Friday, July 31, 2009

Is the VIX Being Gamed?

In Fear Index Now Inverse to VIX, Zero Hedge recently put forth the idea that the VIX is “being gamed by volatility sellers” and may be “the most behind the scenes manipulated index.”

Several readers have asked me to comment on this. In short, I do not believe the VIX is being gamed to any significant extent. Among the volatility data I watch are the correlations across the various major volatility indices, including the VIX, VXN (for the NASDAQ-100), RVX (for the Russell 2000), VXO (for the S&P 100 index) and VXD (for the Dow Jones Industrial Average.) Historically, the lowest of these correlations has been the two market cap extremes, a 97% correlation between the RVX and the VXO. Frankly, I have not seen much of a deviation from historical patterns over the course of the past few weeks. The charts below show all five volatility indices over the course of the past one month (top) and three months (bottom). If there is any evidence to support the VIX as deviating from the other volatility indices, I don’t see it.

Note that because the VXO does not have any options or futures associated with it, gaming that volatility index would likely be the most difficult and expensive of the group. Also consider that because the components of the VXO have the largest market caps of any of the volatility indices, one would expect changes in the VXO to be less dramatic than those of the other indices that are populated by smaller and more volatile companies.

For related posts on the other secondary volatility indices, try:

[source: BigCharts]

Disclosure: Long VIX at time of writing.

Three Good Articles on the VIX

I continue to be amazed at the sustained level of interest in the VIX and other measures of investor anxiety and volatility, now that the VIX is down 72% from its high.

Today I was pleased to see three excellent articles on the VIX and VIX-related subjects. In no particular order:

Jared at Condor Options asks and answers a question on the minds of many as of late: Why Do VIX Futures Remain High? He shares some graphics from his excellent Volatility Tracker feature and offers a reminder that “the reason those VIX futures remain higher is that traders are willing to pay for November and December SPX options at a higher implied volatility – so any portfolio insurance purchased now will already have this information priced in.”

Bradley Kay at Morningstar takes up a related question in Is Volatility Cheap Yet? He discusses VIX futures and the VXX futures ETN at some length and offers a reminder that “these futures are also subject to the same dangers of contango that hurt similar rolling near-month futures investments in United States Oil (USO) and United States Natural Gas (UNG) earlier this year.” Kay concludes, in concert with my own thinking, that “until this contango starts to flatten and the spot VIX falls to levels more in line with historical norms, we do not think these ETNs provide an attractive long-term risk-reward trade-off.” I do think VXX can be traded effectively across relatively short-term time frames, but the contango roll risk or term structure decay should not be dismissed. I will do a deeper dive into this subject in the near future.

Last but not least, Adam at Daily Options Report (note the new web site) discusses the Credit Suisse Fear Barometer (CSFB) in About that CSFB Index and comes down in favor of a modification proposed by Ryan Renicker of New Edge Group. I need to put my hands on a full set of historical data before drawing any meaningful conclusions about the CSFB, but I like the logic and construction behind a fear-based index denominated in cost of collar data. From what I have seen of the CSFB charts, however, I will approach this one with a fair degree of skepticism.

Thursday, July 30, 2009

Waiting for a Line in the Sand

The rocket-fueled rally continues this morning, with today’s rally marked by very strong breadth and advancing volume ahead of declining volume by more than 10-1 as I write this.

Sooner or later, the bulls will run out of steam, the bears will get tired of retreating and we will have some semblance of a top. With SPX 1000 just around the corner, tomorrow the last trading day of the month and a number of overbought signals being pushed to extremes, today or tomorrow looks like a good place for any bears left alive to make their stand.

The chart below shows that since the March lows, five of the major indices have rallied from 43% (Dow Jones Industrial Average) to 64% (Russell 2000 small cap index).

In addition to being a nice round number and source of psychological support and resistance, SPX 1000 also marks exactly a 50% rally from the March bottom. If the bears cannot keep the SPX under 1010, then there is very little in the way of resistance on the way up to 1050.

I expect a line in the sand soon – and I expect it will have some staying power.

Wednesday, July 29, 2009

Call Volume Spikes in SPXU

Since my ongoing discussion of SPXU seems to have generated considerable interest in the SPX pair of triple ETFs (SPXU is the -3x ETF and UPRO is the +3x ETF), I thought this morning’s surge in call activity in SPXU should be noted.

As the chart below from shows, the 20,000+ calls traded in SPXU during the first two hours of trading suggests some large bets on the SPX are now making their way into the triple ETF options arena. This should come as no surprise, as my recent Triple ETF Options Landscape confirmed large volumes of options trading in several triple ETF pairs, including financials (FAS and FAZ), small caps (TNA and TZA), large caps (BGU and BGZ) and emerging markets (EDC and EDZ.)

Today’s big SPXU transaction was for 20,961 December 75 calls, which appear to have been transacted at the ask price, suggesting some buying interest in the -3x ETF.

Whether this transaction is a speculative play or of the hedging variety cannot be determined, but given all the issues associated with price decay due to compounding, I find it interesting that the options are five months out.


Disclosure: Long SPXU at time of writing.

Tuesday, July 28, 2009

How are SPXU and UPRO Being Traded?

Yesterday, I did my best to be provocative in Is the VIX Being Artificially Depressed by Increased Use of SPXU? One of the points I made is that SPXU could be a substitute for SPX puts (and perhaps artificially depress the VIX as a result) for those who are looking for leveraged ETFs as possible portfolio hedge. To be perfectly frank, I do not believe there will be substantial demand for SPXU (or any of the triple ETFs) as portfolio hedging vehicles, largely related to the issue of the compounding effect (see Understanding the Impact of Changing Market Exposure on Leveraged ETFs from Direxion for more details.)

In fact, when I predicted a bright future for SPXU and counterpart UPRO in The Next Big Thing? back when they launched a month ago, I envisioned three primary uses for these triple ETFs:

  1. As a speculative short-term trading vehicle, with particular emphasis on day trading
  2. As part of various pairs trading schemes
  3. As part of the many arbitrage opportunities presented by all the large and growing family of SPX-based derivatives (futures, options, ETFs, leveraged ETFs, etc.)

While I did not envision SPXU as a viable hedging vehicle, this is largely because I was thinking in terms of a longer time frame for the hedge. If SPX puts can be utilized in increments of the one month options cycle, SPXU would be at a disadvantage trying to compete on a monthly time frame. I do believe, however, that SPXU can be a viable hedge for more than just a single trading session or an occasional two day sequence, as many have suggested. Depending on volatility levels, SPXU hedges can be left in place for up to three days with minimal risk of losses due to compounding. In my opinion, only when holding periods start to exceed four days does an SPXU hedge start to become inefficient.

With SPXU already having traded 2.3 million shares as I type this, the success of this product is now assured. While the value of SPXU as a hedging instrument pales in comparison to other possible applications, I do think SPXU can be used as an effective hedge for periods of 2-3 days at a time with an acceptable degree of compounding risk.

[source: BigCharts]

Disclosure: Long SPXU at time of writing.

Monday, July 27, 2009

Is VIX Being Artificially Depressed by Increased Use of SPXU?

The continued drop in the VIX below the 25.00 level caught a number of traders by surprise, including this writer.

If one were to study last Friday’s Forces Acting on the VIX, it would not take long to determine that with very few exceptions, the fear and uncertainty associated with the forces in the graphic have been rapidly diminishing over the course of the past few months.

One of the forces that I mentioned has received very little attention and has likely been underestimated by traders – if accounted for at all. This is the growth of hedging substitutes for the SPX. As the VIX is strongly influenced by the demand for SPX puts, it stands to reason that any substitutes for SPX puts could ‘artificially’ lower VIX levels by diverting demand to alternative hedging products. Historically, these substitutes have included futures, options and various forms of swaps. With the increased interest in ETFs and particularly leveraged ETFs, however, the menu of substitutes has increased dramatically.

During the height of the financial crisis, I documented how many investors were foregoing SPX and SPY puts in favor of options targeted specifically on the financial sector.

With the introduction of the bearish -3x Short ProShares (SPXU), a triple ETF aimed at replicating -300% of the daily move in the SPX, I believe traders have found – and embraced – an alternative to SPX options that is starting to impact the VIX.

The graphic below shows how the recent increased volume in the SPXU just happens to coincide with the decoupling of the VIX and the VXN. The same factors are undoubtedly impacting volatility term structure as well and may explain some of the recent low readings in the VIX:VXV ratio.

I am leaving the title of the graphic as a rhetorical question for the moment, as one month of data will necessarily leave us far short of any sort of statistical proof. Do not be surprised, however, if SPXU and its +3x sibling UPRO continue to generate larger interest and volume, both as a hedging tool and as a speculative play. As leveraged ETFs based on the SPX increase their market share, interest in SPX puts – and absolute levels in the VIX– may see a significant decline.

For some related posts, see:

[graphic: VIXandMore]

Sunday, July 26, 2009

Chart of the Week: Volatility and Mean Reversion in 1987-88 and 2008-09

In this week’s chart of the week, I have elected to compare the aftermath of volatility spikes in 1987 and 2008. For the 1987 series, which begins with Black Monday, I have chosen to use a reconstruction of the ‘original VIX’ which has been tracked under the VXO ticker since 2003 and peaked at approximately 172; for 2008 I begin on November 20th, which the close of 80.86 is the highest VIX close ever.

The key takeaway is that for the first six months after the volatility spike high, post-spike volatility fell faster in 1987-88 than it did in 2008-09. This is not surprising in that the consensus of opinion is that there was much less structural volatility and a much shorter period of extreme risk during 1987-1988 than in 2008-09. Interestingly enough, however, now that we are eight months and 169 trading days removed the November 20th VIX spike, it turns out that volatility has fallen to much lower levels in the current environment than in the eight months following the 1987-88 volatility spike.

The graphic highlights that volatility remained at a higher level in 2008-09 than 1987-88 throughout the 50, 100 and 150 day milestone. In the last month, however, the absolute level of volatility for 2009 has been consistently lower than the readings from 21 years ago. Whether there is indeed less risk in 2009 than 1988 or whether the current period is simply characterized by higher levels of complacency remains to be seen.

For those who may want to chime in about comparing the VIX to the VXO, please note that the VIX closed at 23.09 on Friday and the VXO closed at 23.06. Using VXO data for 2008-2009 would result in the same takeaways and only slightly different data.

For a related post, see:

[source: Yahoo]

Friday, July 24, 2009

Forces Acting on the VIX

I have received quite a few requests to comment on the recent falling VIX, which stands at 23.23 as I write this, as well as the VIX:VXV ratio, how far I expect the current bull leg to run, etc.

I will get to most of this over the weekend (and newsletter subscribers will invariably get a much more detailed sense of my thinking), but I thought this might be a good time to put up a graphic that attempts to capture some of the many forces that act on the VIX. Going forward, I believe having a framework to refer to when talking about the VIX might help ground some of the dialogue.

When all is said and done, the VIX reflects supply and demand for options on the S&P 500 index. The factors that affect movements in the VIX from day to day or week to week, however, are always in flux. The graphic below is the result of a brain dump I did this morning in an effort to put some of these factors onto a single page. I started in on grouping the forces that act on the VIX and using some arrows to indicate relationships between the various factors, etc., but this clearly requires a little more soak time before it will look like a finished product. For that reason, I thought I might post this graphic here and ask for reader feedback.

[Note that the relative positions of the shapes on the VIX axis are not necessarily indicative of the potential effect they might have on the VIX. At first I wanted the graphic to encapsulate each factor on a relative importance scale and yet also have grouping and arrows that helped to described the relationships across factors. I think this might have been a little too much wishful thinking in just two dimensions, so the graphic below has some of the relative importance and some of the relationships, but is far from the last word on the subject.]

Excellent New VIX Video at

As a discretionary trader, I sometimes like to act on my gut before I get the proper confirmation signal to enter or exit a position. The bottom line is that I don’t mind being early and I don’t mind being wrong, as long as the economics of my gut is positive on balance.

Two weeks ago, I took that same gut feel approach with a new blog from a blogger I was completely unfamiliar with. In fact, in New Options Blog:, I had the nerve to call Dean Mouscher’s blog “a must read” after only two posts. Well, bloggers come and go, but if were a stock, I think my IPO price would have at least doubled or tripled by now, based on the number of readers who thanked me for the recommendation.

The latest from is The VIX – What You Need to Know and includes a new 16-minute video that details some of the essentials of the VIX, with an emphasis on VIX futures. Between Dean’s video and My Ten Things Everyone Should Know About the VIX, someone who is new to the VIX can get up to speed very quickly.

Two quick comments on Dean’s video:

  • VIX futures were introduced in March 2004; VIX options were not introduced until February 2006 (see Overview of the U.S. Volatility Indices for more details)

  • Representatives from at least three different brokerages have told me that the SEC/CFTC regulatory split is responsible for quotes for VIX options erroneously using the cash VIX instead of VIX futures as the underlying for calculating VIX implied volatility (see Calculating the Implied Volatility of the VIX for more details)

Thursday, July 23, 2009

CBOE Launches Implied Correlation Index

Volatility watchers and risk managers have a new index to watch, starting next Monday: the CBOE S&P 500 Implied Correlation Index. The CBOE announced the new index in a press release yesterday, noting that the Implied Correlation Index will be tied to two different option maturities - January 2010 (ICJ) and January 2011 (JCJ). The values of ICJ and JCJ will be disseminated by the CBOE every 15 seconds during the trading day, as is done with the VIX.

The Implied Correlation Index does not calculate the correlations among the entire S&P 500 index. Instead, it utilizes a “tracking basket” of the 50 largest components of the SPX as measured by market capitalization. For more on the calculations involved in the Implied Correlation Index and related materials, check out the Implied Correlation Index splash page, the Implied Correlation Index white paper and historical data going back to the beginning of 2007.

I will discuss this index on the blog going forward, as it is clearly an important piece of the VIX valuation mystery. For now, readers may be interested to see how SPX component correlations (blue line) have compared with the VIX (red line) during the recent bear market.

[source: CBOE]

Wednesday, July 22, 2009

More Questions About Bollinger Bands

Yesterday’s post, Charts on the Blog, triggered several questions from readers about the nature of the Bollinger Bands data and the usefulness of these bands to traders.

One reader asked whether I intended to say that the two standard deviations should contain 95.45%. While this is what would expect from a Gaussian or normal distribution, the distribution of stock prices does not follow a normal distribution. In fact, they tend to have fat tails or what statisticians call positive kurtosis.

In Bollinger on Bollinger Bands, John Bollinger talks about the extensive research he did which demonstrated that Bollinger Bands do not capture as much of the data as would be expected from statistics associated with a normal distribution.

Bollinger describes his findings as follows:

Only approximately 89 percent of the data is contained within 2 standard deviation bands when we would expect 95 percent.

There are two possible reasons why we don't get as high as a level of containment as we would expect -- near 95 percent with 2 standard deviation bands. First, we are using the population calculation, which results in slightly tighter bands than the sample calculation. Second, the distribution of stock prices is not normal -- there are more observations at the extremes than one would expect -- so there are more data points outside the bands too. There are undoubtedly more factors, but these appear to be the main ones.”

Another reader offered the following critique of Bollinger Bands:

“I've never understood the value of Bollinger bands. They don't provide a measure of volatility since as the chart gets more volatile the bands expand. One might look at the width of the band to estimate volatility. But that seems like a very imprecise measure. It doesn't really stand out. A graph of historical volatility would be much more useful.

Nor do they help with estimating when regression to the mean might occur. For again, as the item moves farther from the mean, the bands expand. There are many instances in which the chart touched the extreme of the band only to continue on farther -- with the band following along.”

While not trying to sound like an apologist for Bollinger Bands, it is important to note that these are one way of measuring historical volatility (albeit not the standard approach) and they have the benefit of providing a visual shorthand for those who wish to eyeball the ebb and flow of relative volatility.

In fact, Bollinger Band width is a way to measure one type of historical volatility statistically rather than to rely on a chart and I have used this measure on the blog (see link above for examples) on several occasions to measure volatility.

Regarding predictive value of Bollinger Bands, I find that they can be a useful indicator – notably with the VIX – and increase in their predictive the more standard deviations the VIX is from the mean. While October and November 2008 were not good times to employ this strategy, for the most part, I believe Bollinger Bands usually provide some helpful information about the likelihood of mean reversion.

Finally, there are some traders who prefer to play the volatility trend instead of using a mean reversion approach. Volatility trend traders might do something opening and maintaining long positions when a stock is trading between +1.0 and +2.0 standard deviations above the mean and closing those positions when the Bollinger Band lines are violated.

For those who are interested in learning more about Bollinger Bands, Bollinger’s own book on the subject (see above) is a probably the last word on the matter. Readers are also encouraged to check out a three-part series on three important parameters of Bollinger Bands that I posted a little over a year ago:

  1. Bollinger Bands: Why 20 Days?
  2. Bollinger Bands and the Standard Deviation Setting
  3. Bollinger Bands and the Percent B Setting

Tuesday, July 21, 2009 Charts on the Blog

By far, my favorite stock charting site on the web is, from which quite a few screen shots have been imported into the blog.

Recently I have fielded a few questions about my StockCharts charts and I wanted to spend a little time talking about the information contained in these charts. For starters, StockCharts offers what they call a “gallery view” for each ticker. This is a group of three free charts consisting of a daily chart with five months of data, a weekly chart with two years of data and a point and figure chart. StockCharts members also have a fourth intraday utilizes ten minute bars for the past four days.

While these gallery charts are an excellent starting point, the true power of StockCharts is in creating custom charts. At the bottom of this post is what I would call my “standard chart” from StockCharts, which uses daily bars over the course of the past eleven months. My standard chart utilizes candlesticks because I prefer the informational content that can be displayed in one candle. I also utilized three simple moving averages: 10 days (solid blue line) for the short-term; 50 days (dotted red line) for the intermediate-term; and 200 days (dotted green line) for the longer-term. These are widely-used moving averages and the selection is somewhat arbitrary. I prefer the 10 day to the more common 20 day because I often have a very short-term time horizon and because the 10 day is utilized heavily by traders who follow the VIX.

The gray cloud around the candlesticks is Bollinger Bands, set to 20 days and two standard deviations. I like to use Bollinger Bands to give a sense of the ebb and flow of historical volatility superimposed on the price data, rather than as a separate study above or below the main price chart. I choose to display these by area instead of the more typical lines because I want to limit the lines cluttering up the chart and give some semblance of visual clarity. According to extensive studies done by John Bollinger, one would expect 88-89% of all future daily price moves to fall within the range defined by the current Bollinger Bands – assuming, of course, the future resembles the past.

The only other graphical data on this chart is the volume data, which includes a 50 day exponential moving average line in purple, making it relatively easy to identify large volume spikes.

Finally, a reader recently asked why the y-axis is not proportional. The short answer is that charts can be plotted with a standard (proportional) y-axis or using a logarithmic axis. The benefit of a standard axis is the ease of measuring absolute changes: ten points up and ten points down are the same height. For longer periods, however, compounding distorts percentage changes, so a logarithmic axis ensures that percentage moves up and down are the same height. Consider a $100 stock. If it goes up 50% three years in a row, it ends up at 337.50 (100*1.5*1.5*1.5) a change of 227.50 points. But if the same stock goes down 50% three years in a row, it will be at 12.50, a change of only 87.50 points. On a standard y-axis, the move up 50% for three years will look 2.6 times (237.50 / 87.50) greater than the move down 50% for three years. A logarithmic axis makes sure that these percentage changes look identical to the eye. In a future post, I will talk more about logarithmic axes and use some examples to illustrate their advantages and disadvantages.

In the meantime, those with an interest in learning more about charts, high quality charts and archiving their ideas in chart form are advised to kick the tires of If you want to see some of what others have done with the available tools, check out the public charts section.

[source: StockCharts]

Monday, July 20, 2009

Triple ETF Options Landscape

Since I find myself increasingly active in trading options in triple ETFs, I thought readers might find it interesting to see a graphic of some important options data on the triple ETFs currently in the market.

Utilizing data from, the spreadsheet below captures the average options volume, open interest and current implied volatility for the 12 pairs of triple ETFs. I have separated the ETFs into four groups: broad index ETFs (market cap focus); sector ETFs; geography ETFs; and bond ETFs. I have also color coded the top five pairs in terms of liquidity in green, with two additional pairs highlighted in yellow that I believe are liquid enough to trade, though they do not yet have the following of the “big five.”

I will refrain from additional comments, other than to note that I believe a lot of additional information of interest can be gleaned from this relatively simple graphic.

For a related post, see: Using Options to Control Risk in Leveraged ETFs

[source: iVolatility]

Sunday, July 19, 2009

Chart of the Week: SPX and NDX

In reviewing previous chart of the week graphics, I was surprised to see that I have featured a chart of the SPX only once in the past five months (Chart of the Week: Lack of Volume and Breadth Threatens Bull Move) and decided that this most important of indices needs to take center stage more often.

Alas, this week’s chart of the week shows a year of SPX daily bars, with some standard moving averages and Bollinger Bands, as well as a set of Fibonacci retracement lines that have generated considerable discussion in the past (SPX and Fibonacci Resistance at 966.) The new twist on this chart is a simple ratio of the NASDAQ-100 (NDX) to the SPX, which is included as a study above the main graph. The NDX:SPX ratio shows that while the SPX was retreating from its June 12th high, the NDX was outperforming the SPX on a relative basis, as has been the case for the past two months. Spurred on by a very strong earnings report from Intel (INTC) the NDX:SPX ratio is currently at its highest level since early 2001 and the NDX is now comfortably above its June high.

It is worth noting that outside of technology, the only other major sector to have topped its June high is health care (XLV) with consumer staples (XLP) just 0.03 below that high water mark. With the leadership role of technology should be considered a positive sign for bulls, the high relative strength of defensive sectors such as health care and consumer staples might be considered a warning sign.

For a related prior chart of the week post, see: Chart of the Week: The Resurgent NASDAQ-100 (4/5/2009)

[graphic: StockCharts]

Friday, July 17, 2009

Trading Options Expiration Days

I had just about decided to stop trading options expiration days when I read Jeff Augen’s Trading Options at Expiration: Strategies and Models for Winning the Endgame (see Another Winner from Jeff Augen for more details), which inspired me to consider a number of potential new options expiration strategies.

As a trader, I am acutely aware that my aggregate P&L for options expiration days is a net loss. It is not just the fact that I have always found it difficult to be consistently profitable on options expiration days that has bothered me, but it has also been the frustration of seemingly having to maintain one set of rules for 240 trading days per year and another set of rules to deal with a completely different set of opportunities and hurdles presented once each month.

The bottom line for me is that it is not worth it to day trade options expirations days and let’s face it, who doesn’t need an extra day off each month. Further, why bother with the day before FOMC announcements, when trading is typically lackadaisical at best? With options expirations every month and FOMC meetings every six weeks, this means 20 additional vacation days a year – perhaps even paid for by cutting trading losses.

I encourage every trader to check their track record on options expirations days and FOMC announcements days to see whether they should be entitled to 20 extra vacation days. Don’t stop at these two slices, perhaps your strategies do not work well on the day before holidays, the week after options expiration, the first week of each month, Wednesdays (crude oil inventories), Thursdays (jobless claims), the day you have dental appointments or whatever.

Not all days are created equal and if your edge isn’t there on certain days, perhaps you should not just step away from the keyboard, but hop in the car and go have some fun with all the money you are saving.

[A number of readers have asked where I took this photo. It is from Battle Rock Beach at Port Orford, Oregon. I took this particular shot on a bluff overlooking the beach. Later on I discovered that a local B&B just happened to have a webcam with a similar perspective: Battle Rock Beach webcam]

Thursday, July 16, 2009

200 Trading Days Ago Today

Exactly 200 trading days ago today, on September 24th, the S&P 500 index last traded over 1200. From that point, it only took six more trading days before the SPX closed under 1000. From that point forward, the SPX flirted with the 1000 level for about a month, before plunging to a low close of 752 in November and ultimately a bottom closing low of 676 in March.

I mention this not out of a desire to wax nostalgic, but to point out that the 200 day simple moving average for the SPX is in the process of dropping those last few closing values in the 1000-1200 range over the course of the next week or so. This means, among other things, that the 200 day moving average is going to start forming a rounded bottom next week and should only drop another five points or so to 869.

Don’t expect to see much of an uptick in the 200 day moving average until the beginning of September. At that point, it should start rising at a rate of about two points per week.

Finally, as I type this, the SPX is at its highest level above the 200 day SMA (about 6.6%) since July 2007.

For more on this subject, check out The SPX and the 200 Day Moving Average.

Wednesday, July 15, 2009

Volatility Analysis for July 15, 2009

One what was one of the more interesting days in volatility in a long time, I thought I should pass along a few random thoughts:

  1. The intraday tick for tick positive correlation between the VIX and the SPX was as strong as I have ever seen. Most of the time the VIX and the SPX move in opposite directions. Today it was almost as if someone has inverted the gravitational forces acting upon these two indices. (For more on the correlation between the VIX and the SPX, check out the posts with the SPX-VIX correlation label.)

  2. The SPX finished the day up 2.96%, with the VIX up 3.48%. This is the first time ever that both indices moved more than 2.8% in the same direction on the same day.

  3. For more on days in which the VIX and SPX both have strong moves to the upside, check out my June 1st post, Eerie Déjà vu as VIX and SPX Both Jump More Than 2.5%

  4. When both the VIX and SPX are up on the same day, this is historically bearish, generally conveying an edge of 0.25% or to the bears for 3-5 days. This edge begins to diminish substantially after about a month or so.

  5. Regarding today’s VIX movement, keep in mind that the VIX gapped down about 0.80 when Intel (INTC) earnings were announced after hours yesterday. So with the SPX essentially frozen, there was a 0.80 offset going into the day from the 15 minute twilight zone while trading that took place yesterday from 4:00 to 4:15 p.m. ET. If we were to back out the 0.80 after hours VIX drop, then the VIX would have finished approximately flat today – still an interesting development, but a lot less noteworthy.

  6. As predicted earlier today (VXX Volume Spiking to New Record as Investors Bet on Increasing Volatility), the iPath S&P 500 VIX Short-Term Futures ETN (VXX) crushed the old volume record, with 1,537,844 shares exchanging hands, eclipsing the old record by more than 440,000.

  7. Finally, Tuesday was a particularly interesting day to see volatility drop so low, with so many very important volatility events right around the corner, including a critical earnings reporting season, a flood of highly anticipated economic data and options expiration.

VXX Volume Spiking to New Record as Investors Bet on Increasing Volatility

With volatility hovering around 25.00, investors are piling into the iPath S&P 500 VIX Short-Term Futures ETN (VXX) today. Just before 2:00 p.m. ET, VXX had already traded over 1 million shares and is well on the way to breaking the ETN’s volume record of 1,094,140, which was established on May 21st.

[source: BigCharts]

Some Thoughts on Current Volatility

Being a West Coast guy, I often find myself three hours behind the rest of the blogging world when I stumble out of bed. Once or twice a year, I manage to sleep through the open and generally spend the rest of the day playing catch-up, as has been the case today. Now that I am mostly coherent and have digested the bulk of the news and market movements for the first three hours of today’s session, let me offer some comments.

While stocks are enjoying an Intel (INTC) inside jump, the VIX is up a shade as I type this, seemingly intent on staying above the 25.00 level. On the other hand, three of other major market index volatility measures I follow (VXN, RVX and VXD) are all down in the 5-7% range for the day. The outlier among the secondary volatility indices is VXO, the volatility index for the S&P 100 index (OEX), which is only down about 2% on the day. (I am not sure exactly how to parse this information, but with the meat of second quarter earnings season just around the corner and options expiration only two days away, I would not be surprised to learn that portfolio managers are looking to lock in some profits and add some additional downside protection.)

In the last day or two, a number of other bloggers have commented up on the volatility premium issue. In VIX Predicting the Future…and It’s Cloudy, Jason Goepfert of Sentiment’s Edge has an excellent chart of the premium of the front-month VIX futures to the spot VIX index and points out that a high premium has lately been bearish for stocks. Adam Warner of Daily Options Report picks up the premium theme in While We Were Churning…… as does the Decline and Fall of Western Civilization blog in Volatility Curve Warning Again.

The premise is exactly the same reasoning as is behind the VIX:VXV ratio and the VXX:VXZ ratio: when short-term volatility measures become substantially out of line with longer-term volatility measures, the divergence is most likely to be resolved by the short-term measure ‘correcting’ in the direction of the longer-term measure. With the VIX:VXV ratio recently hovering around 0.85, this means a VIX spike is more likely to take the ratio back toward equilibrium than a substantial drop in the VXV index. By the same token, VXX and VXZ are more likely to converge as a result of a jump in VXX than a decline in VXZ. Of course, the numerator and denominator can always converge at the same rate, but that type of resolution seems to be relatively rare.

For those who may be interested, my various estimates of fair value for the VIX are largely in the range of about 28-29 at the moment, suggesting that short-term volatility is due for a bounce soon.

As a reminder, anyone wishing to speculate on the VIX using options and futures should note that VIX options expire next Wednesday (July 22), with the last day of trading on Tuesday.

Tuesday, July 14, 2009

Round Number Magnet Strangle

The power of round numbers does not seem to receive a lot of play in investment circles. Sure, there is the psychological significance of an index or a stock crossing above or below a round number, but I am surprised that nobody ever talks about how to trade these.

Rather than look as round numbers as potential areas of enhanced support or resistance, I like to think of them has having a strong attractive power, almost as if they are large magnets. In some indices and stocks, prices tend to linger near round numbers for longer periods than a random distribution would suggest.

One way to take advantage of the attractive tendencies of round numbers is to sell options at or near that strike. Straddles, strangles, butterflies and iron condors would certainly be appropriate choices, but I have personal preference for strangles, with their wide maximum profit zone and simple construction/position management.

These ‘magnet straddle’ plays can utilize options of any duration, but maximum time decay (theta) is achieved in the last few weeks prior to expiration. In the graphic below, which is courtesy of optionsXpress, I show that anyone interested in selling an 890-910 strangle on the SPX can make a profit if the index manages to stay in a 40 point zone (880-920) during the last three days prior to expiration.

I feel obliged to mention that conventional wisdom says expiration week is too fraught with short-term uncertainty and gamma risk to be traded profitably on a consistent basis, yet I still think there are a number of opportunities where probabilities favor the experienced options trader.

Finally, if this trade sounds somewhat familiar, readers may be interested in checking out a similar straddle trade in Is the SPX Going to Stick Close to 900? from last December. With a VIX in the upper 50s when the original trade was discussed, the profit zone of 840-960 makes it look like a slam dunk winner by current volatility standards.

[graphic: optionsXpress]

Monday, July 13, 2009

Quantifiable Edges and Daily Options Report on Volatility

I woke up this morning to find two posts on volatility from fellow East Coast bloggers who have some excellent insights on the subject.

Rob Hanna at Quantifiable Edges has a post up in which he looks at short-term volatility cycles. In What Happens After a Sharp Contraction in Volatility, Rob reviews three day periods of extremely low realized volatility and concludes that three day cycles of extremely low volatility are typically followed by three subsequent days of dramatically increasing volatility, in classic mean reversion fashion.

Adam Warner at Daily Options Report covers several volatility-related issues in Other VIX Gappage, where he discusses gaps in the VIX and his preference for using VXX over VIX to better gauge volatility trends on Fridays.

Both bloggers make superb points about volatility and both are on my daily required reading list for their consistent high quality work across a wide variety of subjects.

Sunday, July 12, 2009

Chart of the Week: Crude Oil and Volatility

While stocks have gyrated wildly during the course of the past year, fluctuations in the price of crude oil have been even more dramatic. Crude oil hit a high of 147.90 one year ago yesterday, on July 11, 2008, yet fell 76.2% to reach a low of 35.13 just five months later.

The chart of the week, below, captures the weekly changes in the price of West Texas Intermediate crude oil since the beginning of 2005. Note that the 39 week moving average (solid red line), which encompasses three quarters, aligns very closely to the classic 200 day moving average that is frequently found in charts of daily bars. Crude oil made a bottom 29 weeks ago and as a result, the 39 week (and 200 day) moving average should begin to rise during the course of the next 2-3 weeks, providing technical support for this commodity.

Note also that the Oil VIX (OVX), which was launched one year ago this coming Wednesday reflects the volatility in crude oil prices during this period. While the VIX never reached 90 during the market turmoil, the OVX hit 103.54 in November and currently sits at 50.88, some 75% higher than the VIX.

[source: StockCharts]

Friday, July 10, 2009

Excellent New Options Blog:

In the blogging world, there are very few options blogs that I would consider a must read. Based on the first two posts, it looks as if Dean Mouscher’s blog is going to be added to that list.

What Is an Option Worth? is Mouscher’s first post. The post includes a 45 minute video dedicated almost exclusively to implied volatility and is one of the best videos I have seen on the subject – and almost certainly one of the top free options videos out there. The discussion of implied naturally evolves into a fairly detailed treatment of the forces that act upon the VIX, making this an excellent primer for the beginning options trader and a worthwhile review for intermediate options traders as well.

By all means, check out Mouscher’s blog and take the 45 minutes to hear what he has to say about implied volatility.

Thursday, July 9, 2009

The VIX as a Hedging Tool

I generally use the VIX as a speculative vehicle rather than a hedging tool, but lately I have received several questions about how one might go about hedging a portfolio with the VIX. The subject of hedging is going to require a series of posts in order to do it justice, but before I dive in, I thought I should share an interesting paper from Edward Szado that recently became available on the web site of the Center for International Securities and Derivatives Markets (CISDM) at the University of Massachusetts.

In Szado’s own words, his paper “assesses the impact of a long VIX investment as a diversifier for a typical institutional investment portfolio during the 2008 credit crisis. The analysis covers the period of March 2006 to December 2008 (beginning shortly after the introduction of VIX options in February of 2006) with a focus on the latter part of 2008 (from August to the end of December).”

The research utilized by Szado incorporates three different long VIX hedging strategies.

  • VIX futures (near month, 2.5% and 10% allocations)
  • VIX at-the-money calls (1% and 3%)
  • VIX 25% out-of-the-money calls (1% and 3%)

The full text of Szado’s conclusion is as follows:

“Ultimately, the goal of this study is not to make a strategy recommendation for an ongoing risk management program, but rather to consider the impact that a long VIX exposure would have had in this particular time period. The increased correlations among diverse asset classes in the latter half of 2008 generated significant losses for many investors who had previously considered themselves well diversified. It is clear from the results of the analysis that, while long volatility exposure may result in negative returns in the long term, it may provide significant protection in downturns. In particular, investable VIX products could have been used to provide some much needed diversification during the crisis of 2008. In addition, the results of this study suggest that, dollar-for-dollar, VIX calls could have provided a more efficient means of diversification than provided by SPX puts.”

Going forward, I will discuss in more detail the approach and data from Szado’s study and offer some of my thoughts about using various VIX products for the purpose of hedging.

Further reading:

Wednesday, July 8, 2009

Options Available for New S&P 500 Triple ETFs

Though they are less than two weeks old, the two new triple ETFs based on the S&P 500 index already have options available to trade. The bullish 3x ETF, Ultra ProShares (UPRO) has July options that expire one week from Friday with strikes from 60 to 95, including single dollar increments from 80 through 90. The bearish -3x Short ProShares (SPXU) has options available from 70 to 95, with all the strikes in single dollar increments.

In anticipation of a broad range of applications and the potential for some significant movement, the strikes for the December options range all the way from 30 to 140 for UPRO and from 40 to 150 for SPXU.

While both of these triple ETFs have been attracting more volume each day, neither has managed to break the million share mark yet. I anticipate that we will begin to see million share days in each of these ETFs next week and shortly thereafter, UPRO and SPXU will begin to trade in the volumes currently associated with leveraged ETF pairs such as FAS/FAZ and SSO/SDS.

As these triple ETFs are based on the same underlying as the VIX, an entire new genus of trading strategies is being hatched as I write this…

Tuesday, July 7, 2009

Interest in VIX Spikes as Volatility Declines

I was not at all surprised that when the VIX spiked over 80 last October, this blog was the beneficiary of a similar spike in readership. In fact, spikes in visitors to the blog have been highly correlated with the VIX and with various volatility events since the blog was launched in January 2007. This phenomenon is not limited to VIX and More. As a general principle, readership of all sources of financial information tends to increase whenever investor anxiety is heightened and the need for quality information and insight is greatest.

What has surprised me, however, is the magnitude of the persistent interest in the VIX in recent weeks, not to mention the debate caused by the drop in the VIX below the 30 level. Clearly, the VIX is not a one-spike pony and investors have become highly attuned to a more complex dialogue about volatility levels and their implications. This point was brought home dramatically last month when the blog’s readership hit a new high, eclipsing the VIX moon shot mania of October. In the chart below, I have noted the events which have triggered readership to spike above the long-term trend line. As best as I can tell, last month was the first time readership spiked due to concerns about how low the VIX is.

Apparently, the VIX is here to stay. And while I enjoy probing the “…and More” portion of my blogging calling card, I will see what I can do to at least match the volume of VIX posts by the irrepressible Adam Warner at Daily Options Report.

[graphic: VIXandMore]

Monday, July 6, 2009

Direxion Announces Reverse Splits for FAS and FAZ

Direxion formally announced today what has been rumored for awhile now, that its two most popular triple ETFs, FAS and FAZ, will undergo reverse splits after the close of trading on Wednesday, July 8th.

FAS (financial 3x ETF), which closed Friday at 8.34, will split 1-for-5, while FAZ (financial -3x ETF), which closed Friday at 5.13 will split 1-for-10.

For more details, check out the Direxion press release.

“Darn Nice Economic Eye Candy”

Lately it seems as if every new piece of economic data gets scrutinized ten different ways for signs of green shoots, brown shoots, bottoming, rebounding and backsliding. To make matters worse, there are headline numbers, data subsets which are ex-this and ex-that, month-over-month comparisons, year-over-year comparisons, and comparisons relative to consensus estimates – and depending on who you are listening to, there can even be multiple ‘consensus’ numbers.

Fortunately, there are a number of excellent sites in the blogosphere that are quick to distill each piece of new economic data into some essential graphics. Some of the best of these, like Calculated Risk, The Big Picture, etc. are widely known. Other blogs that rip apart the data and repackage the highlights graphically should probably be better know. Included among this group is EconomPicData, which is responsible for the chart below.

Here is the lead from this morning’s Bloomberg news report that bears the headline Bank of Japan Says Recession Easing in All 9 Regions:

The Bank of Japan became more optimistic about the economy in all nine regions for the first time since January 2006 and Governor Masaaki Shirakawa said exports and industrial production are recovering.

“The pace of economic deterioration was slower in all regions,” the central bank said in a quarterly report in Tokyo today.

Jake at EconomPicData puts this optimism into a broader historical context:

[graphic: EconomPicData]

There may indeed be signs of progress, but it certainly strikes me as premature to get excited about the magnitude of improvement.

For a steady stream of economic graphics and interpretation, check out the site with the tagline Darn Nice Economic Eye Candy.

Friday, July 3, 2009

Chart of the Week: Breaking Down the S&P 500 Index in Q2

In the 31 weeks since the launch of the chart of the week feature, I have created all the charts with the exception of (I believe) two of them. Going forward, I think it is time to relax this constraint a little and expand the scope of the chart of the week feature to cover a broader range of subjects, bring in a little more visual variety, etc.

What better way to usher in an expanded chart of the week feature, but with a heat map of the second quarter performance of the S&P 500, particularly when the 15% gain in the quarter was the best for the index in eleven years. The heat map breaks down the quarterly performance at the component level, grouped by sectors and industries, with the size of the squares being proportional to market capitalization and the color codes (and numbers) representing quarterly performance. has a large number of heat maps available and is a site that is well worth exploring.


Thursday, July 2, 2009

Guest Columnist for Steven Sears at Barron’s Today

Thanks to Steven Sears at Barron’s for giving me an opportunity to contribute to his excellent options column, The Striking Price Daily, while he is on vacation.

It should surprise very few readers that I elected to write about a subject that has garnered a great deal of attention on this blog, the CBOE S&P 500 Three-Month Volatility Index. Of course we just call it VXV here. The Barron’s column, Take a Longer View on Volatility, is available to subscribers and non-subscribers alike.

Wednesday, July 1, 2009

Timing of VIX Bottom

Based on a number of factors, including my recent comments in VIX at Seasonal Cycle Low, I believe there is a very good chance the VIX may put in an intermediate-term bottom either today or tomorrow.

Top Posts of 2009 (Midyear Edition)

This is the third year I have been reporting on the most popular posts at VIX and More. As of June 30th, the 2009 posts which have been read by the largest number of unique readers are as follows:

  1. Chart of the Week: Might Recent Volume Bottom Doom Stocks?
  2. Lagging Semiconductor Index Suggests Caution
  3. The Possibility of a ‘Stealth Bottom’
  4. Three Fear Indicators (or…The Three Baritones)
  5. On Trading Rules and Guidelines
  6. Chart of the Week: Change of Trend in Cash Holdings?
  7. VIX:VXV Ratio Moving Toward Bearish Zone
  8. VIX:VXV Ratio Sell/Short Signal
  9. Equity Put to Call Ratio Hits Ten Month Low
  10. Learning About Options (1)
  11. Cash on Sidelines Headed Back to Stocks?
  12. Eerie Déjà Vu as VIX and SPX Both Jump More Than 2.5%
  13. Late Day Rallies, the SPX and the VIX
  14. Roubini and the VIX
  15. Regional Banks in Trouble
  16. The New VIX Macro Cycle Picture
  17. Where Will the VIX Bottom?
  18. Direxion Triple ETFs Add New Horses to Stable
  19. Today’s Jump in the VIX
  20. The SPX and the 200 Day Moving Average
  21. Chart of the Week: Emerging Markets
  22. VIX at Seasonal Cycle Low
  23. Commercial Real Estate Problems Piling Up
  24. Can Selling Options Make You a Better Trader?
  25. Percentage of NYSE Stocks Above 200 Day SMA

For the record, the top 25 posts for 2007 and 2008 are pinned to the right hand column of the blog and can also be plucked from the archives at:

Weather permitting, I will be back at the end of the year to update this list.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
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