The Year in VIX and Volatility (2014)

This is the seventh year in a row I have offered a retrospective look at the year in VIX and Volatility, which is my attempt to cram some of the highlights of the year in volatility onto one eye chart graphic with a (somewhat) manageable number of annotations.

In aggregate, 2014 was a very quiet year for the VIX, with a mean close of just 14.19 for the year, which is the lowest the VIX has been since 2006 and third lowest since 1995. On the other hand, as I recently documented, VIX spikes were common last year, with 2014 registering the third highest number of 20% VIX spikes since the beginning of VIX data, in 1990. In short, the VIX was susceptible to large spikes, but these were typically followed by strong mean-reverting declines. For example, the peak VIX of 31.06 on October 15 was the highest VIX reading since 2011, yet just six weeks later the VIX was back in the 11s.

When asked in October what they perceived as the biggest threat to stocks, respondents to the VIX and More fear poll pointed to the end of quantitative easing and the removal of the Fed safety net as their top concern, with Ebola narrowly edging out the much more nebulous “market technical factors” for the second slot. As best as I am able to determine, it was the panic associated with fears of an Ebola epidemic that took an already elevated VIX and pushed it up into the 30s.

At various times during the year, Ukraine/Russia, crude oil, ISIS/ISIL, Israel/Gaza, the Fed and the European Central Bank all managed to increase anxiety and perceptions of risk among investors. Also, the narrow miss in the vote for Scottish independence created turmoil in the United Kingdom and across the euro zone, but managed to avoid morphing into another nationalist crisis. Early in the year, there was a currency crisis in emerging markets that was triggered by (unfounded, in retrospect) concerns about higher interest rates in the U.S. Throughout the year there were concerns about valuations and excesses momentum trading in the likes of biotechnology, social media, internet and solar stocks. To some extent, these concerns peaked in April (see The Correction as Seen in the ETP Landscape for additional details), only to return periodically throughout the balance of the year.

[source(s): StockCharts.com, VIX and More]

Last year at this time, the prevailing worries were focused on whether or not Fed Chair Janet Yellen was leaning toward a more hawkish stance, the inevitable march to higher interest rates in the U.S., the weakening of emerging markets currencies and the potential fallout from the Fed’s tapering of bond purchases. In retrospect, investors were largely worrying about the wrong things.

The first few weeks of 2015 have seen Greece, Saudi Arabia and Ukraine back in the spotlight, with the Swiss National Bank and European Central Bank dominating news on the central banking front. If the past is any guide, the big issue for 2015 has yet to rear its ugly head, whether it turns out to be a gray, charcoal or black swan.

Related posts:

• The Year in VIX and Volatility (2013)
• The Year in VIX and Volatility (2012)
• The Year in VIX and Volatility (2011)
• The Year in VIX and Volatility, 2010
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• 2014 Had Third Highest Number of 20% VIX Spikes
• The Correction as Seen in the ETP Landscape

Disclosure(s): none

CBOE Risk Management Conference Update

Today was the first full day of the CBOE Risk Management Conference and between the presentations, sidebar conversations and opportunities to meet and greet, I have to say that things hit full stride very quickly.

Today CBOE CEO Ed Tilly announced that the CBOE will roll out nearly 24 hours of trading, five days per week in VIX futures beginning on Sunday, June 22. This announcement follows another important announcement last week that options on VXST (the CBOE Short-Term Volatility Index) will commence on April 10. Clearly, things continue to move forward on the volatility product front and at the end of the year, I suspect we will lock back on these two developments as critical milestones in the volatility space.

Today I had the opportunity to listen to Marvin Zonis give a keynote address on “New Insights into Geopolitical Risk: Examining Geopolitical Risk Hot Spots and the Implications for Trading Strategies and Risk Management.” For anyone wondering about what it might take to drive the VIX higher over the course of the next few years, Zonis had a laundry list of grave concerns (Ukraine, Japan/China, Korean Peninsula, Pakistan, Iran/Israel/nuclear weapons, Egypt/Syria/Turkey, China, political stagnation, etc.) and summarized the situation by saying, “We are in the age of major, major political risk.”

Another featured speaker was Maneesh Deshpande, who talked extensively about the evolution of the demand for volatility products as well as the evolution of the supply for volatility products. Maneesh had a number of interesting observations about new players and new strategies in the volatility space. He also expressed concern about the crowded VIX short trade and the potential for the next crisis that does not mean-revert quickly to lead to a sharp second VIX spike as shorts scramble to cover their positions.

Also of interest was a two-part presentation with Dominic Salvino discussing VXST and other volatility index products (he expects interest in VXST futures will pick up dramatically after the options are launched in less than a month) as well as a detailed description of the VIX settlement process (VIX SOQ) by Bill Speth of the CBOE

Other sessions I attended today included:

• a panel on volatility as an asset class that produced considerable debate on the proper answer to that question as well as a good deal of criticism of tail risk strategies
• two speakers on trading volatility across asset classes that shared details on the methodology they use to generate trade ideas as well as quite a few cross-asset class pairs trades

Last but not least, I had the opportunity to meet quite a few people who have been regular readers of VIX and More over the years, many of whom nudged me to ramp up my posting frequency – which I certainly intend to do in 2014, starting this week.

Related posts:

• Be Greedy When Others Are Fearful (Barron’s)
• Charting the Recent Decline of the BRIC Components
• Using DXJ to Monitor Developments in Japanese Equities, Currency and Risk
• VXEEM as a Measure of Emerging Markets Volatility and Risk
• Chart of the Week: EGPT and Collateral Damage
• VIX March Futures and Options Expiration on Monday, Not Tuesday
• The New VXST and VXST:VIX Ratio

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