The Year in Global Volatility (2008)

In November I launched the VIX and More Global Volatility Index, which is a weighted average of the implied volatility in options for equities in the 15 largest global economies. I will have more to say about the Global Volatility Index in 2009, but want to use this occasion to highlight the index as a means of tracking the rise of volatility in response to major volatility events during the course of the past year. In addition to the Global Volatility Index (shown in red), the chart below captures the Dow Jones World Stock Index (blue), as well as the signing of the TARP legislation (black) and the tickers (dark red) for some of the major financial companies that failed and/or were rescued by the U.S. government.

[source: VIX and More]

Good Luck Getting a Mortgage Here…

I don't talk much about my trading and investing background, but suffice it to say that I have been an active investor for 25 years, have traded all sorts of options for 10 years, have accounts with about a dozen financial institutions, some of which carry what I consider to be significant balances, etc. On top of that, the options commissions alone that I generate are quite substantial.

So...just for the heck of it, I decided to open an account with Bank of America and see how well their 30 free trades a month promotion works and whether it makes sense to move a large chunk of money there and make them a part of the network of institutions with which I place most of my trades.

On their options application BofA asks the usual questions about the number of years trading options, number of trades per year, average trade size, types of trades, etc. Given the substantial history and volume I have in this area, including writing naked options on equities and indices, I was surprised that it had taken several weeks for them to add options authority to an account that I opened and funded at the beginning of the month. Finally, I get a call from them today. I returned the call and their rep proudly informed me that I have been approved for Level 3 options trading – which is their equivalent of an investor with training wheels: no authority to write uncovered puts and calls for equities, not to mention index options. I just laughed. I love thinkorswim and optionsXpress. I also think TradeKing does an excellent job with options, especially considering their pricing. No doubt those three brokers will continue to get 95+% of my options business. Fortunately, I won't have to worry about how good the options executions are at Bank of America. What a joke...

[For those who are wondering, I did not reference the blog, nor ask the person on the other end how he would go about evaluating a fair price for a VIX calendar spread when the VIX is in contango.]

Disclaimer: I have no position in BAC at the moment, but keep in mind that this is the same company that invested $2 billion in Countrywide Financial when the common stock of CFC was trading at about 26 (it is now at 9)

Fireworks Forecast for the Next Few Days

It doesn’t take a lot of courage to predict fireworks in the markets following tomorrow’s Fed announcement, but it is interesting to wonder which stocks will be the biggest movers.

A scan of some of the stocks with the highest implied volatility tells a good part of the story. From the group below comes some obvious choices, such as home builders and lenders. There are also two Chinese companies, including one in the red-hot solar sector, as well as various natural resources plays in gold, oil/gas, and dry bulk shipping. Then, of course, there is the VIX itself.

[The chart above includes only front month at the money options with an IV of 70 or more and a relatively low bar for volume and open interest.]

For the record, the current VIX IV is right in the middle of the 52 week range and has been below 30 day historical volatility for the past month or so.

I have included a Yahoo finance link to all nine high IV stocks (actually eight stocks and the VIX, but who’s counting…) for those who like to play with fire. As I write this, I’ve begun to wonder whether traders are more likely to have been pyromaniacs as children. Hmmm. Are traders more or less prone to having risky hobbies? Lurkers, feel free to weigh in on this one.

How Healthy Is the Rally?

I don't have much to add to what has already been said about today's rally.

For what it's worth I am watching three indicators in particular to gauge the health and longer term potential of this rally:
XBD -- broker/dealer index (to a lesser extent XBD:SPX, GS, BSC, BKX, CFC, etc.)
RUT -- Reuters 2000 Small Cap Index (also RUT:SPX)
EEM -- iShares MSCI Emerging Markets (also EEM:EFA)

Right now, all three indicators are outperforming the broad market indices, so I feel as if the rally is on good footing. My biggest concern coming into the day was that would be traders worried about Monday's headline risk, but the longer the indicators noted above continue to do well, the less pressure there will be on the system.

For a little while earlier in the day the markets and the VIX were both up, as fear lingered in the face of a weekend of uncertainty, but for now, the fear component of the VIX seems to be slowly dissipating.

Before I finalize my positions going into the weekend, I will take one last look at Hurricane Dean.