Sunday, April 15, 2007

VWSI at +3

After several weeks at zero, the VIX Weekly Sentiment Indicator (VWSI) is once again showing a directional preference with the current +3 reading. For those who may skip the fine print below the graphic, this means that I am officially neutral, but borderline bullish, in the direction of the VIX over the course of the next 1-4 weeks. Without trying to sound like a two-handed economist, this also means that history and statistics are on the side of the VIX moving up from these levels, but that the edge is not significant enough to warrant my taking a long position in the VIX at this time.

Also, while I use the VWSI as a trading signal for trading the VIX and not the broader markets, it is still reasonable to interpret the a VWSI as suggesting that the markets are likely to trade sideways to down in the next few weeks.

For the record, the VIX needs to drop another point or so next week before I would start buying calls.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing:
For a VWSI of +3, I recommend a sauvignon blanc. Traditionally the primary white wine varietal of Bordeaux, sauvignon blanc floundered for years in the US as “the other white wine grape” for those who decided they needed an occasional break from chardonnay. Robert Mondavi began calling sauvignon blanc by the name of fumé blanc in 1968 and helped to increase the prestige and awareness of the varietal to some extent, but also created considerable confusion among the largely unsophisticated American consumers of the era.

In the 1980s, sauvignon blanc experienced a renaissance with the help of innovations in New Zealand that involved fermentation in stainless steel tanks instead of the traditional oak barrels and resulted in a refreshing, fruit-forward wine that bore only a passing resemblance to the lemony, grassy efforts that were common in the US. In the last two decades, the fruity stainless approach has come to dominate much of the new production and has helped to restore the reputation of the varietal and dramatically increase demand and acres planted.

Thom Elkjer offered up a summary of the recent history of sauvignon blanc in his “The Many Faces of Sauvignon Blanc” article in the San Francisco Chronicle back in 2004. His assessment still holds up well today. Elin McCoy provides a current evaluation of the grape, along with some suggestions, in “Food-Friendly Sauvignon Blanc Wine Sheds Its Underdog Status.”

In terms of a specific recommendation, you might as well start with a Marlborough sauvignon blanc from New Zealand from the winery that played the biggest role in kick-starting the Kiwi sauvignon blanc revolution: Cloudy Bay.


Robert L. said...

Long time lurker, but I want to add, so here goes...

Seems like that one point decline in the VIX that you were looking for was almost achieved this morning alone. I noticed that the low was 11.47 thus far.

Pretty amazing.

BTW, what strikes would you personally be looking at if you were interested in purchasing VIX calls?

I was looking at either May 10s (Lower potential risk, acceptable spread) or the May 15s (Acceptable spread, but higher risk/reward.)

Just curious what your thoughts were. I have avoided VIX options entirely since becoming interested in them several months ago due to the many warning posts on your blog, but I feel that I am finally ready to attempt them and take a small position in some VIX calls. Can sub-10 VIX really be possible again? It seems almost impossible, but stranger things have happened.

Robert L. said...

Also, keep up the great work. Your blog is one the most thoroughly researched and analytical of any that I read. It is a daily stop and I appreciate all the content that you offer to your readers.

Bill Luby said...

Hi Robert,

Thanks for your kind words. I appreciate the comments a great deal.

It looks like my post and your comments crossed somewhere at a remote server farm...

Regarding call purchases, my personal preference is to pay more up front to get the at the money or in the money calls, particularly when looking at high implied volatility. Right now, I'm looking closely at the May 11s (IV = 150) or 12s (IV = 141)

Two quick notes on the VIX calls that may not be obvious if you have not traded the VIX before:
1. They expire on May 16th (the purple square on this chart) -- the Wednesday before most other the other options you may be following; and
2. The last day to trade VIX options is May 15 (see CBOE specifications for VIX options for details) -- so if you still hold them EOD May 15 they will be automatically exercised on May 16 (if they are in the money)

Go ahead and give VIX options a try, but keep a close eye on your greeks. I find that I learn a lot faster if I have some money riding on the outcome, even if it is just a token amount.

Finally, regarding sub-10 VIX, I don't see this happening for awhile, but I am by no means certain. For example, with another two weeks of slow gains in the market, the VWSI may be neutral on a 10.50 VIX, at which point I'd have to say that anything goes.

Cheers and good trading,


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