Friday, August 29, 2008

Best Hurricane Blog Out There?

I am by no means a weather junkie, although many years of sailing have helped transform my curiosity about weather systems and related phenomena into just enough knowledge to get me into trouble.

As I am also interested in market volatility and the commodities markets, each hurricane season gives me an opportunity to scour the web to update my favorite hurricane links, which seem to increase in quantity and quality each year.

There is one hurricane blog out there that strikes me as the undoubtedly best in the business: Dr. Jeff Masters Wunder Blog. Masters is one of the founders of The Weather Underground (that would be the meteorologists, not the radical bombers) and his blog is well written and filled with top notch content. The Wunder Blog has also attracted the attention of quite a few aficionados who do a surprisingly good job of augmenting Masters’ content in the comments section.

Side note: if you ever wanted to know what it is like to fly into the eye of a major hurricane, check out Masters’ harrowing account of Hunting Hugo

Thursday, August 28, 2008

Gustav and the Oil Volatility Index (OVX)

Since first becoming a tropical depression on the morning of August 25th, Gustav became a tropical storm, then a hurricane, and is now back to being a tropical storm – at least for the time being. Most models have Gustav reaching hurricane strength again later today, perhaps as soon as the next National Hurricane Center (NHC) update, which is only a half hour away.

If anyone is interested in watching a movie of the evolution of Gustav and the evolution of the five day forecast cone, I can highly recommend the Gustav graphics archive at the NHC web site.
At least as interesting as the changing fortunes of Gustav and predictions for Gustav’s future has been the market’s reaction to crude oil and natural gas prices. In the graph below, courtesy of, I have captured the change in crude oil prices (via the USO crude oil ETF) as well as the change in the new ‘Oil VIX’ (OVX) that was recently launched by the CBOE. Note how volatility (the candlesticks) has generally followed the underlying up and down, though it has remained elevated as oil prices (the gray area chart) trended down this morning.

Those who are looking at options plays on oil and gas are likely to see long positions facing an uphill battle against time decay in the current highly speculative environment. As a result, spreads and short volatility plays should look more attractive as alternatives.

Wednesday, August 27, 2008

Where Will Gustav Land?

There are several excellent sources which will provide the latest updates on hurricanes and the various potential paths that a number of computer models are projecting. These sites include the National Hurricane Center, Weather Underground, AccuWeather, and others. The most common graphical depiction of these projections come in the form of a probability cone that projects the most likely path of the eye, with an increasingly large cone farther into the future to reflect the increased uncertainty about the forecast.

You can study these probability cones, computer projections and other data and adjust your portfolio accordingly. There is another tool that I don’t believe many know is out there. Intrade, the prediction market site, has recently added a number of contracts covering possible landfall locations for Gustav. The graphic below highlights the current landfall contracts associated with Gustav. These range across the Gulf of Mexico and also include Georgia, South Carolina, and “any other state”. Note that all these contracts stipulate that landfall has to be as a category 2 hurricane (winds 96-110 mph) or higher. Finally, there is also a contract that Gustav does not make first landfall in the U.S. as a category 2 or higher hurricane.

These may not be the ideal trading vehicles for hurricanes, but they can be interesting data sources as volume picks up in these contracts, enhancing the value of their informational content.

Tuesday, August 26, 2008

Energy ETFs and Katrina

With Hurricane Gustav now packing 90 mph winds and apparently headed in the direction of the Gulf of Mexico, this seems like a good time to pull up some data from the Hurricane Katrina period to get a sense of what happened to energy stocks during this time.

Recall that of Katrina was the fourth strongest Atlantic hurricane ever recorded and the most intense hurricane ever to enter the Gulf of Mexico at the time it made landfall on August 29, 2005. Amazingly, just three weeks later, Hurricane Rita turned out to be even stronger than Katrina, reaching maximum sustained winds of 180 mph on September 21, before losing strength and making landfall on September 24 with 115 mph winds. While Katrina ended up doing most of the damage, the appearance of an even stronger Rita headed toward an already damaged energy infrastructure almost certainly had a much stronger psychological impact on the markets. Katrina, which strengthened considerably just before making landfall, arrived with much less fanfare than Rita.

In the chart below, I have captured the relative performance of crude oil, natural gas, the broad energy select sector SPDR ETF (XLE), and the oil services HOLDRs ETF (OIH) for a period of a little over six months leading up to and following Katrina and Rita. Note that there was very little net change in crude oil, XLE and OIH from the end of July to October/November; almost all of the action was in natural gas.

Monday, August 25, 2008

New Contrarian Sentiment Indicator?

My father lives in suburban Connecticut where the deer are plentiful, but there is little else in the way of large mammals. Or so I thought. Apparently a neighbor saw a bear walking up my father’s driveway yesterday.

Out of curiosity, I went to Google to check for bear sightings in the area and was surprised to find a story about another bear sighting several days ago in a neighboring town, Simsbury, with the accompanying photo snapped from inside an insurance agency by an alert Kris Anderson. Now I really began to wonder: just how many bears no longer have enough room to wander around in lower Manhattan and have moved to Connecticut to take up residence? While the exact number is a mystery, I was surprised to see that according to the Connecticut Department of Environmental Protection, there have been 1349 black bear sightings in the state over the course of the past year. Granted, it has been 30 years since I have lived in the state, but that number is about 1330 more than I would have guessed. Incidentally, Simsbury appears to be the bear capital of Connecticut, with 229 sightings – or about two every three days.

Investors take note: Stamford and Greenwich, where hedge funds are a dime a dozen, have not reported any bear sightings in the past year.

SPX and VIX Three Month Futures Premium

Friday’s post, VIX Slips Below 19, appears to have raised some interest in VIX futures premiums (or “premia” for the more scholarly inclined).

Looking three months out, the VIX November 2008 futures contract (VIX/X8) has been open since November 2007 and reached a settlement high of 26.25 on March 14, 2008, just before the bottom of the equities market. By contrast, the all-time settlement low for the VIX November futures contract was 21.35 on May 2, 2008, a month and a half after the markets moved off of the March bottom and about two weeks before the markets topped. These VIX futures peaks and valleys just happened to precede important intermediate-term market tops and bottoms and may have hinted that a reversal was coming soon, in a manner similar to that of the VIX:VXV ratio.

Keep in mind that the VIX:VXV ratio is a ratio of the VIX (CBOE [S&P 500 1-Month] Volatility Index) to the VXV (CBOE S&P 500 3-Month Volatility Index). The six month chart below (courtesy of and captures the difference (i.e., "futures premium") between the VIX November 2008 futures (VIX/X8) and the VIX index or cash/spot VIX. As the chart demonstrates, highs and lows in the VIX futures premium also coincide with tops and bottoms in the SPX.

Whether you are dividing or subtracting VIX futures and the VIX index, I feel obliged to offer a caution that a simplistic analysis of futures premiums can lead to some bad trading decisions. Like many sentiment indicators, however, when VIX futures premiums reach extremes, these can be valuable signals for market timers.

Friday, August 22, 2008

VIX Slips Below 19

One of the interesting side benefits of having a blog is that you can get a sense of what some investors are thinking just by looking at the Google searches that result in people clicking through to the blog. Today, for instance, I note some have found their way to VIX and More with the following Google searches:

  • “VIX oversold”
  • “VIX call options”
  • “trade using the VIX”
  • “bull call spread VIX”
  • “calendar spread VIX”
  • “predict VIX settlement value”
  • “September VIX futures”

It certainly appears as if quite a few investors are looking at a VIX that is below 19 and trying to understand that number in the context of headlines filled with gloom and doom. One possible conclusion, which I’m sure accounts for a fair number of the Google searches above, is that it is just a matter of time before the VIX spikes to a level consistent with the fear and anxiety which dominates much of the media coverage of the markets at the moment.

While a VIX of 18.92 (as I type this) sounds low, it is only 7.3% below the 10 day simple moving average and 11.8% below the 100 day SMA. Further, because today is a Friday and we have some low volume days approaching in advance of the Labor Day holiday, there are some calendar reversion effects at work, as Adam at Daily Options Report has detailed nicely in VIX Bicentennial Parade and several previous posts.

A look at VIX futures (see futures quotes from optionsXpress below) shows that futures expectations for the VIX for October to May are generally in the range of 22.50 – 23.20. Anyone considering a VIX options trade needs to get a better sense of how VIX options are priced off of and generally move with VIX futures, not the cash or spot VIX index that is four points lower.

That being said, there is also the case to be made that the VIX is not that low at the moment. Looking at a weekly chart, for instance, the VIX is toward the middle of the typical Bollinger band settings. This is the essence of VIX options: when they look like sitting ducks, it is usually an optical illusion.

Still, with a relatively low VIX and relatively low VIX implied volatility (58.2%), VIX options may be inexpensive portfolio insurance and/or a good leveraged bet against further turmoil in the markets. The key concept to remember is that a 3-4 point move in the cash/spot VIX will have little impact on the VIX futures prices on which the VIX options are based.

Thursday, August 21, 2008

Headwinds Index Turns Up

Unless you are Usain Bolt, you are not likely to be in top form – not to mention setting world records – running into a headwind. For that reason, last month I developed something I call the Headwinds Index to calibrate the extent to which oil prices and concerns about financial institutions are providing a drag on stock prices.

In keeping with my desire for simplicity wherever possible, the Headwinds Index is calculated as the price of crude oil divided by the financial sector ETF (XLF). For various reasons, I used the USO crude oil ETF instead of the crude oil front month futures.

The resulting ratio chart, which I have enhanced from the previous iteration presented in Headwinds Index: How Long Can Financials Outperform Energy? now includes a 100 day simple moving average for the USO:XLF ratio and a 50 day SMA for the SPX mini-graph at the top. [I have also inverted the ratio to better align with the headwinds metaphor.] Note that the 100 day SMA served as support for the Headwinds Index last week and the current level is at the 50 day SMA, which is a potential area of resistance. If this index breaks above 5.0, I would expect to see a rush to re-implement many of those long oil and short financials momentum trades.

Finally, note that an upturn in the Headwinds Index has preceded a turnaround in a rising SPX on a number of occasions. Keep an eye on this divergence going forward, as I do not expect to see a sustained rally in the S&P 500 until financials are able to outperform energy on a relative basis.

Wednesday, August 20, 2008

Put to Call Ratios and Volatility Predictions

Michael at MarketSci is out with another provocative post this morning. Focusing on the CBOE total put to call ratio (CPC) data history, he uncovers an interesting relationship between an elevated put to call ratio relative to the 50 day moving average and next day volatility in the S&P 500 index. In The Put-to-Call Ratio at Extreme Values, Michael draws the following conclusions:

“High and low put-to-call ratios…have done a pretty good job at predicting next-day volatility… High PCR levels indicate a bearish sentiment (high level of puts relative to calls purchased) and have been followed by a significant increase in volatility (+29.7%). Low PCR levels indicate a bullish sentiment and have been followed by a significant decrease in volatility (-17.3%).”

Looking at over a dozen years of data, MarketSci also concludes that the pattern has persisted over time but has been less pronounced over the course of the last two years (see chart for details).

I will leave the reader to ponder the implications of having a one day edge in predicting SPX volatility, but given how active SPX and SPY options are, there ought to be quite a few different ways to profit from this type of insight.

Tuesday, August 19, 2008


With the markets warming up to the idea of a trading range, this seems like a good time to pull back and look at some broader issues. Thanks to all the great blogs out there (281 Bloglines feeds, as of today), I have had a lot to ponder as of late. Some of the latest colon-enabled ideas:

Monday, August 18, 2008

The ETF Energy Troika

The ETF revolution is making it much easier than ever before to draw comparisons across related groups of stocks and commodities.

In the past, it has been easy to compare and contrast the price action in crude oil and natural gas. With the advent of a coal ETF (KOL), now it is easy to lump coal into the same comparison.

The chart below shows the crude oil (USO) and natural gas (UNG) commodity ETF as well as the recently launched coal ETF, which is based on a basket of coal stocks (top holdings are BTU, CNX, and ACI). This comparison may have an element of apples to pears about it, but the correlation across energy sources is unmistakable. Note that all three ETFs peaked at the beginning of July and have fallen sharply for the last month and a half. KOL seems to be the best candidate to find a bottom first, with USO showing some signs of flattening out and UNG still heading lower. KOL was the first of the three ETFs to top in June and July; could it be the first to signal a bottoming energy market in August?

Friday, August 15, 2008

Blogroll Additions and Other VIX and More Changes

When I first started this blog, the reason was as much to create my own personal investment portal as anything else. As such, I have always spent a lot of time trying to shoehorn the best of a broad range of perspectives into my blogroll (“Blogs I Frequent”). Now that I have long since transitioned to subscribing to feeds, I do not keep the VIX and More blogroll as up to date as it should be. Recently I have pruned some blogs that appear to be inactive and have added several others that I can highly recommend:

In addition to the blogroll changes, I now have a total of four posts in a new section I have titled “VIX – Educational Posts”. See the upper right hand corner of the blog for more details. In the next week or so, I intend to add some new posts about implied volatility and historical volatility.

Also in the right hand column, I have added new section I am calling “Aggregator Communities Featuring VIX and More”. These sites republish some of what appears on this blog, but more importantly they do an excellent editorial job of culling what they consider to be some of the best posts from the top bloggers out there. I am pleased to be a regular contributor to each of these communities and encourage readers to test drive these sites.

Going forward, I have given some thought to how this blog might continue to evolve, including more of a global perspective, an emphasis on asset classes other than equities, increased commentary on macroeconomic issues and current events, etc. If readers have any suggestions about what they would like to see more of, this would be a good place to leave a comment.

The Dollar Is UUP

I know there are many stock pickers out there who never thought they would put on commodity positions until a spate of commodity-related ETFs began appearing. Perhaps the next frontier for these former “equities only” investors is currencies.

Clearly currencies aren’t for everyone and in some respects they are the ultimate zero-sum game, but if anyone doubted their importance, just look how the markets have changed since the dollar reversed its course and started moving up a month ago.

The chart below shows the UUP ETF, the dollar ETF whose formal name is the PowerShares DB US Dollar Bullish Fund. This ETF is based on the Deutsche Bank Long US Dollar Index Futures Index, where futures contracts are designed to replicate the performance of being long or short the US Dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. For more details, a good place to start is the UUP fact sheet.

It is important to note that while the dollar has made a substantial move over the course of the past month and is now breaking out of a three year downward channel, the dollar’s move is more the result of increasing concerns about foreign economies than it is about strength in the U.S. economy. The bottom line: the U.S. economic outlook has not improved over the past month; instead, things have taken on an even gloomier tone overseas.

Finally, I would be remiss in not pointing out that on balance, U.S. equities tend to react favorably to a rising dollar. The chart of the UUP shows the dollar’s rally off of the July low buffeting the S&P 500 index.

Thursday, August 14, 2008

The Return of David Altig and Macroblog

I was very much disappointed when David Altig decided to suspend posting at Macroblog. The good news is that Macroblog is back and the more interesting news is that Altig is now Senior Vice President and Director of Desearch at the Federal Reserve Bank of Atlanta.

Altig describes the new role of Macroblog as follows:

“I originally launched macroblog in 2004 as an independent blog, but it will now be run through the Atlanta Fed on our Web site. Macroblog will feature commentary by me as well as other members of the Bank’s research department. The purpose of the blog is to help inform readers with commentary and observations on a variety of current economic topics, including monetary policy, macroeconomic developments, financial issues, and Southeast regional trends. I do need to emphasize that the views expressed in macroblog will not necessarily be those of the Atlanta Fed or the Federal Reserve System – feel free to quote me on that.”

His first policy-related post under the Atlanta FRB mantle is out today, with the title What the Fed Did During Macroblog’s Vacation.

If it isn’t already, be sure to put Macroblog on your required reading list.

Welcome back to the blogosphere, David.

Queuing Theory and the Price of Oil

I thought I might write something provocative and different this morning, yet I was surprised – and pleased – to see that Kurt Cobb of Resource Insights beat me to the punch by several days. In Sunday’s Does Queuing Theory Explain Oil’s Wild Price Swings? Cobb draws upon queuing theory as a possible explanation for price swings that seem to be out of proportion to changes in supply and demand.

Up front I should say that the extent of my knowledge about queuing theory is limited to some brief exposure to the subject back in business school. Still, that exposure made a significant impression on me, as one of the important takeaways was that a very small and seemingly insignificant change can quickly move a system from equilibrium to chaos.

Consider a grocery store that has ten checkers and only one or two people in each line. If one checker takes a 10 minute break, you would not expect that lines in the other nine lines would triple or quadruple in just a few minutes, but according to queuing theory, this scenario is quite likely. Similarly, if customers are entering the store at a rate of one every 15 seconds, it doesn’t sound like a change in the rate to one customer every 14 seconds could impact lines to the degree that they go from two deep to ten deep before the 10 minute break is over, but once again, this is a plausible scenario.

The mathematics of queuing theory (which I have no desire to delve into) explain how very small changes at the margin (i.e., number of checkers, average checkout time, customer arrival rate, etc.) can quickly move a system from equilibrium to bottleneck, with resulting wait times increasing exponentially. It may be a little bit of a stretch to say that a grocery store is analogous to the world oil market, but I do think queuing theory provides a model for how small changes in input and output rates can create a massive bottleneck problem in a very short period of time.

Wednesday, August 13, 2008

Sports, Emotions and Trading

When I wake up each morning, I take a drink from the blogosphere news fire hose in order to get caught up with what is going on in the world and to get a sense of how some learned minds are thinking about these and other developments. I find this process puts a lot of random ideas in front of me in a short period of time and often leads to some interesting juxtapositions that help stimulate my own thinking.

This morning had just one of those juxtapositions. First, in Olympics and Stocks Don’t Mix, Mark Hulbert cites the work of Edmans, Garcia, and Norli (“Sports Sentiment and Stock Returns”) which shows how World Cup soccer losses translate into significantly poorer performance in the local stock market the next day.

Hulbert weaves this research into his own observation:

“In my experience, few investors even recognize the role that their emotions play in their decision-making. When challenged, they are able to point to a litany of reasons, all well documented, for why their strategy is strongly based on a sound statistical foundation. But, most of the time, I still don't believe them.

That's because there are different types of reasons. On the one hand, there are the reasons that genuinely account for why we have decided to do something. And, on the other hand, there are the reasons that we turn to, after a decision has been made, to justify it to ourselves and others. Most of the investment reasons that I hear or read about are of the latter variety.“

Right after Mark Hulbert, I stumbled onto Brett Steenbarger’s A Dozen Thoughts on Trading Stress and Emotion. Frankly, I don’t recall ever having seen a short list that has so much for traders to chew on in the realm of “Know Thyself.”

There are many ways to look at the markets and how you interact with them, but one should never underestimate the emotional component on both sides of that equation.

Tuesday, August 12, 2008

Crude Oil Volatility Slides with Crude Prices

Based on the large number of Google searches that have recently been landing on the blog, there is considerable interest in the CBOE’s new “Oil VIX” or crude oil volatility index (ticker OVX), which was launched exactly four weeks ago today.

While it is still too early to pluck much in the way of useful conclusions from the OVX, I have included a chart of the new volatility index below. So far what may surprise most newcomers to crude oil volatility is that the OVX has fallen in concert with crude oil prices (as measured by the USO crude oil ETF). My analysis of USO options suggests that crude oil implied volatility and the price of the underlying are likely to be largely uncorrelated going forward, which is in sharp contrast to the strong negative correlation between equities and their corresponding volatility indices, such as the VIX, the VXN, and the RVX.

An Eight Year View of the Dollar

Last week’s 3.3% gain in the dollar was the biggest weekly gain since the dollar peaked some seven years ago.

The chart below chronicles the decline in the dollar over the course of two long downward legs, the first leg running from 2001-2004 and the most recent leg from the end of 2005 to the present.

From a technical perspective, it is still too early to say that the dollar has begun a decisive new uptrend. Since 2001, there have been quite a few 3-4 month countertrend rallies and one full year (2005) in which the dollar looked to be making a new bullish leg before reverting back to the long-term downtrend.

That being said, the dollar is nearing the top of its trading channel for the first time in over a year. Looking at macroeconomic and other factors, I believe that a channel breakout is the most likely scenario, which will bring a new technical twist to currencies, commodities, bonds and equities.

Monday, August 11, 2008

Monday Musings From Around the Blogosphere

I stayed up late to watch the men’s 4x100 freestyle relay and it was well worth losing some sleep to see that amazing anchor leg by Jason Lezak.

In any event, I am fortunate that other bloggers have been out there digging up some nuggets to keep my brain engaged...

Friday, August 8, 2008

Increasing Options Volume in Double Inverse ETFs Crowding Out VIX Options?

One year ago this month, VIX options peaked in popularity. As the graphic below from shows, VIX options continue to trade at impressive volumes of about 100,000 contracts per day, but this number is about 30% below the levels from August-November of last year.

Part of the reason for this change in trading patterns is that some of the portfolio hedging trades formerly conducted with VIX options are now being redirected to options on double inverse ETFs. Back in February, in Interest in VIX Waning? I spoke about how the new trend seemed to favor QID options over VIX options. Six months later, the popularity of QID and SDS options persists, with QID + SDS options now accounting for approximately one third of the volume in VIX options.

More recently, the rise of double inverse sector ETF options has translated into more choices for investors and lower market share for the VIX. While sector options are more likely than VIX options to be used for speculative purposes than as portfolio hedges, the surge in options volume for double inverse sector ETFs is worth highlighting here, with the SKF (double inverse sector ETF for financials) and DUG (double inverse sector ETF for oil and gas) receiving the most interest.

The rise of inverse and double inverse ETFs raises a number of questions about the VIX and poses some challenges for the index as a portfolio hedging tool and as a sentiment indicator. I will delve into these two subjects in more detail in the coming weeks and months.

Thursday, August 7, 2008

Weak Bounce in Homebuilders

Pending home sales are up 5.3% today, handily beating the consensus expectations, which called for a 1.0% decline. Barry Ritholtz at The Big Picture has a different interpretation of the data in Media Gets Pending Home Sales Wrong (Again!) Not surprisingly, Barry is less optimistic about the state of the housing market and emphasizes the importance of looking at year over year changes instead of sequential monthly changes.

The homebuilders are a very interesting sector – and one worth following closely. Homebuilder stocks (as measured by the XHB ETF) actually peaked at 39.39 back in early February 2007, several months prior to the time frame covered in the chart below.

For a few months, homebuilders looked as if they had made a bottom in January, when they rallied more than 60% from their January low to their April high, only to grind down to a new bottom in July. The graphic shows a sharp two day bounce off of the July low, followed by a lot of sideways action over the course of the past three weeks. At this stage, the July bottom does not yet look convincing and XHB is actually trading down as I type this.

With foreclosure activity now accounting for an increasingly large percentage of all home sales, statistics such as selling price per square foot (see Solano County, in particular) may help to sort out some of the divergence between sales volume and sales price data.

Wednesday, August 6, 2008

Energy Sector Weekly Chart and Support Levels

There has been a lot of wild action in the energy sector as of late, with much of it favoring the bears for the first time in a while.

Within the last hour, the US Energy Information Administration reported that crude oil inventories increased by 1.7 million barrels last week, compared to a consensus estimate of a 1.2 million decrease. This announcement has put considerable pressure on crude oil prices once again in morning trading, with the commodity now down 20% from the high of about a month ago. Not surprisingly, energy sector stocks are falling in tandem with crude.

A look at the weekly chart of XLE, the de facto energy sector ETF, shows that the recent correction in energy stocks is comparable to what transpired at the beginning of the year. In fact, XLE bounced off of the 100 week simple moving average in January and may have done so again yesterday, when it touched 69.83 – just above the current 100 week SMA of 68.79.

I believe there is a good chance XLE made an intermediate-term bottom yesterday, but it will take a convincing rebound in the second half of today’s session for me to want to act on that opinion.

Tuesday, August 5, 2008

Overview of the U.S. Volatility Indices

As a companion to yesterday’s The Evolution of the Volatility Index Family Tree post, I thought it might be helpful to include a comparative look at the major U.S. volatility indices, which is what the table below hopes to accomplish.

The main distinguishing factor for these indices is whether or not futures and options are available as a means to trade the underlying. It is also important to note not just the launch date for the index, but also the period for which historical data are available. In some cases (e.g., VIX, VXO, VXD), this extends back several years prior to the official index launch.

Two of the indices stand out from the crowd for a particular unique characteristic: the QQV is the only volatility index that is sponsored by the American Stock Exchange (AMEX); and the VXV is the only index that has a 93 day time horizon rather than the standard 30 days.

Finally, I have covered this in several on the blog, but those who are interested in why there is an asterisk for the VIX and VXO launch dates should be aware that the calculation methodology for the ‘original VIX’ (VXO) was overhauled in 2003, at which point the original methodology was preserved under a new VXO ticker and the new methodology was applied to the VIX ticker. Some additional details are available in Ten Things Everyone Should Know About the VIX.

Monday, August 4, 2008

The Evolution of the Volatility Index Family Tree

In the beginning, there was the VIX. Eventually, the reach of the VIX was deemed too narrow and the volatility index universe was expanded to include the VXN, VXO, and a host of other volatility indices based on various U.S. equity indices. First an American phenomenon, volatility indices soon began sprouting up overseas, notably in the form of the German VDAX, but more recently reaching Asian shores with the April launch of the India VIX.

Having expanded geographically, volatility indices also recently began to expand the time horizon in which they evaluated volatility with the launch of the VXV, the 93 day version of the VIX.

In the last three weeks, the CBOE has started moving past equity-based volatility indices into commodity and currency volatility indices. The OVX (“Oil VIX”) was the first such effort. Last Friday the CBOE launched two new volatility indices:

  • GVZ – CBOE Gold Volatility Index (“Gold VIX”), based on the GLD ETF

  • EVZ – CBOE EuroCurrency Volatility Index (“Euro VIX”), based on the FXE ETF

The graphic below summarizes some of the highlights across the volatility index evolutionary timeline.

It remains to be seen whether the VIX branding and labeling will stick to oil, gold and the euro. Five years ago, the VIX label was transported from the S&P 100 (OEX) to the S&P 500 (SPX), but until the past few months there has been only one VIX. With the recent arrival of the India VIX, Oil VIX, Gold VIX, and Euro VIX, there is ample room for confusion about what exactly “VIX” means. On the other hand, “VIX” is really just shorthand for a generic “volatility index.” If this potential confusion can be overcome, the CBOE may have found a way to enhance and extend the most successful product and brand they have ever launched – and in the process dramatically change the volatility landscape.

Portfolio A1 Performance Update: 7/31/08

As previously promised, I am now providing a monthly performance update for Portfolio A1, which I launched live on the blog almost 1 ½ years ago.

The chart below shows the equity curve and some summary performance statistics for Portfolio A1 since the equities only (no ETFs or options), long only portfolio was created on February 16, 2007. During the 17 ½ months since inception, Portfolio A1 has posted a cumulative return (exclusive of dividends) of 14.6%, while the benchmark S&P 500 index has declined 12.9%. This adds up to a net performance of +27.5% for the portfolio vs. the benchmark.

As of July 31, Portfolio A1’s holdings included: Terra Industries (TRA); W&T Offshore (WTI); DreamWorks Animation (DWA); Synaptics (SYNA); and Hugoton Royalty Trust (HGT). For the record, Portfolio A1 also shares some common ancestry and has a stock ranking system that is similar to the VIX and More Focus Aggressive Trader model portfolio – one of the four model portfolios that I update transaction by transaction for the VIX and More subscriber newsletter.

As a reminder, Portfolio A1 was created with tools developed by and is managed via’s tool set. For more information on, please refer to an earlier post on the subject, The Engine Behind Portfolio A1.

Friday, August 1, 2008

Intrade 2009 Recession Prediction Contract

Since I have not seen it mentioned anywhere else, I thought I should point out that, the prediction market site, now has a contract covering whether or not the United States will go into a recession at any time during 2009. While the contract currently suggests a greater than 50% probability that the U.S. will slip into a recession in 2009, I find it interesting that the contract price has been slipping over the past 2-3 weeks, suggesting that the likelihood of a recession next year is declining.

For more on Intrade and prediction markets, see my February post, Intrade Prediction Markets as a Sentiment Indicator.

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