exposure to equities should be reduced during periods of higher overall market volatility, and increased during periods of a more stable (lower volatility) market environment. Each Fund has a target volatility level for its corresponding index. When volatility moves above those levels, the Funds will increase their exposure to U.S. Treasuries and decrease their exposure to equities. The Funds will proportionately increase exposure to equities during periods of low market volatility.”

Readers with sharp memories may recall that back in July 2010, Direxion was the first ETF provider to announce that they would be launching a product based on the S&P 500 Dynamic VEQTOR Index, which was an effort to mitigate risk with a dynamic allocation of VIX short-term futures, essentially the equivalent of sizing a VXX hedge based on observed levels of implied volatility and historical volatility. I am not sure why Direxion’s VEQTOR product never saw the light of day, but Barclays ended up with one of the few successful VIX ETPs in 2011 (see VIX Exchange-Traded Products: The Year in Review, 2011) with its Barclays ETN+ S&P VEQTOR ETN (VQT) product, which I made a strong case for back in October 2010 in The Case for VQT.

One of the interesting aspects of the approach taken by VSPY, VSPR and VLAT is that these products will tend to have minimum exposure when the VIX is at its highest – and as anyone who has ever looked a chart of the VIX and SPX/SPY knows, this is typically when stocks bottom and begin a sharp bullish move.

With impeccable timing, EconomPic Data just happened to publish a study yesterday, VIX as a Predictor of Equity Returns, which concluded that for the most part, SPY daily returns were much higher with an elevated VIX than with a historically low VIX.

All this raises the question of how to play increased volatility and risk. In the land of ETPs, there are quite a few alternatives, including:

Barclays ETN+ S&P VEQTOR ETN (VQT) – dynamically hedge with a long VIX futures position
Direxion’s VSPY and VSPR to dynamically adjust exposure to equities
PowerShares low volatility (SPLV) and high beta (SPHB) approaches for manual market timing
ETRACS Fisher-Gartman Risk On ETN (ONN) and ETRACS Fisher-Gartman Risk Off ETN (OFF) – for those who wish to manually time the multi-asset class risk on/risk off trade

Investors who believe they are more adept at timing the market may prefer to avoid the rules-based products that dynamically adjust exposure based on a static risk measurement mechanism. For those who prefer not to watch their portfolio closely or are not convinced that they can do a better job than the likes of VQT, VSPY and perhaps SPLV, the new category of dynamic risk exposure products should provide some excellent tools for portfolio augmentation and in some cases, portfolio replacement.

Disclosure(s): short VXX at time of writing

VXV Heralding a Return to Normalcy

2012-01-06T09:18:00.001-08:00

With the political season heating up, it seemed like an opportune time to work “normalcy” into one of my posts again and what better way to do that than by putting under the microscope one of my favorite overlooked indices: the CBOE S&P 500 3-Month Volatility Index, which I typically reference with the more pithy VXV ticker symbol.

For those not familiar with VXV, I am fairly sure I was the first person to discuss this index back in 2007, talk about the merits of the VIX:VXV ratio (which is a great way for someone without VIX futures quotes to keep on top of the VIX futures term structure), devote an entire Barron’s column to the subject (Take a Longer View on Volatility) and promote VXV as a better reflection of long-term and structural/systemic volatility than the VIX, which is better suited to measuring short-term event volatility.

For those who desire some additional background and context, there are shiploads of prior posts on the subject and the links below should provide for some excellent jumping off points.

Getting back to VXV, I think it is important to note that while the VIX remains above its December lows, VXV has now moved below those lows and it plumbing levels that have not been seen since early August – and as VXV is a better gauge of structural and systemic risk than the VIX (not to mention largely untouched by the holiday effect), I think this is an important development to watch.

Frankly, the VXV chart looks a lot like it did back in early April 2009, when I penned Chart of the Week: VXV and Systemic Failure. At that time I concluded, “The key takeaway: systemic healing is continuing and the risk of systemic failure is diminishing.” Based on the VXV chart, it appears as if we are at a similar moment in time right now.

[source(s): StockCharts.com]

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

VIX and More and the 2012 Bespoke Roundtable

2012-01-05T10:24:00.001-08:00

I was delighted to be invited back for the third year in a row to share my thoughts about 2011 and 2012 as a part of Bespoke Investment Group’s third annual Roundtable.

As someone who trades options, just predicting what one stock or index will do over the course of a four-week expiration cycle can be a humbling experience. Since I rarely focus the bulk of my thinking more than two or three expiration cycles into the future, I always embrace the process of what I have come to think of as Bespoke’s comprehensive 37 question “take-home final.” Of course you don’t have to have an opinion about every issue out there to be a successful investor, but being informed about as many issues as possible makes you better prepared when the next surprise hits. As I noted in The Education of a Trader, anyone who has ever uttered, “Do we have to know this for the test?” is not cut out for trading, as every day in the financial markets is an open book pop quiz.

When it comes to formulating answers to these 37 questions, I tried to balance what I think are the most likely scenarios with more provocative comments about some low probability scenarios that I believe that a higher likelihood of coming to fruition than the rest of the crowd. The result is typically a patchwork of the unexciting and the outrageous. In 2012 it looks like I am leaning more toward the unexciting end of the scale, which is not difficult to do in a year in which the Mayan calendar may be predicting the end of the world, while many pundits are calling for at a minimum the end of the euro zone as we know it. That being said, I do think I have some provocative things to say about a wide range of issues, from Apple (AAPL) vs. Google (GOOG) to social networking and beyond.

The full set of my comments for 2012 is here.

For those who are curious how my crystal ball has fared in years past, my archived predictions for 2010 are here. If I can locate a link to my (decidedly less impressive) 2011 predictions, I will post that here as well.

I also recommend reading through some of the comments from the other participants in the 2012 Bespoke Roundtable. A splash page for the full set of predictions is here.

Disclosure(s): none

Covered Calls Finish Strong in 2011

2012-01-03T11:36:00.001-08:00

Just looking back at The Year in VIX and Volatility (2011) is enough to make one’s stomach churn. Try to tell someone who has acrophobia that even the scariest roller coaster ride ends up right where it started and you will likely not assuage any fears. Something similar is at work for hikers, bikers or mountain climbers. The amount of effort they will need to call upon has nothing to do with ending up at the same elevation they started, but rather it is the cumulative elevation gain over the course of the trail, road or mountain. As with many things in life, it is all about the journey, not the destination.

For those who may have a touch of acrophobia, prefer their hikes to put less stress on their cardiovascular system and want a portfolio that matches the way they wish to experience the world, covered calls or buy-write strategies might be the answer. I have addressed the subject of covered calls and buy-writes a number of times in the past in this space (see links below), but essentially this is a strategy which sells calls against an existing (covered call) or new (buy-write) long position in order to generate income off of the underlying. Covered calls and buy-writes will generally beat the SPX/SPY if stocks decline, move sideways or rise slowly. The cost to implementing one of these strategies is that if the markets make a sharp bullish move, gains are capped by the covered calls.

In the ETP world, there are two choices when it comes to buy-write strategies:

PowerShares S&P 500 BuyWrite Portfolio ETF (PBP)
iPath CBOE S&P 500 BuyWrite Index ETN (BWV)

PBP is by far the more liquid of the two alternatives, but some investors may have a reason to prefer BWV’s approach and performance.

In the chart below, I have captured the equity curve of PBP vs. SPY over the course of the second half of 2011 – a period in which stocks generally moved sideways and volatility remained high. In other words, a period that was tailor-made for buy-write strategies. Note that PBP outperformed SPY by 7.7% during this six-month period, with considerably less volatility and also a less peak-to-trough drawdown…or what alpinists would probably call cumulative elevation loss.

Should high volatility persist in 2012 and stocks end up near where they started the year, both PBP and BWV are likely to outperform the major market indices once again.

[source(s): ETFreplay.com]

Disclosure(s): long PBP at time of writing; TradeKing is an advertiser on VIX and More

The Year in VIX and Volatility (2011)

2012-01-02T11:44:00.001-08:00

One of the most-loved charts I assemble each year is my retrospective look at the year in volatility. I already touched on some of the highlights of event volatility in text form in Expectations, Surprises and Fear in 2011, but this is one case in which I believe a picture does a better job of telling the story in the context of a timeline for the entire year.

From a volatility perspective, the first half of 2011 was relatively benign, even though the global social and economic fabric was ripped by Arab Spring and the Japanese trio of disasters which came in the form of the earthquake, tsunami and nuclear meltdown.

Things were much more promising during the middle of the year when the Greek parliament voted in favor of austerity and the euro zone agreed to expand the European Financial Stability Facility (EFSF) to €780 million.

For a while, there was considerable angst surrounding the bipartisan politics associated with the U.S. debt ceiling deadline at the beginning of August, but only after the Democrats and Republicans failed to come up with a meaningful debt reduction deal did investor anxiety shift back to Europe. Ironically, the downgrade of the U.S. debt from AAA to AA+ had very little impact on Treasury securities, which actually began to rally sharply after the downgrade. When Europe returned to the center stage, however, the sovereign debt crisis was escalating rapidly and it was now Italy that was in the crosshairs. The VIX shot up to 48 on August 8^th and was regularly above 30 through the end of November, setting a new record for persistent backwardation in the VIX futures in the process.

The VIX was a high wire act throughout August and September, with multiple excursions into the 40s. Even after the S&P 500 index bottomed on October 4 at 1074, the VIX remained stubbornly elevated in October and November, before finally falling into the 20s in December. While the SPX was essentially unchanged for the year, the VIX ended 2011 at 23.40, up 31.8% over 2010’s close of 17.75. At the same time, the VIX futures are calling for a VIX of between 29 and 30 by the mid-point of 2012, suggesting that volatility will climb higher once again in the coming months.

In a year where most asset classes struggled mightily, volatility was one of the few great long positions. With a higher starting point going into 2012, it will be difficult for the VIX to repeat its market-beating performance once again, but if the euro zone and some of the geopolitical flash points fail to make progress, 2012 may indeed be the year of the VIX.

Finally, since I had so many requests for a high-resolution version to download last year, I am going to preemptively offer a full resolution PNG screen capture of the graphic below for download here.

[source(s): StockCharts.com]

Disclosure(s): none

CBOE To Launch Futures on Emerging Markets Volatility (VXEEM)

2011-12-30T09:32:00.001-08:00

One of the predictions I made for 2011 was that the trend toward what I have labeled “atomic volatility” (a lessening of the scope of the underlying for options contracts and/or the duration of those contracts) would accelerate.

Back in March 2011, the CBOE helped to usher in the atomic volatility era when they rolled out volatility indices using the VIX methodology for six sector and geography ETFs:

iShares MSCI Emerging Markets Index Fund (VXEEM)
iShares Trust FTSE China 25 Index Fund (VXFXI)
iShares MSCI Brazil Index Fund (VXEWZ)
Market Vectors Gold Miners Fund (VXGDX)
iShares Silver Trust (VXSLV)
Energy Select Sector SPDR (VXXLE)

Later in March, the CBOE rolled out futures based on the gold volatility index (GVZ), which was launched back in August 2008, at the same time as the euro volatility index (EVZ) and several weeks after the launch of the OVX, known affectionately as “the Oil VIX.” [Those who are interested in the sequencing of the launch of various volatility measures should refer to The Evolution of the Volatility Index Family Tree.]

Now the CBOE is taking the next step with VXEEM, the volatility index that is based on the popular emerging markets ETF (EEM), and offering futures on that index. The launch of these futures contracts is set for January 9^th and will initially include contracts with expirations in February, March, April and May. Note that the expiration cycles for these contracts are the same as those for the VIX futures and options, meaning that they will expire on Wednesdays (February 15, March 21, April 18 and May 16) and can last be traded on the Tuesday immediately following the expiration. For more information, check out the CBOE’s VXEEM splash page and information circular.

One of the reasons I think products based on EEM and VXEEM have a good chance of being successful is that emerging markets are typically a highly volatile area – much more so than the basket of stocks included in the S&P 500 index on which the VIX is based. Right now, for instance, EEM has a 60-day historical volatility that is more than 50% higher than that of the SPX. All this means that short-term traders should find VXEEM products (futures as well as options and ETPs, assuming they are in the pipeline) to be the types of high-octane trading vehicles that are well-suited to some of their favorite strategies, much like leveraged ETPs and VIX-based products.

Additionally, as the chart below reminds us, emerging markets sometimes move in cycles that are distinct from U.S. stocks. Note that the ratio of EEM to SPX has varied wildly over the course of the past five years and has had different bottoms and tops than the SPX has. Whether this phenomenon will continue into the future (influenced strongly by China) remains to be seen, but the role of emerging markets relative to developed markets should be watched closely in 2012.

[source(s): StockCharts.com]

Disclosure(s): none

Expectations, Surprises and Fear in 2011

2011-12-29T09:30:00.001-08:00

For the last three years, the holiday season has been leaving me something new in my stocking: a detailed questionnaire from Bespoke Investment Group that provides the raw material for the annual roundtable…and undoubtedly more than a couple of snickers for Justin, Paul and the gang.

In the inaugural year of the Bespoke roundtable, my crystal ball guesstimates for 2010 proved to be surprisingly accurate, naturally leading me to debate the relative influence of luck vs. skill when I had a chance to reflect back on the events of the year.

When I made my predictions for 2011, I had serious concerns about Europe and China in particular, but before January was over, the dawning of the Arab Spring had begun to change the world in a profound and dramatic way, cutting across religious, political and economic dimensions. While the VIX remained in the teens for almost all of January and February, I suspect that when we reflect back on the events of 2011 in another decade or so, the widespread tumult in Northern Africa and the Middle East is likely to produce a more profound long-term effect on the world than any of the other events of the year.

As the Arab Spring continued its geographic spread, a trio of disasters shook Japan, starting with the magnitude 9.0 Tohoku earthquake and tsunami, which was followed by a nuclear meltdown at the Fukushima Daiichi nuclear power plant.

So while Europe and China were simmering on the back burner, two huge and unforeseen events reverberated around the world, both of which triggered a large number of downstream consequences.

Events in Europe began heating up in the middle of the year, but they were largely overshadowed by the growing angst over the U.S. debt ceiling crisis and the political gridlock that seemed poised to prevent a solution to that crisis. Only after a partial ‘solution’ to the debt ceiling issue was agreed upon and S&P downgraded the credit rating of the U.S. from AAA to AA+ did the European sovereign debt crisis return to the center stage, this time roiling the markets throughout the remainder of the year.

In retrospect, being able to anticipate some of the surprises of 2011 would have required expert knowledge of such far-reaching fields as Arab social unrest, plate tectonics, and the inner workings of governments in the U.S., Greece and elsewhere. On top of all this, it is never easy to discern when a seemingly harmless development will suddenly mushroom out of control into a crisis. Knowledge of this type is much more elusive and requires an understanding of concepts like “fingers of instability” which is discussed by Mark Buchanan at length in Ubiquity: Why Catastrophes Happen – and which is a topic I shall pursue in more detail in 2012.

The bottom line is that many of the big risks for 2012 are obvious: Europe, China, Iran, North Korea, etc.

What keeps option sellers up at night and often puts oversized dents in portfolios are those unknown unknowns lurking just below the surface.

[source(s): StockCharts.com]

Disclosure(s): none

Italy’s Sovereign Debt Schedule and the VIX

2011-12-28T11:11:00.001-08:00

When I think about the risks posed by the European sovereign debt crisis in 2012, the first thing that comes to mind is the huge amount of debt that Italy has to roll over next year. In yesterday’s staff meeting/run with Logan (What My Dog Can Tell Us About Volatility) I even floated the semi-sexy label of “peak refinancing.” He was not particularly impressed…

But I’m sure that somewhere under that calm demeanor, Logan too is worried about Italy and how well that pivotal country will manage the burden of refinancing. Of particular concern is that the refinancing schedule has a three month stretch from February through April in which the debt that is coming due is particularly large – €91.7 billion, just under half of the total redemptions for the entire year.

The table below summarizes the monthly estimates of Italy’s 2012 issuance (per HSBC), as well as the schedule of redemptions and net issuance minus redemptions for each month.

In planning for the timing of elevated anxiety and perhaps a full-blown crisis in Europe in 2012, one would think that Italy’s debt schedule would figure prominently into those calculations. I would also expect to see some of that timetable translated into elevated VIX futures, which I have included at the bottom of the table below. In fact, the 2012 VIX futures term structure is very similar to what it looked like prior to the August selloff, with no hint at all that volatility might peak in February, March or April.

When it comes to pricing options for 2012, keep Italy’s debt schedule in mind, regardless of whether the VIX futures are paying attention to this issue.

[source(s): Italy Department of Treasury, HSBC, Interactive Brokers]

Disclosure(s): none

Q & A: The Historical Volatility of VQT

2011-12-27T12:04:00.001-08:00

Questions from readers are where I get to learn which aspects of volatility cause the most confusion and consternation among investors, so one of the things I will strive to do in 2012 is take more of the Q&A exchanges that might be buried in the comments sections of previous posts and shine some light on them here.

I was reminded of the importance of Q&A when I stumbled upon the following comment to VIX Exchange-Traded Products: The Year in Review, 2011, which I fear may have been lost in the holiday shuffle. [For the record, I tagged that post with my elusive “hall of fame” label, which I typically use to honor only handful of posts each year.]

The comment/question was posted as follows:

Thank you for alerting me to VQT. Where does one find the realized volatility number on it...or is this number just the VIX?

Before I dive into the issue of the realized or historical volatility (the two terms are synonymous) of VQT, I would be remiss in not pointing out that the question suggests some confusion between realized volatility and the VIX.

First things first, realized volatility is also known as historical volatility because it is based on past price moves, has already been observed, and can be calculated with great precision (see Calculating Centered and Non-Centered Historical Volatility for more details.) This is essentially what an investor sees out his or her rear view mirror.

Implied volatility is a very different animal from its realized/historical cousin. It boils down to the market’s best guess as to what (historical) volatility will look like in the future, based on how much investors are currently paying for options. The VIX is a specific instance of implied volatility and is based on options on the S&P 500 index over the course of the next 30 days. To return to the car analogy, it is what the consensus of drivers believe will be around the next bend and over the horizon.

Getting back to VQT, the chart below captures historical volatility based on past daily price moves in VQT for lookback periods of 10 days, 20 days, 30 days, 50 days and 100 days. As these are calculated based on price moves, they are necessarily based on trading days, not calendar days, which are the unit of time used for implied volatility data.

Looking at the table, these historical volatility numbers for VQT are in 10.50 - 10.90 range for the past 30 trading days. The 100-day lookback window takes us back to early August, so it is not surprising that 100-day historical volatility is higher at 14.30.

I have also included some historical volatility data for the S&P 500 index (SPX) for comparison purposes. Note that historical volatility for the SPX has been 100 – 130% higher than it has been for VQT during the same lookback periods.

One can find historical volatility data on sites from brokers that specialize in options (optionsXpress, TradeMonster, Trade King, thinkorswim/TD Ameritrade, etc.) or from options data providers such as Livevol and iVolatility.

Disclosure(s):
optionsXpress, TradeMonster, Trade King and Livevol are advertisers on VIX and More

VIX Exchange-Traded Products: The Year in Review, 2011

2011-12-23T09:41:00.001-08:00

The year is not quite over, but I can safely predict that it when it is in the books, there will be no doubt that 2011 has been a bull market for VIX exchange-traded products (ETPs). After seeing two VIX ETPs launched in 2009 and ten in 2010, this year has witnessed the launch of 20 VIX ETPs.

In the week ahead I will provide some commentary about the evolution of VIX ETPs in 2011 and what to look for in 2012, but for now I wanted to share a performance table for a cross-section of VIX ETPs that were open for the full year.

Before I touch upon on the graphic below, I wanted first to comment on the time periods used for the performance data. Now perhaps my life is too complicated, as it seems I have to simultaneously sync it to three different calendars: the standard Gregorian calendar, the options expiration calendar (particularly the standard Friday monthly and weekly expirations) and the VIX options expiration calendar (featuring VIX options and futures expiration on those Wednesdays highlighted by purple squares in the preceding link.) The graphic below uses the VIX options expiration cycle, specifically measuring from Tuesday’s close immediately before VIX options expiration to the next Tuesday’s close just prior to VIX options expiration the following month. This means that the January 2011 entry includes the full VIX options expiration cycle for that month: December 22, 2010 – January 18, 201. This also means the most recent December 2011 data covers the full December VIX options expiration cycle: November 16, 2011 – December 20, 2011.

In the graphic below, I have highlighted the best performing (VIX expiration cycle) month for the SPX in green and the worst performing month in red. Note that over the course of the full year (December 22, 2010 – December 20, 2011) each of the VIX ETPs (long volatility in green and short volatility in red) managed to lose value, even though the VIX was up over 40% during that period. The one exception is VQT, which consists largely of a SPY position, with a dynamic allocation of VXX that ranges from 2.5% to 40% of the ETPs holdings. [For more information on VQT, refer to The Case for VQT and Barclays VEQTOR ETN (VQT) Begins Trading.]

While it is interesting that both the long and short volatility ETPs were unable to turn a profit for the year, there were stretches during 2011 that various VIX ETPs produced extraordinary gains.

As promised, I will delve more into the performance of the universe of VIX ETPs and their suitability as speculative and hedging plays before the end of the year and in the weeks and months ahead.

Disclosure(s): long XIV, ZIV and VQT; short TVIX and VXX at time of writing

VIX and St. Louis Fed’s Financial Stress Index Moving in Concert

2011-12-16T08:57:00.001-08:00

Last year I talked about the St. Louis Fed’s Financial Stress Index (which I am calling the STLFSI in order to lower my carpal tunnel risk) as a measure of financial market risk that I consider complementary to the VIX and in some cases perhaps even a superior alternative.

Given the fact that some investors have difficulty coming to terms with the “holiday effect” and the seasonal swoon in the VIX, I thought it might be timely to update a chart I have posted here previously which captures the movements in the more broad-based STLSFI. Note that the chart dates from January 2007 and includes all the data from the financial meltdown of 2008, as well as the various permutations of the European sovereign debt crisis that have plagued the financial markets during the last two years or so. [Data are through the last update to the STLFSI, 12/9/11.]

Looking at some of the spikes in the chart, the first thing that strikes me is just how closely the two measures of risk have moved during the past five years. Also worth noting is the fact that both the VIX and the STLFSI indicate that the degree of risk/stress in the financial markets over the last few months has been slightly higher than what happened in one of the earlier Greek chapters of the euro zone debacle back in May and June of 2010.

More importantly perhaps, both the recent VIX and STLFSI data suggest that the current threats to the global financial markets are at least an order of magnitude lower than what we experienced in late 2008 and early 2009. This is not to say that both the VIX and STLFSI cannot spike much higher in short order, only that according to both measures, we now appear to be on the downhill side of the crisis.

For more information on the components of the STLFSI and the index’s long-term performance, check out St. Louis Fed’s Financial Stress Index.

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

The Year in Safe Havens

2011-12-15T11:54:00.001-08:00

Earlier today, in Safe Haven Options Shrinking? I noted the recent failure of some of the safe haven trades in volatility, gold and crude oil securities to hedge the latest decline in stocks.

A question many observers have is how well these “big five” safe haven trades – volatility (VXX), gold (GLD), crude oil (BNO), the dollar (UUP) and U.S. Treasuries (TLT) – have fared over the full extent of the 2011 volatility storms, from the Arab Spring and Japanese earthquake/tsunami/nuclear disaster duo during the first quarter, to the U.S. debt ceiling debacle and the seemingly endless wave of disasters associated with the European sovereign debt crisis that plagued investors for the balance of 2011.

The graphic below, courtesy of ETFreplay.com, shows the year-to-date performance of big five safe haven ETPs, as well as historical volatility and drawdown data.

It is worth noting that while VXX is up for the year, it may be difficult to think of anything as a safe haven that was down 46.6% peak-to-trough earlier in the year.

Looking back with 20-20 hindsight, if one could have switched between safe haven vehicles at the most opportune time of the year, Brent crude would have been the best bet throughout the Arab Spring and up until early June, at which point gold would have been the horse to ride until August, with volatility the best play through the beginning of October and Treasuries the ideal hedge for the last two months. While the dollar has turned up as of late, the relatively low volatility in the currency market (assuming no use of leverage) means that the dollar is a better place to park investing capital until the perceived threat passes than to be employed as a hedge against a downward move in stocks.

[source: ETFreplay.com]

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

Safe Haven Options Shrinking?

2011-12-15T09:45:00.001-08:00

Back in February, in Chart of the Week: Flight-to-Safety ETPs, I examined the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade: volatility (VXX), gold (GLD), crude oil (USO), the dollar (UUP) and U.S. Treasuries (TLT). At that time, the Arab Spring was considered to be the main risk to portfolios and I noted that with the exception of crude oil, none of these supposedly safe havens had been profitable for the first two months of the year.

Ten months later the risk landscape is a much different one and TLT (+33.7), GLD (+10.2%) and VXX (+8.4%) have all lodged fairly impressive gains. While the dollar is flat, the picture in crude oil depends on where you look, with USO down 6.0% and BNO (a much better measure of global crude oil prices) up 15.7%.

So while it seems as if the safe havens have had a good year, a large part of that picture has changed during the first two weeks of December. Most notably, implied volatility, gold and crude oil have declined sharply in concert with stock prices, with all three acting as ‘negative hedges’ and adding insult to injury for those who were looking to cushion losses instead of exacerbate them.

Of the big five flight-to-safety vehicles, this leaves just U.S. Treasuries and the dollar as having been successful during the first half of December. With rates on the U.S. Treasuries at all-time lows and seemingly everyone waiting to time the Bill Gross short trade better than the bond master himself, this leaves only a currency that is less debased than most of its competition.

So where is the safe haven? Not too many years ago, many thought real estate was the best safe haven.

Right now one interesting short-term play is EUO, the ProShares UltraShort euro ETF, where the ETFs objective is to move -2x the daily direction of the euro.

[source: StockCharts.com]

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

High and Low Volatility ETPs

2011-12-14T09:57:00.001-08:00

Since Barclays/iShares launched the first VIX-based exchange-traded products (ETPs) three years ago next month, the landscape of volatility ETPs has been dominated by products that are based on VIX futures. This should come as no surprise to investors, since the cash VIX (or VIX index quoted on CNBC and elsewhere) cannot be traded directly.

In early May, however, PowerShares elected to go in a different direction and launched the PowerShares S&P 500 Low Volatility Portfolio (SPLV) on one end of the spectrum and the PowerShares S&P 500 High Beta Portfolio (SPHB) at the more volatile end of the spectrum. [I’m guessing that a “High Volatility” moniker didn’t make it very far with either the legal or marketing folks…]

Three weeks after the PowerShares products, Russell Investments peppered the market with a launch of ten different “factor ETFs” which also address investor demand for products with high and low volatility, beta, momentum, etc. over the Russell 2000 and Russell 1000 universe, later followed by three international variants. Since then, several other issuers have entered the market with similar products.

By far the products that have received the most attention from investors have been the low volatility ETPs, with SPLV leading the pack with a market share of around 80%.

So far these volatility/beta ETPs have attracted approximately $800 million in assets, about 1/3 of the amount that is invested in VIX-based ETPs.

While the low volatility products have performed quite well since their launch and I understand the visceral desire to hold low volatility products in a high volatility world, as I see it, holding low beta stocks (SPLV top holdings) is just another way at market timing and not necessarily better over the long haul than diversifying with bonds or even more cash.

Going forward, I will spend some time analyzing the performance of SPLV, SPHB and some other ETPs in the volatility/beta group. In the meantime, give some thought to the possibility that even though utilities (XLU) have been superb performers in 2011, these are not necessarily the best long-term investments for most of us.

Disclosure(s): none

December Is the Cruelest Month…For the VIX

2011-12-13T10:06:00.001-08:00

It seems well-nigh impossible for a December to pass without some sort of movements in the CBOE Market Volatility Index (the formal name of the VIX, for those who may have a short memory) that leave investors scratching their heads. In light of this, it appears I will be responsible for at least one December post reminding investors about the idiosyncrasies of implied volatility and the VIX during the holiday season.

There are a number of ways to look at the typical holiday swoon in the VIX, which I have labeled (the holiday effect or calendar reversion) for easy tagging and backtracking. From a strict fundamental perspective, the biggest change during the December/January holidays is fewer trading days, which means a shorter runway for stocks to depart for some unusual destinations. The other big factor is one of seasonality, specifically the tendency for December to be a bullish month for stocks.

I have chronicled how these factors influence the VIX and the strange prints they sometimes leave on the charts in posts from previous years (see links below.)

This year I am offering a chart which shows that in any given year, there is about a 40% chance that the VIX will make its annual low in December and as I discussed last year in VIX and the Week Before Christmas, the bottom usually comes in the last half of the month and most often just before Christmas.

In three trading sessions the VIX is already more than 20% off of its 30.91 close from last Thursday. It seems rather far-fetched to think that the VIX will plummet all the way below the current 2011 low reading of 14.27 from April 28^th of this year (a date that is provisionally included in the chart below,) but stranger things have happened.

Even if you think the European sovereign debt crisis will see several more eruptions before the end of the year, don’t be surprised if the VIX is sleeping with the fishes for the next week or two.

Disclosure(s): none

[source: CBOE, Yahoo]

The Low Fear Selloff

2011-12-12T09:57:00.001-08:00

Steven Place of Investing with Options has a video post up this morning, Options Market Does Not Care About Selloff, in which he discusses how the implied volatility in various asset class volatility indices (VIX, GVZ, EVZ) are showing a very muted reaction to today’s selloff in stocks.

As noted here previously, the VIX generally moves about -4x in percentage terms the direction of the SPX. Mondays generally see a slightly larger move in the VIX relative to the SPX (usually an incremental 0.5% - 1.0% increase over Friday’s close) due to calendar reversion or the weekend effect, so today one would expect to see the VIX moving at least 4x in the opposite direction of the SPX.

In fact, as I type this the SPX is down about 1.9% on the day and the VIX is up only 3.9% -- so the VIX is about half as sensitive to changes in the SPX that is typical for a Monday trading session.

This is not to say that investors are oblivious to the risk that remain in Europe (and elsewhere) or that today’s move is just a head fake by stocks, but it does mean that the consensus expectations for immediate downside risk are quite low.

Santa may pay a visit after all, assuming he manages to survive all the austerity measures that I am certain his government has saddled him with…

Disclosure(s): none

Aggregate View of U.S. Data vs. Expectations

2011-12-10T18:13:00.001-08:00

Yesterday I posed and (to some extent) answered the question, How Good Has the U.S. Data Been Lately?

Today I have aggregated the performance relative to expectations across five groups of economic activity (manufacturing/general, housing/construction, employment, consumer and prices/inflation) and present those data and the S&P 500 index for the past two years.

As the graphic below shows, both the data and the SPX has retraced about half of the decline since the late April (stocks) to early May (economic data) peaks.

Looking at the chart, one could certainly make the case that data underperformed stocks from April to September, but has been outperforming stocks for the last 2 ½ months.

While conventional wisdom says that stocks lead economic fundamentals for 6-9 months, this graphic does not support that idea. Instead, it will be interesting to see which of the two assumes a leading role now that at least some of the European angst appears to be in the rear view mirror.

[Readers who are interested in more information on the component data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).]

Disclosure(s): none

[sources: various]

How Good Has the U.S. Data Been Lately?

2011-12-09T10:35:00.001-08:00

At some point investors are going to have to change their watches back from Central European Time to Eastern Time (or Central Time if you are an options trader) and pay more attention to what is going on inside the borders of that sometimes overlooked nation just south of Canada.

Whenever that time comes, the first question on the agenda on the minds of most investors will be whether the relatively robust economic performance (at least by current global standards) will be able to continue. Earlier this week, in Global Manufacturing Recession or Noise? EconomPic raised the question of whether the U.S. and a handful of emerging market economies would be able to lift the global economy up or whether Europe and the Pacific Rim nations would end up dragging down those few economies that are currently thriving.

I do not have an answer to that question at this point in time, but I do believe the answers are most likely to come out of U.S. economic performance relative to expectations, which I have been tracking in some detail for the past two years. The graphic below shows how the United States has been faring relative to expectations in five groups (manufacturing/general, housing/construction, employment, consumer and prices/inflation) since the beginning of 2010.

The graphic below shows a definite upturn in positive surprises across all categories during the past 2-4 months. Should these trends continue, it bodes well for global activity and for stock prices as well – especially if the European disaster discount can be marked down.

Readers who are interested in more information on the details of the economic data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).

Disclosure(s): none

[sources: various]

Taking Profits in VIX Options (and ETPs)

2011-12-09T08:59:00.001-08:00

Two hours into today’s session, the trading idea I mentioned yesterday, going long VIX puts, is doing quite well. The VIX Dec 27.50s are up more than 50% and the Dec 30s puts have advanced about 45%.

One question that I believe is much trickier with VIX options than options for most other securities is when and how to take profits. A large reason why taking profits in VIX options has an extra layer of complexity and difficulty is due to the mean reversion tendencies of volatility in general and the VIX in particular.

Another potential complicating factor regarding the management of VIX options positions has to do with their underlying. I hope that by now readers of this blog have had it drummed into their head that the VIX futures are the best proxy for the underlying in VIX options, not the cash VIX or VIX index, which is the VIX that is most often quoted in the media. Anyone holding positions in VIX options – and VIX ETPs for that matter – should be monitoring the VIX futures.

Looking at the changes in the first two hours of trading, one can see the typical pattern in which the front month (December) VIX futures (-6.3%) are moving about 80% as much as the cash VIX (-7.9%), with the second month (January) futures (-4.4%) moving about 56% of the cash VIX. This is right in line with historical norms. For an additional data point, VXX, which is a blend of front month and second month VIX futures, is down about 4.7%, which makes sense in that hold a disproportionate amount of front month futures at this point in the options expiration cycle.

So what does this all mean for taking profits in VIX options?

First, I cannot overstate how important it is to watch the VIX futures and understand how they move in relation to the cash VIX.

Second, because the VIX has a tendency to mean revert and thus often reverse recent sharp moves in either direction, it is important to take at least partial profits when one is the beneficiary of a significant favorable move in volatility. I like to take profits in 25% or 50% of my position, for instance, if my VIX options appreciate by 50%.

Third, keep in mind that the long VIX puts mentioned above are still out of the money and have no intrinsic value. As a result, they are subject to significant time decay (theta) each day and therefore will lose value if there are no additional favorable moves in volatility.

The bottom line is that harvesting VIX profits can be a challenging task and should be thought of as part art and part science. One only has to look at the many steeple-shaped VIX spikes to appreciate just how fleeting large profit opportunities in VIX options can be.

Besides, who knows what the next rumor out of Europe will be and how much the masses will panic or unpanic.

[source: LivevolPro.com]

Disclosure(s): short VXX at time of writing; Livevol is an advertiser on VIX and More

VIX Puts Looking Attractive

2011-12-08T12:06:00.001-08:00

A lot can happen to the financial markets in the course of the next day or so and by my unofficial reckoning, quite a few of those are not just scary, but could have a 2008 flavor to them.

With the VIX at 30.60, implied volatility certainly is high, but not as high as it has been in recent months. This sounds like it may be a good time to buy some VIX calls, but I have a contrarian thought. VIX puts are relatively overlooked right now. The ask for the VIX Dec 27.50s is 1.00 and for the Dec 30s it is 2.30. Should we see a post-summit volatility crush, then even with some of those bearish scenarios, it is possible that the VIX will be declining as the anxiety over event volatility is behind us.

I like to say that the best time to buy VIX calls as portfolio protection is when the VIX is cheap, not when you think you need it. The corollary to this is that a good time to buy VIX puts is when everyone else is snapping up the calls at inflated prices.

Keep in mind that VIX options have their own options cycle. This month they expire on Wednesday the 21^st and the last time they can be traded is on Tuesday the 20^th.

[source: LivevolPro.com]

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

VIX Under 30 Five Days in a Row?

2011-12-06T10:37:00.001-08:00

The day is still young and the rumor mill has been eerily quiet so far, but I think it is worth noting that the VIX appears ready to make it five consecutive days (green box) without breaching the psychologically significant 30.00 level (dotted black line) for the first time since July.

For those keeping score at home – or in the office – it has now been two months (as of yesterday) since the VIX has moved above the 40.00 level.

The chart below shows the path of the VIX so far in 2011, which somewhat resembles either Nessie or a cobra that has reared up and is poised to strike. Call it a Rorschach amphibian, if you will.

I have also added a 10-day rate of change study below the main chart to emphasize that while the absolute level of the VIX is important, the recent rate of change can sometimes be a better gauge of evolving market sentiment.

Given all the uncertainty surrounding a group of 17 diverse actors with very different motivations arising from divergent national agendas, economic interests and domestic political situations, it is reasonable to expect the VIX and other measures of uncertainty to climb going into the end-of-week summit. With four hours in the books, today’s action in the SPX is the tightest single-day range in five months ago. When will the next sabot fall?

[source: StockCharts.com]

Disclosure(s): none

Major Changes to the VIX and More Newsletter and to EVALS

2011-12-04T16:58:00.001-08:00

Just a quick update to let readers know that there have been some substantial changes recently to the VIX and More subscriber newsletter and to VIX and More: EVALS.

Back in July I moved the publication of the VIX and More newsletter from Sundays to Wednesdays, due to subscriber feedback. At the time I also dramatically changed the focus of the newsletter content, again based on subscriber feedback, placing an increased emphasis on the analysis of VIX ETPs and ideas about how to trade them.

Two weeks ago I also completely overhauled EVALS so that it now focuses almost exclusively as a model portfolio for VIX ETPs.

Rather than go into the details of these changes in this space, those who are interested in more information are encouraged to check out:

A large part of the reason for these changes is to link the newsletter and EVALS more tightly and also have EVALS complement and extend the analysis found in the newsletter.

Thanks to all those who have provided feedback along the way to enhance the value of these two services.

Disclosure(s): none

VIX Reflecting Skepticism About Rally

2011-11-30T09:58:00.001-08:00

With the S&P 500 index up 3.4% as I type this and the VIX down 7.8%, it is clear that there is a fairly substantial disconnect at the moment between those who are buying stocks and those who are trading options on the SPX. The picture is even more dramatic if you look at the upward trend in both the SPX and the VIX since the open. The graphic below is not ideal for deciphering the relative movements, but the unusually high correlation between stocks and implied volatility is unmistakable when looking at today’s intraday price action.

With the VIX typically moving about 4x as rapidly in the opposite direction of the SPX under ‘normal’ market conditions, it appears as if many investors are skeptical about stocks continuing to rally in the face of ongoing uncertainty about the Europe-driven news cycle. Following an initial pop, the euro is selling off and after it dropped into the 27s, the VIX now looks content to remain above 28 for the balance of the day, the bullish action in stocks notwithstanding. One simple explanation: investors are snapping up options, including put protection, at what look like bargain basement prices.

[source: FreeStockCharts.com]

Disclosure(s): none

Slicing and Dicing All 31 Flavors of the VIX ETPs

2011-11-21T21:55:00.001-08:00

Ten months have passed since the last time I attempted to graphically depict all the VIX-based exchange-traded products. At that time there were 16 such securities; now that number has swelled to 31 and two have closed their doors (IVO and VZZ) along the way.

The graphic below attempts to map the herd onto an x-axis for target duration and a y-axis for leverage. In addition to these important criteria, I have also further delineated the group by identifying the four ProShares ETFs in black (the balance are all ETNs), highlighting the five optionable ETPs with a red O preceding their ticker and flagging the two VIX ETPs that have some non-VIX components (in the form of the S&P 500 index) with a black triangle. For good measure I have identified the issuer with a parenthetical one letter abbreviation (Barclays,VelocityShares, ProShares and UBS).

It is worth noting that earlier in the month S&P and VelocityShares announced several new VIX futures strategy indices that hint at future VIX ETPs, all of which will include both a long leg and a short (inverse) leg.

The VIX ETP space is already an exciting one, with over $2.1 billion in assets and daily volume of over 45 million shares per day. As exciting as 2011 has been in this space, things look to be heating up even more in 2012.

Disclosure(s): none

Interview at OptionPundit

2011-11-18T11:27:00.001-08:00

Earlier this week, OptionPundit published the transcript of a recent interview: Bill Luby Talks to OptionPundit.

The interview touches on a wide range of subject, but with an emphasis on the VIX and VIX-based ETPs, such as VXX, VXZ, XVIX. As always, VIX futures and the VIX futures term structure are a critical part of this discussion.

Disclosure(s): long VXZ and short VXX at time of writing

VIX Futures: A Tale of Two Backwardations

2011-11-04T12:59:00.001-07:00

After yesterday’s New VIX Backwardation Record post, I thought it might be interesting to compare the VIX futures term structure during the past three months to that of the prior record, which spanned September to December 2008.

The mechanics for graphing VIX futures over time are fairly complicated, as not only do values change daily, but on any day there can be up to ten futures contracts traded, with the front seven months generally being the only actively traded contracts. Of course, the futures roll every month, so the result is a rolling and scrolling array of data. My efforts at oversimplifying this problem for the purposes of comparing the record 2011 backwardation data and the prior record data from 2008 resulted in the graphic below, which shows the average front month, second month, etc. values for the VIX futures all the way out to the seventh month. Note the relatively mild in backwardation in 2011 compared to the steep backwardation in 2008. In fact, the 2011 curve is essentially flat from the third month through the seventh month, while the 2008 curve slopes down throughout the entire term structure.

Clearly some of the differences between the shape of the term structure in 2011 vs. 2008 can be attributed to the absolute level of the VIX and the fact that mean reversion expectations were therefore much higher in 2008 than during the past few months.

Students of the VIX may find it interesting that the front two months of the VIX futures briefly reverted to contango in the middle of December of 2008, while both the VIX and the front month VIX futures were still above the 55.00 level.

As it turns out, the VIX futures during late 2008 greatly overestimated the level of the VIX during the first half of 2009. It will be interesting to see if the same can be said for the first half of 2012.

[sources: CBOE Futures Exchange, Interactive Brokers]

Disclosure(s): short VIX at time of writing

New VIX Backwardation Record

2011-11-03T23:06:00.001-07:00

This week marks the first time that the front two months of the VIX futures term structure have been in backwardation each day for more than three consecutive months. In fact, the current streak of 68 days eclipses the old record of 63 days that dates to the 2008 financial crisis.

While the backwardation streak is intact for the front two months, when looking at the full VIX futures term structure, the futures curve has reverted to contango five times over the course of the past three weeks. The primary reason that the front two months have remained in backwardation in defiance of the rest of the VIX futures term structure has to do with something I call the “holiday effect” or “calendar reversion.” Essentially, what happened a little over two weeks ago was that the roll from the October front month to the November front month VIX futures, as well as from the November second month to the December second month VIX futures has added some incremental holiday effect backwardation to the front two months. This is due to the fact that the second month VIX futures have an expiration of December 21^st, and these are artificially depressed due to the historically low volatility associated with the holiday season. The impact is being felt by all the short-term VIX futures ETPs that are buying second month (December) VIX futures at artificially depressed levels and selling front month (November) VIX futures as part of the daily rebalancing process.

The graphic below shows the 1.70 point differential between the front month and second month VIX futures. Note that it is not until February 2012 that the term structure starts to flatten out, as investors begin to converge on the idea that the VIX is likely to hug the 30 level for the better part of the first half of next year.

[source: Interactive Brokers]

Disclosure(s): short VIX at time of writing

Shrinking VIX Macro Cycles

2011-10-31T11:36:00.001-07:00

Staring at the VIX from the 30,000 foot level, it looks much different than it does from the trenches of daily trading. In the monthly chart below, one can see that from 1990 through 2008, the VIX moved in fairly regular ‘VIX macro cycles’ of 2-4 years in duration, with relatively gentle trends and transition points.

Seen in terms of monthly bars, the financial crisis of 2008 changed the nature of those VIX cycles, with the result that in the last three years the VIX cycles have been short and steep. Unlike the VIX movements through 2008, the more recent VIX movements seem to defy a traditional directional label, so for now at least I have attached a provisional label of “volatility chop” to characterize the VIX movements since the April 2010 low of VIX 15.23. Note that this low coincides with the euro zone approval of $40 billion in bailout funds to Greece. In many respects, the volatility of the last 1 ½ years can be seen as a slow escalation of the European sovereign debt crisis and the evolution of investor opinion regarding the magnitude of the risk and the ability of the euro zone to get ahead of the problem.

Volatility has indeed been qualitatively different since the 2008 financial crisis. You can see the differences on a daily, weekly and monthly basis. Even more interesting for the academician and perhaps problematic for the trader is that distinguishing between volatility regimes is more difficult now that it was for the first decade and a half of the life of the VIX – at least from 30,000 feet.

Chart of the Week: VIX Macro Cycles and a New Floor in the VIX (9/27/09)
The New VIX Macro Cycle Picture (4/23/09)
Recent Volatility and VIX Macro Cycles (10/30/08)
VIX Macro Cycle Update (3/19/08)
Was 2007 the Beginning of a New Era in Volatility? (12/24/07)
VIX Macro Cycles (9/10/07)

Disclosure(s): none

[sources: Stockcharts.com]

Recent Thoughts on the VIX

2011-10-31T10:36:00.001-07:00

The VIX and More blog has been quiet for a while as I enjoyed some vacation time and family time. Of course it always seems that when I take some time off the VIX decides to do something extreme and this time around it was no exception.

While I am about to return to writing regularly in this space going forward, I did want to remind readers that no matter how active the blog is, I am always sharing my thoughts on the VIX and volatility on a weekly basis in the VIX and More subscriber newsletter (which is available with a 14-day free trial) and also in more in-depth feature articles in Expiring Monthly: The Option Traders Journal. Back in July I made some changes to the newsletter to place more emphasis on the VIX exchange-traded products and using the VIX futures term structure to enhance trading strategies.

Expiring Monthly continues to be where I publish my extended thinking on volatility. Last week we published the October edition of the magazine and in it was my latest, Investing Implications of the VIX Term Structure. This article actually built on one of my pieces from the September issue of Expiring Monthly: Trading the Expanding VIX Products Space.

Since I last recapped the Expiring Monthly content in May, I have also authored the following articles for the magazine:

VIX Convexity (June)
Crises, Event Theta and Risk Assessment (July)
Volatility During Crises (cover article for August)
A History of VIX Futures Roll Yields (September)

There was a time that I felt that if I did not offer my thoughts on the VIX, the subject would probably be ignored. Now I am delighted to say that there are a number of others who have taken up the cause to provide regular analysis and commentary on the volatility space. Going forward, this gives me more freedom to touch on a wider variety of issues across the investment landscape, but rest assured, the VIX and volatility will always be at the core of my thinking.

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Front Two Months of VIX Futures Slip Back Into Contango

2011-09-16T10:08:00.000-07:00

For the first time since the end of July the front two months of the VIX futures are in contango, after spending 1 1/2 months in backwardation.

While the degree of contango is very slight at the moment, this means that the short-term inverse VIX futures ETPs (e.g., XIV) are now benefiting from negative roll yield, while the short-term long VIX futures ETPs (VXX, TVIX, etc.) are no longer receiving the benefit of positive roll yield from backwardation and now face a slight headwind.

Economic Data Not Supporting Gloom and Doom Forecasts – At Least for Now

2011-08-30T12:55:00.001-07:00

For over a year I have been examining how economic data in the United States has been faring relative to expectations and have been posting graphics that show the trends in five groups (manufacturing/general, housing/construction, employment, consumer and prices/inflation) in order to get a better sense of which pockets in the economy have been exceeding expectations and which have been lagging. [For the detailed graphics see links 2-8 below.]

The last time around (Economic Data vs. Expectations and Stock Prices, June 2, 2011) I elected to switch to a graphic which aggregated the data across all five categories in order to drive home the main point, which was that the economic reports were consistently missing expectations, sometimes by a wide margin, even though stock prices seemed to be largely treading water. Stocks held on for another few weeks, but ultimately they began to act like the data – as if they had an anchor tied to their ankle.

Today’s consumer confidence data was another big miss, but the trend for the last two weeks has been one of data that is slightly better than expected. At the very least there are some signs that the deluge of bearish data which began in early May ran its course during the third week in August. Whether this is just a pause before the August swoon begins to show its impact in next month’s data remains to be seen, but for now at least the data show slowing growth. Call it partly cloudy and a chance of gloom.

Finally, I cannot help but wonder aloud once again about the old dictum that the stock market looks not at the current economic environment, but at what conditions are expected to be in about 6-9 months. In the chart below it appears that for the better part of the past year, stocks have been more of a simultaneous reflection of current data than a predictor of what may lie down the road.

Readers who are interested in more information on the details of the economic data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).

Related posts:

Disclosure(s): none

[sources: various]

Echo Volatility and Another VIX Double Top

2011-08-18T23:50:00.000-07:00

Back in 2007, I wrote extensively about the phenomenon I dubbed echo volatility, in which large VIX spikes are frequently accompanied by a second spike of similar size in the month or so following the initial spike. Following the twin VIX spikes over 80 in 2008, I reprised this them in a post I titled The Significance of Double Tops in the VIX.

Lo and behold, here we are in another volatility storm and we have what looks like it was a VIX top of 48.00 on August 8^th followed by a spike to 45.28 today – a nine day span between VIX spikes.
Of prior instances of VIX double tops, certainly the most dramatic comes from 2008, when the VIX hit an all-time high of 89.53, pulled back more than 45 points, then spiked all the way back up to 81.48 some 20 trading days later. The timing of these VIX spikes was eerily reminiscent of the 1998 Long-Term Capital Management fiasco, when the VIX hit 48.06 on September 11^th, then exactly 20 days later hit a crisis high of 49.53.

In addition to those 20-day periods between VIX spikes, there is also precedent for a 9-day twin top going back to 2002, coinciding with the WorldCom bankruptcy filing. Here we saw a top of 48.46 on July 24^th and a secondary spike to 45.21 nine days later.

In sum, of the top seven highest VIX spikes recorded to date, four of these have seen two separate spikes in which the VIX exceeded 45, with those spikes falling from 9 to 20 days apart.

Clearly there are fundamental factors that can trigger another VIX spike above the 45 level before the current volatility storm has passed, but if history is any guide, two is likely to be the lucky number.

Related posts:

[graphic: StockCharts.com]

Disclosure(s): short VIX at time of writing

The Convergence of VIX and VIX Futures at Expiration

2011-08-12T11:46:00.001-07:00

VIX futures and options expire 30 days prior to the expiration of options in the S&P 500 index for the following month. With the September SPX options expiration set for September 16^th, this means that August VIX options will expire on next Wednesday, August 17^th.

Students of the VIX (and there seem to be many when the VIX spikes over 40) should all know that over the course of their life, VIX options are not priced off of the VIX index. Instead, the best approximations for the appropriate underlying for VIX options are the corresponding VIX futures. The one caveat is that at expiration, the VIX index and VIX futures must converge on a single price for the VIX. This price convergence in the VIX and VIX front month futures is always interesting to watch, but particularly so in high volatility environments.

The mechanics of the VIX settlement process are non-trivial, but suffice it to say that they settle with a Special Opening Quotation (SOQ) at Wednesday’s open, based upon opening trades (as well as the midpoint between the bid and ask) in SPX options. As a result, the last opportunity to trade VIX August futures and options is the session before the SOQ, at Tuesday’s close.

With two full trading days plus 1 ½ hours of today’s session left, there is a substantial discrepancy between the VIX and the VIX futures. As I type this, the VIX is at 36.40 and the August VIX futures are at 34.50. Somehow that gap needs to be closed in the next two days. Right now the market’s best guess is that the VIX will fall 1.90 points by Wednesday’s SOQ, but of course the final settlement could be between the two current values and quite possible above 36.40 or below 34.50. If you are trading any of these instruments, you should be aware of the price gap and the path of the convergence. You might also use this opportunity to brush up on the little-known near-term month VIX index (VIN) by checking out VIN, VIF and an Obsolete VIX.

Related posts:

Disclosure(s): Short VIX at time of writing

VIX Suggests Investors Don’t Believe Rally Is Sustainable

2011-08-11T12:23:00.001-07:00

Back in 2007 and 2008 I had a shipload of posts talking about the SPX:VIX correlation, its implications for stocks and the like. I even came up with a plot that I called a “fearogram” to map how changes in the VIX relative to the SPX compared with historical norms and recently dove into the subject of VIX convexity and the movements of the VIX relative to the SPX in a June 2011 Expiring Monthly article, VIX Convexity.

I mention all this because in the recent downturn the VIX has moved much faster to the upside than the SPX has to the downside, given the historical rule of thumb that for every 1% change in the SPX the VIX moves approximately 4% in the opposite direction. For instance, from August 3 to August 8 the SPX lost 11% over the course of three trading days. During the same period the VIX more than doubled, gaining 105%, considerably more than the 44% or so one would have expected. One could argue that much of the move in the VIX over and above the anticipated 44% gain represented fear and irrationality flooding into the markets.

As I write this the S&P 500 index is up 5.2%. At the same time, the VIX is down about 11.8%, close to half of the anticipated -4x move.

So to recap, the VIX rose more than twice as fast as one would expect and is falling almost half as fast it has over the course of its history. That, in a nutshell, is the fear in the market. Another way of looking at the stubbornly high VIX is that investors do not believe the current rally is likely to be sustained, so options sellers are not marking down options prices with any sense of urgency, estimating that continued high implied volatility will persist.

Related posts:

Disclosure(s): short VIX at time of writing

VIX Backwardation Commentary

2011-08-10T23:41:00.001-07:00

My recent VIX Term Structure Evolution Over Last Ten Days post seemed to draw a fair amount of interest from the Financial Times, Forbes and elsewhere, with some pundits claiming that the move from contango to backwardation in the VIX futures was foreshadowing everything from a “full-fledged bear market” to a “systemically important shock event.”

Just five days later, the VIX seems to have peaked, yet the amount of backwardation in the VIX futures term structure has actually increased. Looking at the front two months of VIX futures (which is where investors in the likes of VXX and XIV should be focusing), I note that the front month (August) is now 7.25 points higher than the second month (September) VIX futures. This positive roll yield means that investors who are short VXX and/or long XIV are losing almost 1% per day due to daily rebalancing (rolling) that involves selling the front month VIX futures and buying the second month contract.

This also means that should the VIX spike higher from current levels, ETNs such as VXX of TVIX and others should see enhanced returns due to an increase in volatility plus favorable term structure and roll yield.

One problem with backwardation is that it tends to be fleeting. Of the 59 instances of backwardation in the front and second month portion of the VIX futures term structure going back to the inception of VIX futures in 2004, 37% lasted only one day and 56% lasted no more than two days, fully 83% of all instances of backwardation had ended within six days and only six backwardation events in seven years have lasted more than the current eight days. Not surprisingly, three of those six periods of extended backwardation were from 2008, two were from 2009 and the last one was from 2007.

To state what I hope is the obvious, detailed knowledge of the workings of the VIX futures term structure is mandatory for anyone who trades VIX ETPs. Not only does one need to know what the implications are of the current term structure, but also to have a sense of how that term structure is likely to evolve over time.

Related posts:

Disclosure(s): long XIV; short VIX, VXX and TVIX at time of writing

VIX Sets Some New Records, Suggesting Volatility Near Peak

2011-08-08T23:50:00.000-07:00

Just a week ago the VIX seemed to be lagging behind the growing investor anxiety about fundamental challenges facing the stock market, but after Thursday’s drop of 4.78% in the S&P 500 index and today’s decline of 6.66%, the doubling of the VIX to 48.00 in one week seems right in line with investor fear. [Those wondering what a VIX of 48 means should consider that the literal translation is a prediction of a 3% or more change in SPX at least once every three days. See Rule of 16 and VIX of 40 for a more detailed discussion.]

As the chart below shows, a VIX of 48 only puts the current crisis at #7 all-time – or at least dating back through VIX data since 1990. On a closing basis, today’s close was actually the highest closing VIX outside of the 2008-2009 financial crisis.

In studying my VIX data set, however, I was surprised to see that today the VIX set a number of new records. For instance, today marks the highest the VIX has ever closed relative to its 10-day, 20-day and 50-day simple moving averages. All three of these facts loom extremely large in terms of predicting future mean reversion behavior. In fact, I publish a proprietary VIX Mean Reversion Index each Wednesday for the benefit of my newsletter subscribers and today marks the first time that index has maxed out at 100.

I also have my own proprietary calculations for VIX fair value. Today my model puts VIX fair value in the mid-37s, which confirms what the VIX Mean Reversion Index is saying.

Of course the VIX is certainly capable of continuing to defy gravity for an extended period going forward, but the odds favor a top in volatility very soon and quite possibly at 48.00. Just in the time it took to create this post the Dow Jones Industrial Average futures have swung several hundred points, so it is unrealistic to expect volatility to come to a screeching halt.

Better yet, fasten your seatbelts tomorrow, but don’t be afraid to short volatility.

Related posts:

Disclosure(s): short VIX at time of writing

VIX Term Structure Evolution Over Last Ten Days

2011-08-05T16:12:00.000-07:00

If you think the last two weeks have turned the investing world upside down, well you have to look no farther than the VIX futures term structure to see just how accurate that view is. Two weeks ago the VIX was in the 17s and the VIX futures term structure was in contango (upward sloping) and today the VIX closed at 32 and the VIX futures term structure is in backwardation. In fact, the current VIX term structure looks a lot like a mirror image of what it was two weeks ago.

In the graphic below, I have detailed the shift in the term structure from July 22^nd to today’s close. During that period, the S&P 500 index has sold off 10.8%, while the VIX has spiked 82.6%. Note that the front month (August) VIX futures have advanced sharply – up 59% during this period – but not as sharply as the VIX. Looking at the back end of the term structure, the March 2012 futures were not traded back on July 22^nd, so the February futures are the most distant futures for which we can compare prices. Their move lagged the VIX and front month futures by a large margin and was almost identical in magnitude to that of the SPX, up 10.7% in those two weeks. One can clearly see from the funnel formed by the two term structure lines that for each month farther out in the term structure, the VIX futures were less responsive to the move in the SPX or the VIX.

In addition to annotating the backwardation and contango in the graphic, I have also circled the December VIX futures and options expiration (December 21^st) in an effort to preempt some questions about why these futures seem unusually low both now and two weeks ago. The simple answer is the preponderance of holidays toward the end of the year, with fewer trading days translating into fewer opportunities for extended moves in volatility. I have discussed this phenomenon many times in the past (see VIX and the Week Before Christmas, for starters) and have named it the “holiday effect” or “calendar reversion.” Also note that December has a history of being relatively bullish for stocks, with low volatility.

Finally, I have fielded quite a few questions about the implications of yesterday’s 35.4% VIX spike. Here some prior research on the Short-Term and Long-Term Implications of the 30% VIX Spike will undoubtedly be of interest to most readers. The quick takeaway is that this event is bullish for stocks and bearish for volatility. I would expect to see more evidence of this fact beginning to kick in on Monday.

Related posts:

[source: Interactive Brokers]

Disclosure(s): short VIX at time of writing

VIX Over 31 and SPX Down 12.5% From Peak as Bottom Nears

2011-08-04T13:29:00.001-07:00

Calling bottoms in the stock market is part art and part science, but with the VIX closing over 31 today (up 35.4% to a close of 31.66) and the S&P 500 index having fallen 12.5% peak to trough from its early May high, the markets are likely nearing a bottom. Given that the SPX closed right at 1200, just above the intraday low, it is unreasonable to expect that a bottom is already in the books, but with today’s plunge, the process of finding a bottom has already begun.

Sure the problems with the European sovereign debt crisis seem to be at least one step ahead of the European Central Bank and there are widespread signs that economic growth is slowing across the globe, but a number of market sentiment indicators and technical factors suggest that the selloff in the past week has been overdone and way too emotional, perhaps with a healthy dose of forced selling in the mix. For some perspective, ask yourself just how bad tomorrow’s jobs number will have to be to prevent at least a relief rally from starting tomorrow.

As the table of SPX pullbacks below illustrates, the current selloff is the second sharpest in terms of magnitude since the bull market began in March 2009. It is now the longest in terms of duration, spanning 66 trading days since the high of SPX 1370.

Those who want to initiate new long positions in this environment may wish to limit risk by using options (long calls, bull call spreads, bull put spreads, etc.), but the time has come for the contrarian in the asbestos suit to start at least nibbling on the long side. Those with a more cautious demeanor may prefer to wait for some better evidence of a technical bottom and perhaps even a confirmation of that bottom, but while buying at current prices may risk being a little early, there is also a good chance that today’s sale prices will not be around for long.

[On a personal note, this blog has been quiet for a while as family matters, a vacation and three new computers have competed for my attention. With volatility back on the front page, I will be posting again on a daily basis (at least) in order to offer my perspective on the current spike in volatility, some of its causes and the implications for trading.]

Disclosure(s): none

Apple Products vs. Platform

2011-06-08T09:24:00.001-07:00

Apple (AAPL) is an unusual stock for several reasons, not the least of which is the strong retail demand for the stock and a large contingent of customer-zealots who regularly worship at the altar of Steve Jobs.

Throw together the factors mentioned above, Apple’s history of important product announcements at major events and the return of Jobs and his unique talent for unveiling new cutting edge products and you get an interesting confluence of events – and expectations – at Monday’s Apple Worldwide Developers Conference.

These conferences are always abuzz with rumors and speculation about the next big thing that Apple is going to announce which will once again change the technology landscape. When is the next iPad coming? What new features will it include? When will the iPhone 5 be out? What will the next iOS and Mac OS operating systems do? What will be the implications for the devices they run? What is the iCloud and what does it mean?

In the end, those hoping for groundbreaking new products were disappointed. The iPad, iPhone, iPod, MacBook, iMac, Mac Pro, AppleTV, etc. were not on stage. Instead, the hardware devotees had to settle for innovations which were confined to operating systems enhancements and the iCloud – stuff you can’t wait in line for at an Apple store, take home and dazzle your friends and family with.

The irony is that the obsession with hardware misses the big point. New products are critical to Apple’s business, but at best it gets them a first mover advantage that is not guaranteed to endure. The truth is that from a strategic perspective the iCloud is much more important to Apple’s future than any new product, because the iCloud is a platform play that enhances the value of the full range of Apple products and services, including future products and services.

Let me illustrate this with a personal example. I have about a quarter of a century of PC-based computer experience. I probably owned two dozen laptops before I bought my first Apple product, an iPhone. When the iPad 2 came out, however, it was easy for me to expand my stable of Apple products. Now that I am habituated to iTunes and the App Store, it is easier for me to contemplate something like the MacBook. With all of these devices seamlessly sharing data in the background on the iCloud, the data argument for expanding my suite of Apple products becomes that much more compelling. It is a similar story for my wife, who only recently began playing with her first Apple product, the iPad. She has been so completely won over that an iPod will soon follow and then I’m betting an iPhone will be too difficult to ignore. By the time she gets around to replacing her laptop, I’m fairly sure the MacBook Air will win her over – even if she doesn’t even know what it is right now.

I suspect that something similar is in the process of happening across the globe. Many of us who have spent the majority of our careers in a PC-centric corporate environment have often found Apple products to be too much of a compatibility issue to be worth the trouble. They have been relegated to toy status rather than serving as our our central computing devices. The iCloud gives Apple a chance to convert those PC cling-ons not only to exciting Apple products and services, but to a iCloud data world that could be a platform revolution. Device-independent data sharing is just around the corner and Microsoft (MSFT), Google (GOOG) and their ilk better have a strong alternative – and soon.

As for AAPL stock, it is down about 3% since Steve Jobs took the stage on Monday. Savvy investors should be thinking more about Brian Arthur’s Increasing Returns and the New World of Business and less about the timing of new product announcements.

[graphic: Bloomberg for iPad]

Disclosure(s): long AAPL at time of writing

Economic Data vs. Expectations and Stock Prices

2011-06-02T11:36:00.001-07:00

For the last year I have been posting charts of the trends in various economic data reports versus consensus expectations. The last time around, in Continued Lackluster Data vs. Expectations, I commented that the April data indicated “manufacturing and employment are no longer providing positive surprises relative to expectations, while data related to the consumer reflect consumer activity that is plodding at best.”

After a several weeks of positive surprises, the trend has been one of consistently missing expectations over the course of the last four weeks. In fact, the four weeks leading up to tomorrow’s employment report is the worst four week stretch relative to expectations since I began tabulating the data in this format at the beginning of 2010.

In order to focus on the big picture trend, this time around I have elected not to break out the data into five groups (manufacturing/general, housing/construction, employment, consumer and prices/inflation) as I have done in the past. Instead, the chart below shows just the aggregate data relative to expectations plotted against the SPX on a weekly basis, going back to the beginning of 2010.

To some extent the chart shows stock prices and data surprises have been highly correlated over the course of the past 1 ½ years, with a very minor lag time, if any. Not surprisingly, the recent data trend has been down sharply. It remains to be seen whether this is a temporary hiccup as the full extent of the Japan disruption is revealed or whether the global economy now has some large structural headwinds. Certainly the recent decoupling of data and stocks is unusual – and may come to a head tomorrow morning.

Readers who are interested in more information on the details of the economic data included in this graphic and the methodology used are encouraged to check out the links below.

Related posts:

Disclosure(s): none

Current SPX Pullback Second Longest Since March 2009 Bull Market Began

2011-06-02T10:07:00.001-07:00

Since the current bull market began back in March 2009, I have periodically been posting a table of the most significant pullbacks in the S&P 500 index. With today’s drop down to the 1305, it has now been one full month (22 trading days) since the SPX peaked at 1370. While the 65 point drop grades out at a pullback of ‘only’ 4.7% (the mean for the 15 pullbacks is 6.5%; the median is 5.6%) it does mark the second longest pullback in terms of peak (May 2^nd) to trough (today, assuming 1305 holds) timing.

While long declines are not necessarily steep ones, the longer this market continues to make new one-month lows and has difficulty climbing back into the 1370 range, the more likely this bull market is turning into a sideways move or preparing to reverse downward.

Right now last summer’s 48-day 17.1% decline looks as if it will not be threatened, but a mean decline of 6.5% will take the SPX down to 1281 and a median decline of 5.6% will drop the SPX down to 1294 – and once the index breaks below 1300, all sorts of new scenarios will begin to come in to play.

I still think we will see some buy-on-the-dip activity begin to kick in – as soon as this afternoon – but stocks do appear to be at some sort of inflection point as we await the details of the nonfarm payrolls data.

Disclosure(s): none

Chart of the Week: XIV Celebrates Six-Month Birthday

2011-05-31T11:45:00.001-07:00

Yesterday marked six months since the launch of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV).

While XIV’s launch was received with little fanfare, I was a huge fan of this ETN right from the start. Less than one week after XIV was launched, I shared my thoughts about XIV in the Bespoke Investment Group’s second annual roundtable. When asked about some of my favorite picks for 2011 and beyond, I predicted:

“2011 will mark the rise of volatility as an asset class. Part of the reason for this rise will be the runaway success of VIX-based ETNs and ETFs, notably the recently launched XIV, which will prove that volatility vehicles can be good buy-and-hold investments.”

During the course of its first six months of trading, XIV has managed to return 82% to anyone who was fortunate enough to buy some of this ETN when it launched. As shown in this week’s chart of the week below, XIV's ride has been a wild one and has included a pullback of about 33% in one month during all the turmoil associated with the Japanese earthquake + tsunami + nuclear meltdown.

Looking ahead, I am going to go out on another limb and say that 82% in six months was not a fluke. Sure XIV is an extremely volatile security that will experience sharp drawdowns on a regular basis, but for the patient investor who is able to steer clear of margin issues, XIV can be an excellent way to spice up one’s portfolio with stunning long-term returns.

That being said, just as shorting VXX is a strategy suited to only a small slice of the investment community, so is XIV not appropriate for everyone, in spite of the upside potential. For those who think they may be up to the task, I highly recommend a comprehensive risk management plan and a review of Managing Risk with a Short VXX Position, as well as some of the other links below.

Related posts:

[graphic: StockCharts.com]

Disclosure(s): short VXX and long XIV at time of writing

Expiring Monthly May 2011 Issue Recap

2011-05-26T23:50:00.000-07:00

A quick reminder that the May edition of Expiring Monthly: The Option Traders Journal was published earlier this week and is available for subscribers to download.

This month’s feature article, Understanding Order Flow, Part One: Reading It, is authored by Mark Sebastian and delves into subjects such as the impact of large trades on implied volatility and skew. Mark will be back with part two of this illuminating feature in the June edition.

Another article that breaks new ground and offers more than a few surprises is Jared Woodard’s Why Black-Scholes Is Better Than We Think, which evaluates how robust the Black-Scholes model is in the context of delta hedging.

One of my favorite parts of the magazine is the interview segment. This month Mark Sebastian interviews TradeKing Chairman and CEO Donald Montanaro. Their conversation traces the history of the discount brokerage industry, the role of options in the discount brokerage world, and the evolution from bricks and mortar to online options trading.

In this month’s issue I am responsible for three articles. The one I enjoyed the most I call Cheating with Partial Hedges, which explores the subject of creating custom portfolio hedges which minimizing cost and risk, while maximizing coverage where it matters most. I also was responsible for the monthly Follow That Trade column. This month I follow a silver and gold pairs trade that combines some bottom-fishing characteristics with a short implied volatility flavor. Last but not least, in the Wolf Against the World column I square off with Mark Wolfinger (whose New Options Trader column is a great resource for those who are new to trading options) to debate the merits of using technical analysis in trading options. My argument relies heavily on the use of TA for position management and exits.

In keeping with tradition, I have reproduced a copy of the Table of Contents for the May issue below for those who may be interested in learning more about the magazine. Thanks to all who have already subscribed. For those who are interested in subscription information and additional details about the magazine, you can find all that and more at (the newly redesigned) http://www.expiringmonthly.com/.
Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

SPX Pullback History, 2009-2011

2011-05-03T11:41:00.001-07:00

Since there has been only one significant pullback in stocks so far in 2011, I am taking the mild selling from the last two days as an excuse to update a table of pullbacks that I have been updating periodically since stocks bottomed back in March 2009.

The table captures some of the details of the fifteen significant (in magnitude and/or duration) pullbacks in the SPX during the last 26 months, with the current pullback – so far at only 1.5% from peak to trough – highlighted in yellow.

Not counting the current 1.5% dip, the mean pullback has been 6.5% from the peak, with the median coming in at 5.6%. Using these numbers, a median pullback would take the SPX down to about 1294 and a mean pullback would drop the index down to a little over 1286.

A pullback that matches the 17.1% drop from April to June 2010, which is the largest during this bull market, would drop the SPX back all the way to 1136.

As you think about the current selling and the recent propensity for buy-on-the-dip investors to keep most pullbacks from becoming too severe, this bit of historical benchmarking should be able to serve as a guideline for evaluating how deep and how long the next pullback might extend.

Disclosure(s): none

Reader Q and A: Straddles and Implied Volatility

2011-04-28T11:43:00.001-07:00

Right before the close last Wednesday I placed an ATM straddle that proved to be profitable and I closed it after the IV spike on Thursday. I shouldn't have come back for more, but I placed another ATM straddle Monday before the close and even with the huge drop in price on Tuesday the IV collapse only allowed me to break even. These were my first two super short term volatility trades and now I now that the free IV data on the CBOE's website is an end of day service... definitely wouldn't have placed that trade on Monday afternoon. Seeing now that I possibly should have been doing the opposite, shorting volatility, do you suggest any strategies that aren't outright short and don't require a big amount of margin to be put up?

Also, what service do you use to view real-time IV for ETFs and such?

Adam C.

Hi Adam,

As a newbie, you should make an important distinction between options trades that have unlimited risk and those that you should characterize as limited risk or defined risk. Shorting 10 SLV July 47 calls theoretically opens you up to unlimited risk because SLV can continue to go up and up. Should this happen, depending upon your cash cushion, eventually your broker will hit you with a margin call and you will be forced to cover at a significant loss.

Take the same basic trade and add a second leg as a hedge and your unlimited risk is now limited. Instead of a naked short, a bear call spread involving 10 short SLV July 47 calls plus 10 long SLV July 50 calls caps your loss at the distance between the two strikes. Here that is 50-47 or three points. Three points times 10 options (with a 100 multiplier) puts your maximum loss at $3000.

Make that trade right now and for 10 contracts you should receive a credit of about $1.20 for that spread, so that means your maximum profit is $1200 and maximum loss is $3000 - $1200 or $1800.

This is a directional bet. For a non-directional bet – meaning that you expect SLV to be at about 47.00 at the time of the July expiration, you should probably focus on condors and butterflies, which are essentially the limited risk version of strangles and straddles. Sometimes you will hear a trader refer to “buying the wings.” What that means is they are converting an unlimited risk strangle or straddle into a limited risk condor or butterfly by buying out-of-the-money legs to hedge their risk, just as was the case with the call spread example above. As a matter of fact, one way to think about an iron condor is that it is just a bear call spread plus a bull put spread. Early on I used a more generic label of vertical credit spread on the blog for these strategies. You should be able to follow any of these links to get more information.

An even better way to get up to speed on these strategies is with some online resources. A good place to start is with the Options Industry Council (OIC), where they have an Options Strategy Index. Click on any strategy diagram for more information. Among the many great resources out there, I can highly recommend the CBOE’s Options Institute, where you might want to start with their tutorials. Keep in mind that the options brokers also do an excellent job of educating their customers on options strategies. Two that put a great deal of effort into education are optionsXpress (Education Center) and thinkorswim (Swim Lessons).

Also, the links below should provide some specific posts that will give you some food for thought regarding your recent SLV (?) trade and some alternative approaches.

In terms of real-time IV, I use Livevol Pro, which provides the graphs that I use on the blog for implied volatility and historical volatility. Your favorite options brokers (thinkorswim, optionsXpress, TradeMONSTER, Options House, Trade King, etc.) should also have good real-time or nearly real-time IV data. If you don't have an account at a broker that specializes in options, I highly recommend you open up one with at least one of the brokers mentioned above so you can get your data and place your trades on the same platform.

Related posts:

Disclosure(s): Short SLV at time of writing; Livevol, CBOE, optionsXpress, TradeMONSTER, Options House and Trade King are advertisers on VIX and More

Silver Implied Volatility Rises Over 50

2011-04-28T10:28:00.001-07:00

Yesterday, in the awkwardly titled Is Volatility a Better Play for Silver than Direction? I noted that silver implied volatility had managed to push to heretofore unseen heights and argued that future projections based on SLV options prices had led to a high probability short volatility setup.

Of course, no sooner had I posted than SLV began to climb rapidly in price, bringing implied volatility along for the ride. The pattern has continued for the first half of today’s trading session, with silver futures above $49/oz. and the SLV ETF pushing above 48.

The chart below, from Livevol.com, shows the intraday price and implied volatility (red line shows implied volatility for May options) action in SLV for the past five trading sessions. Note that for the most part, silver implied volatility has had a strong positive correlation with the price of the underlying ETF. This is largely because silver is making new highs and traders see the potential for a big move should silver futures break out above $50/oz.

In terms of trading, I still like the idea of a short volatility play on silver and am currently actively managing several positions with both a volatility and directional component.

For directional traders, the lure of huge momentum play is often too much to resist. For options traders, who are essentially trading volatility more than anything else when all is said and done, playing volatility Whac-A-Mole can be similarly enticing. If you jump on this trade, just make sure you are the one doing the whacking…

Related posts:

[graphic: Livevol Pro]

Disclosure(s): Short SLV at time of writing; Livevol is an advertiser on VIX and More

Is Volatility a Better Play for Silver than Direction?

2011-04-27T09:09:00.000-07:00

It seems as if everyone in the world has an opinion about silver. Is it a bubble? Has it topped? Is it just consolidating before it goes to triple digits?

I have been trading silver directionally with a trend-following approach for many months, but recently exited all my long positions when I came to the decision that a top was imminent.

Still, silver looks way too attractive for me to sit on the sidelines, so now I am trading silver volatility instead of a directional play. The chart below from Livevol.com neatly illustrates my rationale.

Looking at the silver ETF, SLV, for the past six months, one cannot help but observe the ever-widening gap between implied volatility and historical volatility that has developed during the latter half of March. While it is certainly understandable that there is a great deal of uncertainty about the price of silver going forward, given the extreme recent volatility, I find it hard to believe that traders are betting silver will be about twice as volatile in the next month as it has been over the course of the last month.

For me this is a classic short volatility setup, with straddles, strangles, butterflies and condors looking to be pricing in an excessive amount of volatility. One need not necessarily structure those short volatility trades with the current price of SLV (about 44.18) at the midpoint of the spread. If one thinks silver has topped, why not sell a straddle at 43 or a strangle with a 40-45 spread? For now my focus is primarily a non-directional short volatility play, but one can also make a good case for a short volatility trade with a small directional twist, at least as I see it.

Of course, silver always presents some interesting pairs trading possibilities, typically with gold, but given the recent positive correlation between silver and stocks, an interesting approach is to look at short silver trades as a hedge for long equity positions.

Related posts:

[graphic: Livevol Pro]

Disclosure(s): neutral position in SLV via options at time of writing; Livevol is an advertiser on VIX and More

A Trio of Niche iPad Financial Markets Apps

2011-04-26T12:18:00.001-07:00

In my ongoing review of financial markets apps for iPad, there are several which defy easy categorization or appear to be the only entrants in their respective categories. Today I look at three such apps:

All three apps offer very different content that is aimed at users who focus on a specific niche of the investing world.

In the case of ETFdb, the focus is on ETFs and the app carries over much of the content from the popular ETFdb.com web site. The app has two main pieces of functionality: an ETF screener and ETFdb news articles. The screener is somewhat basic and the articles appear in chronological order, what it makes it difficult to keep track of specific sectors or asset classes in real-time. Still, when one drills down from the screening tool, some excellent ETF (and ETN) content is unveiled. The profile pages (see graphic below) include eight separate tabs that are filled with information, including data on holdings, fund performance, charts, technical analysis details, related news, and a link to the issuer home page, where one can generally find a prospectus, dividend information and other details. In short, ETFdb is an excellent tool for researching individual ETFs, though its screening and news functionality could use some enhancements.

The CBOE app covers a different slice or slices of the investment world. It includes general market data (indices, most active stocks, most active options, etc.), quotes, news and a watchlist function where users can pull up options chains and access data and charts for every option associated with a particular underlying. The CBOE app also has some high quality educational content from the Options Institute. Here one can learn the basics of options strategies, take an online course or review a variety of additional educational materials from the CBOE’s educational arm. CBOE TV content is also available on the app. These include videos on breaking news and timely subjects as well as more general background material. Last but not least, the CBOE app has a link to the CBOE twitter feed, which highlights significant options transactions, breaking news and new content on the CBOE web site. For those who are interested in options and particularly options education, the CBOE iPad app should be a high priority.

I found WolframAlpha to be the most interesting and difficult to describe of the three apps. This is partly because it had been awhile since I visited the WolframAlpha web site, but also because the app is such a superb fit for the iPad form factor and display. A self-styled “computational knowledge engine,” think of WolframAlpha as Wikipedia on steroids (lots of them), tied to a world class mathematical brain that effortlessly conveys the nuances of complex subjects with the help of an extremely deft use of statistics and graphics. Yes, it is an elegant nerd. Type in “VIX’ at the web site or in the iPad and you can quickly see what VIX is all about. Try “iron condor option” and you can quickly visualize and internalize much of what that strategy is all about. Tickers work too, though not all of them. Enter “GOOG” and the app (or web site) will pull some interesting stock data and graphics for Google. Unfortunately, there is no such luck with “VXX” and the rest of the VIX exchange-traded products. Unlike the other apps review above and in previous posts, the iPad version of WolframAlpha is not free, but for $1.99 I have little doubt that users will find a way to get their money’s worth out of this application.

In sum, these are three apps that cover a specific aspect of the investment universe and do so in an attractive manner. Investors interested in ETFs, options or computational data and graphics are encouraged to take each of these three apps for a test drive.

Related posts:

[graphic: ETF db]

Disclosure(s): short VXX at time of writing; the CBOE is an advertiser on VIX and More

Chart of the Week: VXV at Critical Juncture

2011-04-25T11:06:00.001-07:00

It seems almost like heresy to consider something other than silver or the VIX as a candidate for the Stock of the Week, but since there have been so many posts and charts about both subjects, I thought I might offer a slightly different twist.

Yes, it is time for me to trumpet the importance of VXV once again. For those who may have forgotten, VXV’s formal name is the CBOE S&P 500 3-Month Volatility Index. The CBOE describes the index in detail here, but the key takeaway is that VXV is essentially a 93-day version of the 30-day VIX. In other words, whereas VIX looks out at just one month of potential volatility and disruptions to the financial markets, VXV has a time horizon of one quarter. This means, among other things, that while both capture the essence of the Q1 earnings reporting season, VXV includes three FOMC meetings and three nonfarm payroll reports, among other things. And whereas there may be no significant developments regarding Greek debt restructuring, it is unlikely that this issue will not be addressed in the next three months.

For these and other reasons, I have always felt that VXV provided a better reflection of long-term and structural/systemic volatility than the VIX, which is better suited to measuring short-term event volatility.

Looking at a weekly chart of VXV since its October 2007 launch, one cannot help but notice a pattern of historical support in the 17.50 – 18.00 zone. Friday’s close took VXV down to 18.35. A couple of closes below could signal not just a change in structural volatility and longer-term risk, but also the arrival of a new volatility regime.

Related posts:

Take a Longer View on Volatility (Barron’s)
Chart of the Week: VXV and Systemic Failure
The VXV and Extreme Structural Volatility Risk
The VIX, VXV and Volatility Expectations
How to Create Your Own Portable VXV
The VIX:VXV Ratio
XXV and the New VIX ETN Landscape (includes a graphic that puts VXV in the context of the full VIX product space)
A Conceptual Framework for Volatility Events

Disclosure(s): neutral position in VIX via options at time of writing

[graphic: StockCharts.com]

Spotlight on the VIX and Bollinger Bands

2011-04-25T10:00:00.001-07:00

As we sit in the pre-FOMC doldrums contemplating how Ben Bernanke will handle his historic post-meeting press conference and wondering whether we can properly label the next VIX move to 17 or 18 a ‘spike,’ this seems like a good time to review some of the elements of VIX spikes and other measures of VIX extremes.

Better yet, point your browser to the My Simple Quant blog and more specifically to a post from last Thursday, More on VIX and Bollinger Bands, in which the resident author Chris has presented the results of his analysis of what happens to the VIX and SPY in the week following those instance in which the VIX closes below its lower Bollinger band two days in a row.

A couple of comments are in order on the analysis at My Simple Quant. First, the results should not surprise long-time readers here, but for those who are prone to not click through, there is always something to be learned in the details. I have discussed at some length how one can use simple and exponential averages, moving average envelopes, Bollinger bands and other similar mechanisms to measure how far the VIX has strayed from various assessments of a historical range.

An important point to consider – and one not stressed by My Simple Quant – is that the VIX is generally a better market timing mechanism when it spikes up than when it prints extreme lows. Perhaps a better way of thinking of this phenomenon is that while an extremely high VIX can rarely cause investors to rethink where an appropriate range should be for volatility, an extremely low VIX can sometimes be a self-reinforcing mechanism and signal a move to a new lower volatility regime.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing

iPad Financial Markets Apps from FOX, Thomson Reuters and NASDAQ OMX

2011-04-21T10:40:00.001-07:00

In reviewing broad-based financial markets news and data apps for iPad, I began with the free apps, which include the high quality CNBC Real-Time for the iPad and runner up, Bloomberg for iPad – both of which I reviewed earlier this month.

A second tier (perhaps too harsh of a characterization) of free apps in the same broad-based financial markets space that I experimented with include one app from FOX, two from Thomson Reuters and a more specialized app from the NASDAQ OMX.

My favorite of these near misses is FOX Business for iPad, which is similar to the CNBC and Bloomberg apps in that its focus is on news, video content and market data. The site is attractively organized, has a large amount of up-to-date video content, includes a portfolio tracker function and a FOX Business Minute button which enables users to quickly scan the day’s headlines and link to related video. In sum, the feature-filled FOX app is a strong competitor to CNBC and Bloomberg and will probably be preferred by some to its two main competitors. In the end I am counting it as a near miss because of some content organization and graphics issues. I was also disappointed that FOX Business for iPad did not have the XIV ETF in its database and was therefore unable to add it to my portfolio.

The two Thomson Reuters products struck me as slightly too news and text-centric for my taste. My favorite of the two is Reuters News Pro for iPad, which has a strong global focus in terms of financial and non-financial news. It also puts more emphasis on global markets and currencies than the competition. While this app lacks a formal portfolio management function, it does have an attractive portfolio monitoring module, Stocks, that makes it easy to track various holdings in terms of news and performance, along with charts. For the international investor, I can certainly see where News Pro might supplement or in some cases even win out over the more U.S.-centric CNBC, Bloomberg and FOX apps. I am still not sure exactly which audience the Thomson Reuters Marketboard app is targeting, though it looks as if this app attempts to leverage and extend the functionality and data available to Thomson ONE account holders. In some respects the app strikes me as a potential companion to News Pro. Again there is a strong global data to the content, but the emphasis is more on headlines and snapshots than detailed content. If you are interested in research, company reports and corporate events – and particularly if you are an existing Thomson ONE subscriber – Marketboard should have a good deal of appeal.

Of all the apps in this group that I wanted to get excited about, at the top of my list was QFolio HD – the NASDAQ OMX Portfolio Manager. While apps from individual brokers are great for tracking broker-specific holdings, the functionality I have yet to find is one that deftly aggregates portfolio information across multiple brokers and asset classes. Unfortunately QFolio did not live up to my expectations, though not for lack of trying.

There are three main screens for QFolio: Portfolio; Company Details; and Market Mind. The Portfolio screen includes aggregated portfolio information with total portfolio value. I was disappointed by the fact that the overview screen only has sufficient real estate to display four holdings on one screen at a glance. While scrolling affords quick access to the full list of holdings, it would be nice to have more holdings and less information available on one screen, ideally with this information customizable by the user. The graphic below is a snapshot [with fictitious portfolio data -Ed] of the Company Details data display, which includes links to a StockTwits feed as well as a StockTwits TV video feed. Last but not least is the Market Mind feature, which turns out to be the best way to monitor changes in prices for five or more holdings at a time. Here one can monitor prices, view intraday charts and even view time and sales data. While the current incarnation of QFolio is certainly an adequate portfolio management tool, it has the potential to be even more. I look forward to seeing how this app evolves over time.

Related posts:

[graphic: QFolio/NASDAQ OMX]

Disclosure(s): long XIV at time of writing

Continued Lackluster Economic Data vs. Expectations

2011-04-21T07:23:00.001-07:00

While investors are focusing most of their attention on earnings reports, I am looking ahead to next week’s FOMC meeting, where the Fed will be more interested in economic data rather than corporate earnings.

For this reason – and because of the absence of recent compelling trends in economic data – I have elected to publish an updated version of my chart of economic data vs. expectations, which has been a big hit in the past.

The chart shows that manufacturing and employment are no longer providing positive surprises relative to expectations, while data related to the consumer reflect consumer activity that is plodding at best. Housing and construction data, which had been a source of positive surprises in 2010, has shown some recent strength, but it is too early to consider this development any sort of new trend.

If I were the Fed I would continue to see a slow growth story, with 2011 bringing much less in the way of positive surprises than 2010 – at least in the first four months.

For more information on the components of this chart and the methodology, check out the links below to archived posts on the same subject.

Related posts:

Disclosure(s): none

The VIX, VIX Products and Replication

2011-04-20T10:31:00.001-07:00

Jared Woodard of Condor Options is out with a post today, Why I’m Not Worried About VIX Derivatives, in which he reviews some recent FT Alphaville commentary about the difficulty in valuing VIX futures, the idiosyncrasies of various VIX-based products, the shortcomings associated with a synthetic VIX, and the implications for volatility as an asset class.

Over the years (I still can’t believe I am in my fifth year of blogging) I have addressed all of these issues to one degree or another, but seeing some of the points being raised by Jared and the FT Alphaville staff, it looks like time to take a deeper dive into these issues, some related sidebar issues, and make an effort to come up with some sort of unified theory of volatility products. Of course I can’t possibly cover all of the space today, but I can at least dive in.

For starters, here are the four FT Alphaville articles referenced by Jared, which are authored by Izabella Kaminska, Tracy Alloway, as well as Theo Casey of Futures & Options World:

The question that seems to be on everyone’s mind right now is why the VIX is “so low.” Better yet, investors would like to know how low the VIX will go and what some reasonable expectations are for the VIX for the balance of 2011.

First, let me dispense with the idea that the VIX is low. With 10-day and 20-day SPX historical volatility just over 8 and 100-day SPX HV below 12, the VIX is actually a little inflated relative to current measures of realized volatility, even factoring in the standard risk premium.

Second, the VIX is currently in the 32^nd percentile of VIX readings going back to 1990. This means that in the 21 years of VIX historical data, the index has been below its current level about one out of every three days.

Third, I think most investors are struggling most with the idea that even with low realized volatility, we have huge issues facing the global economy, including the European sovereign debt crisis, a Japanese nuclear disaster and ripple effect that is far from contained, rising oil prices, strong inflationary pressures across the globe, a huge Fed balance sheet and a host of other formidable threats to economic and political stability.

Fourth, investors are still reeling from the financial crisis of 2008 and the many ways in which that crisis shaped not just a new economic landscape, but a new way in which investors look at the investment world (i.e. "disaster imprinting") and the risks associated with it.

The knee-jerk reaction for many investors is that the VIX is naïve, misguided or perhaps not as relevant as many think it is.

In the links below I address a number of the issues raised by the FT Alphaville staff and Jared. I hope readers will find some insight in these archived posts below, but I promise that in the weeks to come, each of the issues noted above will receive a much more thorough treatment.

In the meantime, do not be surprised if the VIX stays “too low” for an extended period…

Related posts:

Disclosure(s): neutral position in VIX via options

Expiring Monthly April 2011 Issue Recap

2011-04-19T14:48:00.001-07:00

The April edition of Expiring Monthly: The Option Traders Journal was published yesterday (in keeping with our practice of publishing on the Monday following options expiration) and is available for subscribers to download.

In this month’s issue I author the feature article, Exploring Put to Call Ratios. This is somewhat of a departure from the bulk of the content of the magazine, which continues to focus on options as trading vehicles. For many of us, however, options are not only highly flexible trading vehicles, but also the source of quite a few slices of data that can serve as indicators, most notably the VIX and put to call ratios.

Some of my favorite articles in the current issue of Expiring Monthly include a Mark Sebastian interview noted options guru Larry McMillan; a guest article on the CBOE PutWrite Index (PUT) from Jason Ungar; and a thought-provoking piece from Jared Woodard on three volatility plays for the European sovereign debt crisis.

Mark Sebastian also interviews Ping Zhou, a co-author of Trading on Corporate Earnings News and pens the monthly Follow That Trade column, which focuses on position management for an OEX butterfly. Mark Wolfinger continues to be a prolific contributor, speaking out on options brokers are putting limits on customer trading on the last trading day of the expiration cycle, debating the role of options as speculative vehicles and offering some thoughts to the new options trader around risk, timing and money.

All in all I am delighted by the quality of our fourteenth issue, thrilled by the positive feedback I have received from readers, and excited by some of the articles that are currently taking shape for the coming months.

In keeping with tradition, I have reproduced a copy of the Table of Contents for the April issue below for those who may be interested in learning more about the magazine. Thanks to all who have already subscribed. For those who are interested in subscription information and additional details about the magazine, you can find all that and more at (the newly redesigned) http://www.expiringmonthly.com/.

Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

TVIX Trades One Million Shares for First Time

2011-04-07T10:27:00.001-07:00

Launched at the end of November 2010, the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) has been the most popular of the volatility-based ETPs to hit the market in the past six months. Today TVIX hit a new milestone – barely halfway into the trading session – by surpassing one million shares for the first time.

Back in the middle of December, I predicted TVIX “will hit a tipping point and become the darling of day traders” in 2011. Frankly, I am a little surprised that it has taken more than five months to hit the one million share mark, but now that TVIX is adding liquidity, I would expect that day traders, hedge funds and other short-term trading operations will become much more active in this product.

Below is a snapshot of the intraday movement of TVIX taken from Bloomberg for iPad.

Related posts:

[graphic: Bloomberg for iPad]

Disclosure(s): none

Bloomberg for the iPad

2011-04-07T09:51:00.001-07:00

In my ongoing look at trading apps for the iPad, I have elected to initially focus on the ‘big media’ all-in-one apps. I began with an overview of the space and some initial thoughts. Yesterday I offered some more detailed thoughts on CNBC Real-Time for the iPad, and today I turn to CNBC’s main competitor, Bloomberg.

To reiterate from earlier in the week, there are actually two different apps from Bloomberg:

Bloomberg for iPad (reviewed here)
Bloomberg Anywhere for iPad (an iPad version of the full Bloomberg terminal)

Bloomberg for iPad is designed as a news-first application, which is evident from the graphic below – a screen capture of the home page for Bloomberg for iPad. On the plus side, the home page is a healthy blend of news, market data and watch list information. On the minus side, this page is not configurable, save for the ability to edit the top two “My Stocks” entries in a separate module.

The menu on the bottom outlines the full range of functionality. Charts are available for equity indices and stocks, but not for currencies, commodities or equity index futures. While those charts are attractive, the user can only customize the look back period (1d, 1m, 6m, 1y and 5y) and not add any technical indicators. No indicators are included with the charts, not even moving averages.

Where Bloomberg does trump CNBC Real-Time is with its portfolio monitoring functionality. Here users can enter share quantities and cost basis information in order to monitor profit and loss information on a security by security basis. True to its name, this My Stocks feature is limited to equities (and ETFs) and does not accommodate futures or other types of securities. I was also a little disappointed that there is no functionality to display total portfolio profit and loss for the current trading day or any historical period. Finally, it is important to note that while index quotes are in real-time, quotes for individual securities are delayed 15-20 minutes.

From a video perspective, Bloomberg does have a wide variety of podcasts available. Comparing these to the CNBC Real-Time video content, my sense is that CNBC has much more video content available and also a much larger library of content that is from the current trading day.

All things considered, I like the Bloomberg app and find it the news and My Stocks modules to be helpful, but I also see areas where Bloomberg needs to make some enhancements in order to put its product on par with CNBC Real-Time.

That being said, I would imagine that Bloomberg Anywhere for iPad, which is intended to provide a mobile version of the full Bloomberg terminal, would probably be the undisputed content and functionality king in this space. Not having had experience with this app, I will leave it for readers to chime in with their comments.

Next up: QFolio HD – the NASDAQ OMX Portfolio Manager

Related posts:

[graphic: Bloomberg for iPad]

Disclosure(s): none

Options Insider Radio Interviews Jay Caauwe of the CFE/CBOE

2011-04-06T12:04:00.001-07:00

Mark Longo and Options Insider Radio recently conducted an extensive interview with Jay Caauwe, Director of Business Development for the CBOE Futures Exchange (CFE).
As regular readers know, I believe that an understanding of VIX futures is the cornerstone for being able to analyze and trade successfully the entire VIX product space, including VIX options and VIX exchange-traded products.
For those who are looking to get up to speed as soon as possible on VIX futures or perhaps just enhance their existing knowledge base, I recommend listening to Options Insider Radio 83: The Future of VIX Futures.
Related posts:

Appearance on The Options Block

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

CNBC Real-Time for the iPad

2011-04-06T10:11:00.001-07:00

Since there seems to be such a large supply-demand imbalance (little supply, lots of demand) regarding information on trading apps for the iPad, I have decided to devote a little time to drilling down on some of these apps.

First up is CNBC Real-Time for iPad, which offers a large amount of content ranging from market data and graphics to news and videos. For the investor whose primary goal is to monitor the markets when he or she is not at a desk, this app is an excellent choice. The market data goes beyond just stocks and the major market equity indices and includes commodities, currencies and bonds. As the app name indicates, quotes are in real-time and even include a separate Pre-Markets tab with equity futures data. The graphic below shows the menu structure and various tabs available. In the screen capture, I have elected to highlight the Markets > Movers > S&P data. A similar tab, Dow Impact, ranks the five stocks with the largest positive impact and negative daily impact on the Dow Jones Industrial Average, along with the point impact for each stock.

Looking at other features, the news and video content are what you would expect from CNBC: high quality, voluminous and current.

For portfolio monitoring, the My Stocks content pulls charts, news and videos together for each watch list entry. The charts use real-time NASDAQ and NYSE data and make it easy to compare a security to a variety of indices, as well as utilize technical indicators such as moving averages (SMA, EMA, WMA), Bollinger bands, MACD, RSI, DMI and a handful of others. In short, the market technician is well-served here, though it would be nice to have some ability to customize the default settings on the technical indicators. One thing that is lacking is an ability to enter share and cost basis information so that investors can easily track changes to their portfolio in dollar terms across the full range of their holdings.

Even with these small caveats, all in all the CNBC Real-Time for iPad is an excellent ‘do everything’ app for those who wish to monitor the markets remotely and do not need to trade directly from their market monitor platform. Of course, there is nothing stopping this person from keeping their favorite broker-based application open at the same time and becoming an opportunistic trader as well.

Related posts:

[graphic: CNBC Real-Time for iPad]

Disclosure(s): none

Initial Thoughts on Using the iPad for Trading

2011-04-05T10:33:00.001-07:00

Thanks to all who offered up some comments on their experiences using the iPad for trading. Today I will summarize the feedback I have received from other traders, then comment on my own initial experiences with the iPad 2.

Traders express positive feelings about four iPad apps in particular. Two of the four were broker applications:

thinkorswim mobile – now that thinkorswim and T.D. Ameritrade are finally showing some signs of integration, the TOS and TDA apps are surprisingly similar
Mobile TWS – TWS is the Trader WorkStation app from Interactive Brokers

Two others were general applications that are aimed in replicating desktop functionality:

LogMeIn Ignition – According to the company web site, and confirmed by several users, “One touch on your iPhone or iPad lets you remotely access your computers anywhere, anytime and manage your files on the go. Directly control your desktop as if you’re sitting in front of it, access your computer applications as if they were on your iPad, and view or manage files directly from your iPad/iPhone.”
Air Display – works like a wireless monitor

My experiences with the iPad encompass limited exploratory work over the course of two trading sessions, but I thought I would share my thoughts nonetheless.

As a desktop complement, I find that the iPad has limited utility. Perhaps the largest value would be in offloading some peripheral trading or general computing functionality, such as monitoring news events and the like.

As a mobile computing device, I believe the iPad has considerable potential, not just for news, but for analysis, trade execution, position monitoring and the like. I found the thinkorswim and Interactive Brokers trading apps to be excellent and I was also pleasantly surprised by the Fidelity iPad app, which I would put at least on par with the TOS and IB apps as my top three broker apps that I have examined.

As an options trader, I also looked briefly at the apps from optionsXpress and OptionsHouse and while these are fine initial efforts, in my opinion, they have a way to go before they can be considered in the same league as the three mentioned above.

CNBC (CNBC Real Time) and Bloomberg (Bloomberg for iPad and Bloomberg Anywhere, which is the full Bloomberg terminal) also have apps. I experimented with CNBC and Bloomberg for iPad and came away with the impression that these are both adequate general-purpose applications, but traders will likely prefer the offerings from their brokers, including those who are looking for better charting applications.

I have done very little trading with my iPhone over the years, but it does help me keep on top of any sort of extreme market conditions when I am traveling, but it always feels as if I am about 95% in the dark in terms of news and what is really moving the markets. With the iPad, I can see iPad trading as being almost comparable to laptop-based trading, but in an more transportable form factor and perhaps a simpler and more direct user interface.

I eagerly await the next generation of trading apps.

Feel free to add your own experiences in the comments below and/or suggest some additional iPad trading apps.

Related posts:

Using the iPad for Trading

Disclosure(s): none

Chart of the Week: Crude Oil and Transports

2011-04-04T11:27:00.001-07:00

With crude oil prices hovering around $108/bbl. level, it is only natural to begin wondering just what kind of impact crude prices will have on stocks.

Looking back at recent history, crude oil and stocks have been positively correlated, largely because an improving economy translates into increased demand for crude oil. At some point, of course, rising crude oil prices are going to translate into a drag on GDP and on equities. Consensus estimates for the impact of crude oil on GDP generally assign about a 0.25% drop in U.S. GDP for every $10 increase in crude oil.

Whether the negative correlation between crude oil and stocks begins to become apparent at $110 or perhaps at higher levels remains to be seen.

When oil prices begin to be a significant drag on stocks, it will likely show up first in the transportation sector. Looking at the Dow Jones Transportation Average (DJTA) and (West Texas Intermediate) crude oil prices since the beginning of 2010 in this week’s chart of the week, it is obvious that the positive correlation between crude oil prices and transports has continued all the way up to the present. While I expect this positive correlation to end shortly, as long as transports continue to move up in concert with rising crude oil prices, investors should feel comfortable with their long positions in equities.

Related posts:

[source: StockCharts.com]

Disclosure(s): long crude oil futures at time of writing

VIX and More Newsletter Celebrates Third Anniversary

2011-04-03T23:50:00.000-07:00

Today’s publication of the VIX and More Newsletter marks the third anniversary of the launch of this newsletter, which was launched on the heels of the demise of Bear Stearns amidst increasing concerns about the stability of the financial system and increasing market volatility.

Three years later the newsletter has definitely found its voice and represents a more detailed discussion of geopolitical and macroeconomic events than can be found here as well as some broader perspective on the full range of asset classes and issues related to volatility.

Rather than clutter up this blog, I have an entire blog dedicated to the newsletter, as well as the model portfolios and Stock of the Week ‘Sequential Portfolio’ (yes it really is up 1918% in its first 2 3/4 years) information I discuss in the newsletter each week: VIX and More Subscriber Newsletter Blog.

Disclosure(s): none

Using the iPad for Trading

2011-03-31T09:58:00.001-07:00

Unless FedEx (FDX) and Apple (AAPL) have their facts wrong, today the iPad 2 will arrive at my door step.

Since I passed on the iPad 1, this will be my first chance to play with something that I have no idea what I will ultimately end up interacting with. This could turn out to be new computer in a different form factor a toy or anything in between.

While I will try to integrate the iPad into my trading, I am not sure how this is going to happen either. I am not a big fan of using my iPhone for trading unless my environment does not allow any alternatives. As for the iPad, I can imagine it as a complement to my main trading setup, an excellent portable alternative to the iPhone and perhaps filling a bunch of other roles that I am not able to anticipate.

I would love hearing from other traders about how they use the iPad in their trading, whether it means news, charts, quotes, trade execution or whatever. If I get enough responses of note – either here or on Twitter (http://www.twitter.com/VIXandMore) – I will summarize the information in a future post and add in my own experiences as well.

Related posts:

VIX and More and the 2011 Bespoke Roundtable

Disclosure(s): none

VIN, VIF and an Obsolete VIX

2011-03-31T08:48:00.001-07:00

Mark Sebastian at Option Pit has an interesting post up, Could the VIX Become Obsolete? that I suspect VIX and More readers will enjoy pondering. In it Mark argues that because of the VIX calculation methodology, SPX weeklys frequently offer a better insight into the state of current volatility than the VIX. Mark takes this analysis one step further by wondering aloud if this development could mean the demise of the VIX.

For those who are not familiar with the details of the VIX calculation methodology, the VIX bases its calculations on the front month and second month of the SPX for the majority of the expiration cycle. Eight days prior to the VIX options expiration, the SPX options used for the calculations roll forward one month to the second and third month.

Keeping in mind that the VIX blends SPX options with two different expiration dates to arrive at a constant maturity 30-day weighted average of SPX implied volatility, an example may help to illustrate what is happening. Next month the VIX options expire on Wednesday, April 20^th. From today up to Monday, April 11^th, the VIX is calculated based on the SPX front month (April) options as well as the second month (May) options. On April 11^th, eight trading days prior to VIX options expiration, the SPX options used in the VIX calculations roll forward one month so that the near-term month used in the calculations is May and the far-term month used in the calculations is June.

Now, here is the fun part. It is a little known fact that the CBOE actually maintains separate indices for the near-term month VIX (VIN) and the far-term month VIX (VIF). Just pop those tickers into your streaming quotes and you too can watch not just the VIX, but the two components used in the VIX constant maturity blend. Right now, for instance, I show a VIX of 17.88, a VIN of 16.98 and a VIF or 18.23. Just be sure to keep track of the SPX options series roll eight trading days before the VIX options expiration.

Of course the VIX really isn’t about to become obsolete. Just like any index, it suffers some limitations from being only one number. If you want a quick snapshot of where market volatility is, the VIX is the gold standard. If you want some more details and are one of those who likes to look under the hood and tweak the engine a little, the VIX futures and the SPX options themselves are probably the most important groups of market volatility data to study. For those who do not have easy access to VIX futures data, consider adding VIN and VIF to your watch list, to broaden your understanding of what is driving the level of the VIX.

Related posts (some excellent information in this group of posts and a particularly helpful graphic in XXV and the New VIX ETN Landscape):

Disclosure(s): none

Fukushima Daiichi and ‘Event Theta’

2011-03-30T09:51:00.001-07:00

I am generally not a fan of so-called air quotes, nor am I a fan of the gratuitous use of quotation marks for added emphasis in print. That being said, I have this tendency to invent new concepts and attach labels to them that I pull out of the sky. When I do so, as is the case with event theta, the quotation marks are merely shorthand for warning readers that I am making stuff up and cloaking it in somewhat fancy-sounding attire. In other words, if you Google “event theta” you will find a lot of information about sorority functions and the like, but nothing (as far as I can tell) about options concepts.

So what is event theta and why do I think it is important enough to invent a label for it?

Nineteen days ago, Japan was hit by a 9.0 magnitude earthquake and a subsequent tsunami that measured at least 30 feet high in some places. As everyone now knows, the earthquake and particularly the tsunami damaged the Fukushima Daiichi nuclear power plant and set off a chain of events that resulted in a partial core meltdown, damage to at least one containment vessel, overheating of spent fuel rods and dangerous levels of radiation leaks. The situation has been a fluid one, with a limited flow of information, particularly during the early stages of the disaster.

As these events unfolded, seemingly like a slow-motion train wreck, I kept asking myself whether time was in favor of or working against the efforts of those who were trying to limit the damage to the nuclear facility and surrounding areas. In other words, was this a positive theta event (time in our favor) or a negative theta event (a fight against the clock.) Not being an expert in the field of nuclear energy and knowing that certain factors could spiral out of control quickly, but also knowing that efforts were underway to stabilize some of the processes in the plant, I was left to guessing whether current efforts were more likely to fall short and result in a vicious cycle or were expected to stem the problem and turn the tide in favor of the rescue team.

Knowing whether this was a positive or negative theta event also has substantial implications for investment strategies. From a hedging perspective, event theta could influence the selection of hedging vehicles, the anticipated timing for those hedges, how the hedges might be structured and what sort of prices might be appropriate. For the speculative investor, event theta can also help to determine the risk-reward payoff structure and how it varies over time. Anyone who trades in VIX futures and deals with the VIX term structure on a daily basis should have some insights into potential mismatches between event theta and term structure.

Event theta is an idea that complements some of the thinking I have presented in this space earlier regarding event volatility. I maintain that it applies to Libya, the European sovereign debt crisis, and almost every other threat to the financial markets. Going forward, I will give event volatility and event theta some additional treatment in this space as conditions warrant.

Related posts:

Disclosure(s): none

The VIX Summit, a.k.a. the CBOE Risk Management Conference

2011-03-29T18:14:00.001-07:00

About a month ago I had an opportunity to attend the CBOE Risk Management Conference, which could easily had been called the VIX Summit. This was the first time I attended this conference and in retrospect, I have little doubt that if VIXophiles were only to attend one conference per year, this would be the one.

Where else can you find several hundred like-minded souls who obsess about the VIX and volatility on a daily basis? Where else could you holler out “Hey, Mr. VIX?” in a crowded room and expect at least a dozen heads to turn?

This year’s agenda tells part of the story. Some of the sessions I had the pleasure of attending included:

VIX Option Strategies
Tail Risk Protection: A Panel Discussion on Why and How Investors Might Hedge Downside Risk
Volatility ETNs and ETFs: A Panel Discussion on the Construction and Usage of Volatility-Based Investment Products
Equity Correlation and Macro Investment Decisions, Crash Risk and Correlation Trading Paradigms
What the Derivatives Markets Tells us About the Macro Economy

In addition to the sessions above, there were also sessions on cross-asset class volatility strategies; short and relative value volatility strategies; long-dated equity index volatility, etc. Of course, the real value in this type of event is getting an opportunity to meet people in the business and cross-pollinate not just ideas but also relationships.

I went to the RMC hoping that some of the ideas that I would be exposed to might change how I viewed my trading and give me some thoughts about how I might tweak some of my existing strategies or branch out into new strategic soil. The conference certainly accomplished that objective and in a most enjoyable setting, at Dana Point, California.

So, when it comes to planning out next year’s itinerary, give some strong consideration to attending the 28^th annual Risk Management Conference, which I believe is scheduled to return to Florida (it alternates between the East Coast in even years and the West Coast in odd years) for 2012.

Finally, note that some of the presentations from prior years have been archived, so that those who believe good ideas have a meaningful half-life can access them at their leisure.

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