Chart of the Week: VXX Celebrates 2nd Birthday

One year ago today, in Chart of the Week: VXX Celebrates One Year of Futility, I chronicled the first year of the iPath S&P 500 VIX Short-Term Futures ETN, known to most by its ticker symbol, VXX. At the time, I noted that VXX had fallen 68.4% in its first year and made the prediction, “I expect VXX to perform better relative to the VIX in its second year than it did in its first year, though admittedly this is not a very high bar to clear.”

Well, low bar or not, the performance of VXX was even worse in its second year than in its first year. In spite of the fact that VXX rallied 8.4% on Friday to close out the second year on a high note, its performance in the second year slipped to -74.6%, giving the ETN the dubious distinction of having fallen 92% since its launch two years ago.

While I have been chronicling the shortcomings of VXX for the better part of these past two years, let me go on record as saying that VXX does exactly what it sets out to do: capture a portfolio of VIX futures with a constant maturity of 30 days, with daily rolling used in order to achieve the constant maturity. As detailed in the links below and in many other places in this blog, it is the daily rolling in the face of persistent contango which triggers negative roll yield and acts as a drag on the price of VXX. In fact, VIX futures contango has been extremely elevated since the end of August, which largely explains why VXX lost 74.6% in the past year when the VIX declined only 18.6%. To compare the contango impact of the second year of VXX with the first year, all one needs to know is that in the first year VIX outperformed VXX by 26.2%, while in the year just concluded, VIX outperformed VXX by a whopping 56.0%.

This does not mean that investors should shun VIX as a volatility trade. In the short-term, VXX is a viable long volatility play, as evidenced by Friday’s 8.4% gain. When the VIX futures curve slides from contango to backwardation, VXX can also be an attractive trade. The problems on the long side begin when investors utilize holding periods of more than a couple of days. In the long run, volatility is mean-reverting and offers no natural directional advantage. For this reason, the longer the holding period, the more VXX trades become term structure rather than directional trades, with the term structure favoring contango over backwardation approximately 75% of the time.

With this in mind, I will repeat the same prediction I made one year ago, undaunted: VXX will perform better relative to the VIX in the coming year than it has in the past year.

Related posts:

• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• VXX Monthly Performance
• Chart of the Week: VXX Celebrates One Year of Futility
• Chart of the Week: VXX vs. VIX
• Managing Risk with a Short VXX Position
• Charting the Assets of Volatility-Based ETPs
  

[source: StockCharts.com]

Disclosure(s): short VXX and VIX at time of writing

TVIX Finally Getting Its Due as Day Trading Rocket Fuel

Launched at the end of November 2010, I am surprised it has taken so long for TVIX to become a popular short-term trading vehicle. I predicted in the middle of December that TVIX “will hit a tipping point and become the darling of day traders,” but in the absence of meaningful volatility during the last few months, it has sometimes been difficult to see the potential of TVIX.

With today’s sell off in stocks, however, TVIX was up as much as 18.5% at one point and traded a record 120,000 shares in the first half of today’s session, easily eclipsing its prior volume mark.

Shortly after Direxion launched the first triple ETFs in November 2008, I came out with what sounded like an outrageous claim at the time: Prediction: Direxion Triple ETFs Will Revolutionize Day Trading. It took awhile, but eventually these products became the preferred vehicles for many short-term traders. Their popularity was undercut somewhat when margin requirements were raised to match the leverage built into these trades. With TVIX, which is essentially a +2x version of VXX, VIXY and VIIX, I expect that the tipping point has arrived today. With new liquidity, short-term traders now have a product where 10% daily moves will be relatively common and margin issues should be minimal.

Of course, as a buy and hold vehicle, TVIX will present several significant obstacles, including negative roll yield due to VIX futures term structure/contango issues, as well as the loss in value associated with volatility + compounding that plague leveraged ETFs.

Related posts:

• VIX and More and the 2011 Bespoke Roundtable
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to the VIX ETP Space with Leveraged and Inverse Products
• Prediction: Direxion Triple ETFs Will Revolutionize Day Trading

Disclosure(s): short VXX at time of writing

The Skinny on XVIX

Of all the second generation volatility-based exchange-traded products that have been launched in the past few months, the one I find most intriguing is the UBS E-TRACS Daily Long-Short VIX ETN, which I prefer to refer to by its ticker symbol XVIX.

XVIX combines a 100% long position in the S&P 500 VIX Mid-Term Futures Excess Return Index with a 50% short position in the S&P 500 VIX Short-Term Futures Excess Return Index. It is therefore the functional equivalent of a position consisting of two units long VXZ and one unit short VXX. This combined long-short position nets out with very little exposure to volatility in most market conditions. Instead, XVIX is almost entirely a VIX futures term structure/contango play that increases in value when the slope of the VIX futures term structure is upward and/or getting steeper. On the other hand, XVIX comes under the most pressure when the slope of the VIX futures term structure is flattening or becoming downward sloping (i.e., entering into backwardation.)

While I was on a hiatus, Volatility Futures & Options put XVIX under a microscope in De-constructing XVIX and explored the historical data and the appeal of the 2:1 long-short ratio vis-à-vis a number of alternative ratios.

As I see it, XVIX is almost a pure play on the VIX futures term structure. The historical data provided by UBS and analyzed in some detail by Volatility Futures & Options shows annual returns in the 10-25% range prior to 2010, with a maximum drawdown in the 10-15% range. Last year has to be considered an outlier, as the mean daily contango as calculated by my proprietary VIX Futures Contango Index was 79, a huge premium over the lifetime average reading of 50 for this index. Not only was contango extreme in 2010, but it was also increasing for the majority of the year.

The bottom line is that 2010’s performance (up 55%, with a 5% maximum drawdown) in XVIX is not likely to be repeated any time soon. Over the long term, I expect XVIX to revert to annual returns in the 10-25% range. In the short-term, however, there may be some more significant bumps in the road as the VIX futures term structure unwinds some of its extreme contango and returns to a more consistently flat term structure.

Related posts:

• Now Sixteen Volatility ETPs, Four of Which Are Optionable
• Two More VIX ETNs Make it a Baker’s Dozen
• VIX and More and the 2011 Bespoke Roundtable
• Ways to Turn Volatility into an Asset Class (Barron's)
• VIX Futures Contango Soars
• VIX Futures: What Were/Are They Thinking?
• VIX Sets Two New Records
• Shorting VXX and Long XXV or XIV

Disclosure(s): short VXX; long VXZ and XVIX at time of writing

Now Sixteen Volatility ETPs, Four of Which Are Optionable

The graphic below is part of my ongoing effort not only to maintain a list of all the volatility-based exchange-traded products, but present them in a manner which helps to highlight the distinctions among these products.
Since I last updated this picture, in early December, three new VIX-based ETPs have entered the fold. Two of these are the first VIX-based ETFs and also represent the first products in this space from industry heavyweight and leveraged/inverse ETF heavyweight ProShares:

• ProShares VIX Short-Term Futures (VIXY)
• ProShares VIX Mid-Term Futures (VIXM)

As the chart below shows, VIXY enters the already-crowded space of VIX-based ETPs targeting VIX futures with one month maturity, while VIXM is aimed at the five month maturity space. ProShares undoubtedly hopes that by differentiating its products as ETFs rather than ETNs, the absence of credit risk associated with ETNs will resonate with investors. I have highlighted this distinction by using black italics for the ticker symbol of both ETFs.

ProShares has also been fortunate in that as of this week options are now being offered on VIXY and VIXM, making these only the third and fourth optionable volatility-based ETPs, following in the footsteps of VXX and VXZ. Note that all four optionable ETPs have a red O preceding their ticker.

The third new product to be launched in the past month is the iPath Inverse January 2021 S&P 500 VIX Short-Term Futures ETN, which trades under the ticker IVO. The launch of this ETN apparently confused some observers, but is likely an attempt by Barclays to come up with an ETF that does a better job of tracking the inverse of VXX. My concern is that over time IVOs ability to mirror changes in VXX will undergo the same dilution that happened to XXV. It is possible that Barclays will periodically trot out newer versions of XXV and IVO, but until then, I see these two products as performing more like a fractional inverse ETN than XIV. For this reason, I have put XXV and IVO in separate boxes in the one month -1x space to reflect this important distinction (see Shorting VXX and Long XXV or XIV for more details.)

There are several other small changes in this chart, including moving XVIX closer to the neutral volatility line to reflect the fact that on average the long and short volatility components of this ETN net out to a very limited exposure to volatility and more direct exposure to the VIX futures term structure.

With sixteen volatility-based ETPs available for trading and options on four of those, it is not an exaggeration to say that the number of possible volatility strategies and trades is limited only by the imagination.

Related posts:

• Two More VIX ETNs Make it a Baker’s Dozen
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• Interesting New Leveraged Volatility ETN Coming from Citi
• Shorting VXX and Long XXV or XIV
• Ways to Turn Volatility into an Asset Class (Barron's)

Disclosure(s): short VXX; long XIV, VXZ and XVIX at time of writing

Expiring Monthly January 2011 Issue Recap

A reminder that the January issue of Expiring Monthly: The Option Traders Journal was published yesterday and is available for subscribers to download.

In this month’s feature section, the contributing editors reflect on key developments across the options landscape in 2010 and venture forth with predictions for the coming year in subjects ranging from macroeconomic issues to new products to the state of volatility.

This month there are two interviews, presumably following a surprise 2-1 split of the original interview feature. Mark Sebastian interviews author Sergey Izraylevich, whose recent book, Systematic Options Trading, is, as the title suggests, a comprehensive review of a systematic approach to trading options. Also, Jared Woodard sits down with Robert Krause and Charles Barwis of The Volatility Exchange, a new exchange dedicated to realized volatility contracts for currencies, equities, commodities and interest rates whose first products will be launched on February 7^th.

The full slate of articles is captured in the table of contents below, but for those who are volatility fanatics, I feel obliged to point out that Jared Woodward talks five different approaches for forecasting SPX volatility in 2011. Also, guest author Chris McKhann of optionMONSTER delves into some of the nuances of volatility in calendar spreads.

I penned (keyboarded?) two articles for the January issue. The first of these details my thoughts on the options space in 2010 and includes a slew of predictions for 2011. The second article is the conclusion of a two-part series about tweaking a “Swan Catcher” model I introduced last month. The intent of the Swan Catcher is to a position that should profit from extreme moves in the market, without losing too much money while one waits for these events to occur.

For those who are interested in subscription information and additional details about the magazine, you can find all that and more at http://www.expiringmonthly.com/.

Related posts:

• Expiring Monthly December 2011 Issue Recap
• Expiring Monthly November 2010 Issue Recap
• Expiring Monthly October 2010 Issue Recap
• Expiring Monthly September 2010 Issue Recap
• Expiring Monthly August 2010 Issue Recap
• Expiring Monthly July 2010 Issue Recap
• Expiring Monthly June 2010 Issue Recap
• Expiring Monthly May 2010 Issue Recap
• The Education of a Trader (from the May 2010 issue)
• Content Update
• Expiring Monthly: The Option Traders Journal Launches Today

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly; optionMONSTER is an advertiser on VIX and More

Chart of the Week: the VIX Since 2007

The Year in VIX and Volatility was such a huge hit two weeks ago that I thought it would be appropriate to address all the angst about low readings in the VIX with a chart of the CBOE Volatility Index (yes, the VIX does have a formal name) that stretches back to the beginning of 2007 and incorporates the 2007 peak in stocks, the 2008 panic, the 2009 bottom and the rally that has dominated the past two years.

Whereas the majority of the charts in this space use daily VIX bars and an occasional chart of VIX macro cycles and the like utilize monthly bars, this time around I am pulling back to a perspective which utilized weekly bars for the VIX. Personally, I like weekly bars because it removes the weekend effect or ‘calendar reversion’ as I like to call it. More importantly, I plan my trading and execute my strategies in weekly time chunks, hence the weekly subscriber newsletter.

The chart below, courtesy of StockCharts.com, is the first I recall ever having seen that uses weekly moving average envelopes (MAEs) for the VIX. In this particular variation, I have used MAEs that cover 13 weeks (one quarter) of VIX data and plotted an envelope which extends 20% above and below that 13-week moving average. The result is a chart which does a good job of capturing outliers that are generally high probability fade trades.

The chart also shows that a break below the 15.00 level will but the VIX back at a level not seen since July 2007, which is, ironically, just about the time that Adam Warner and I had the bright idea to estimate where volatility was going to be. [See Volatility Aces Bloggers for the gory details.]

Getting back to the moving average envelopes, current VIX levels are relatively low in absolute terms, but with the bottom of the weekly 13-20 moving average envelope currently at 14.63, the risk of the VIX punching through the lower envelope appears to be extremely low, at least to this observer.

My best guess is that the next piercing of the envelope is more likely to be associated with a rising VIX than a falling one, but even that scenario may take a while to play out.

Related posts:

• The Year in VIX and Volatility (2010)
• High Resolution Version of “The Year in VIX and Volatility” Chart Available
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• Chart of the Week: VIX Macro Cycles and a New Floor in the VIX
• Recent VIX Activity in the Context of Moving Average Envelopes
• Volatility Aces Bloggers
  

[source: StockCharts.com]

Disclosure(s): none

Managing Risk with a Short VXX Position

Since I am not sure how many readers review the comments section, I thought I should pass along a recent reader Q&A in post format in order to capture the attention of a broader audience. By the way, if you would like to see more Q&A in this space or have a specific question you are longing for an answer to, just hit up the comments section below.

Reader Mike submits:

With less $$ going into the VXX EFT due to other options to shoppers, in theory VXX should continue dropping in price value as well, correct?

I lost a good amount of money longing VXX over the summer, but recouped all losses and made money towards the end of the year shorting VXX. Now, I've loaded up on shorting it with even more capital and have a very comfortable % gain so far this year. I want to protect that gain, but my belief is that VXX will continue much lower allowing for even more reward.

I'm thinking you have the same thoughts, is that right?

Hi Mike,

Good questions. VXX is more of a function of the price of the underlying VIX futures than the demand for the ETP, so unlike some neglected stocks, it will not drop just because demand slacks off.

I'm glad to hear you have done well shorting VXX. In terms of protecting your gains, you might want to consider buying some VXX calls to hedge your risk in the event of a VIX spike. Another thought is to convert your short VXX position into a long XIV position. While these positions look almost equivalent on the surface, when VIX spikes, the size of your VXX short will increase, while the size of your XIV long will decrease. This has implications for position concentration and potential margin issues, etc. It also means that instead of having losses compound if the VIX continues to rise, there will be a diminution of incremental losses.

For example, assume a net position of $100,000. If VXX jumps 10% three days in a row a short VXX position will lose $10,000, then $11,000, then $12,100. On the other hand a long XIV position would lose $10,000, then $9,000, then $8,100. In only a few days, the daily losses become 50% higher in short VXX than in long XIV. The longer the increase in volatility persists and the bigger the daily moves are, the larger the difference becomes. Recall that in April-May 2010, the VIX tripled in a month and VXX doubled. You might want to walk through how you can protect yourself should something like that happen again.

It's something to think about, anyway.

Good trading,

-Bill

Related posts:

• Short VXX and Long XXV or XIV
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• VIX and More and the 2011 Bespoke Roundtable
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• VXX Monthly Performance
• Chart of the Week: VXX Celebrates One Year of Futility

Disclosure(s): short VXX and long XIV at time of writing

Charting the Assets of the Volatility-Based ETPs

As a follow-up to yesterday’s Barron’s column, Ways to Turn Volatility into an Asset Class, I thought it might be interesting to track the history of assets for the volatility-based ETPs.

Not surprisingly, the assets have been dominated by the two ETPs that were first out of the gate:

1. iPath S&P 500 VIX Short-Term Futures ETN (VXX)
   
2. iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

The chart below, courtesy of ETFreplay.com, shows the history of the assets for the volatility-based ETPs. Note that through September 2010, VXX had been able to maintain a market share of about 70%. In the last few months, VXZ has been able to chip away at that lead, presumably due to investors’ tiring of contango and negative roll yield.

The impact of the recent crop of ETPs has yet to register on this chart, but I expect that in 2011, the share of both VXX and VXZ will drop dramatically as new entrants are responsible for most of the new money flowing into the space. In fact, I fully anticipate that buy the end of 2011, the $138 million currently in the “All Other” category will surpass that of VXX + VXZ. No matter how it plays out, one of the interesting stories of 2011 will be the degree to which investors embrace the most recent generation of volatility-based ETPs.

Related posts:

• Guest Columnist at The Striking Price for Barron’s
• The Year in VIX and Volatility (2010)
• VelocityShares Jumping in to the VIX ETP Space with Leveraged and Inverse Products
• Two More VIX ETNs Make It a Baker’s Dozen
  

[source: ETFreplay.com]

Disclosure(s): long VXZ and short VXX at time of writing

Guest Columnist at The Striking Price for Barron’s

The last few times I have been asked to be a guest columnist for The Striking Price on behalf of Steven Sears at Barron’s, there has been a spike in volatility just about the time I go to commit my thoughts to paper keyboard + monitor. I had begun to think that the folks at Barron’s were somehow omniscient and knew when to put in a call to the bullpen for “that volatility guy.”

So when the call came again, I immediately had a Pavlovian urge to buy up some VIX calls, but alas the markets have been calm. Everyone seems to be wondering where the pullback is. If today’s column is not the catalyst, I’m not sure what it will take.

Speaking of which, I have elected to focus on volatility as an asset class for today’s guest column, which bears the title, Ways to Turn Volatility into an Asset Class. Part of my thesis is that 2011 is the year that volatility goes mainstream, largely due to the rise of volatility-based exchange-traded products, which are in the process of bringing volatility trading to the masses. I also repeat an earlier assertion that before the year is over, XVIX and XIV will gain significant traction as buy and hold volatility vehicles. For all the details, click through to read the original.

…and if we do see a major pullback soon, I expect the timetable to accelerate for investors to begin to embrace the stable of 15 volatility-based ETPs.

Related posts:

• The Year in VIX and Volatility (2010)
• VIX and More and the 2011 Bespoke Roundtable
• Volatility as an Asset Class I
• VelocityShares Jumping in to the VIX ETP Space with Leveraged and Inverse Products
• Two More VIX ETNs Make It a Baker’s Dozen

A full list of my Barron’s contributions:

• Ways to Turn Volatility into an Asset Class (January 12, 2011)
• There’s Opportunity in Uncertainty (November 18, 2010)
• Will Market Volatility Return to Crisis Levels (September 15, 2010)
• The Perils of Predicting Volatility (May 20, 2010)
• Take a Longer View on Volatility (July 2, 2009)

Disclosure(s): long XIV and XVIX at time of writing

World Food Sub-Index Prices

Sometimes I just don’t know when to leave well enough alone, particularly when it involves that Holy Grailesque quest to cram every potentially relevant piece of data into one overcrowded chart.

Yesterday’s Chart of the Week: World Food Prices is an example of a relatively uncluttered chart that attempts to make one or two simple points in a relatively clear and concise manner. After some back and forth with several readers, I have elected to butcher that simplicity and unveil a chart which adds the five sub-indices: meat; dairy; cereal; oils and sugar. The result, which I have appended below, shows that the real wild card in world food prices has been sugar, which is represented on the chart by the green line. To a lesser extent, cereal, dairy and oil have had their moments of extreme price fluctuations. By far the least volatile of the five sub-groups has been meat.

For those who are looking beyond futures to ETPs which can replicate some of these commodity sub-indices, there are a number of broad-based agricultural ETFs which cover most or all of the sub-indices. The popular PowerShares DB Agriculture Fund (DBA) is by far the most liquid of the group. Alternatives to DBA include RJA, JJA, FUD and UAG. For investors looking to target grains, JJG and GRU are worth investigating, as is the corn-specific ETP, CORN. For the sugar sub-index, SGG is an excellent match. JJS is an ETP for the ‘softs’ space and is almost equally weighted between coffee, cotton and sugar. Finally, both COW and UBC are potential proxies for the meat sub-index.

Related posts:

• Chart of the Week: World Food Prices
• Wheat and the Commodity ETF Space
• LSC Long-Short Commodities ETF Struggling Mightily
• Chart of the Week: Impact of Falling Euro on Stocks and Commodities
• Chart of the Week: Commodities and the Dollar
• Chart of the Week: Breaking Out Recent Commodities Moves
• CME to Use VIX Methodology for New Crude Oil, Corn, Soybean and Gold Volatility Indices
• Agricultural Commodities vs. Base Metals
  

[source: United Nations]

Disclosure(s): long CORN and SGG at time of writing

Chart of the Week: World Food Prices

Talk of rising commodities prices seems to focus primarily on energy and metals, with agricultural commodities often overlooked, at least in the United States.

This week’s chart of the week is intended to underscore the inflationary trend in agricultural commodities and ‘softs’ (which generally refer to sugar, coffee and cocoa) as reflected in the United Nations World Food Price Index. As the chart below shows, world food prices hit a new high in December, after jumping more than 54% from a February 2009 low. The new high in the index eclipses the old high from June 2008.

Among the various sub-indices, the most dramatic increase has been seen in sugar, which is up 51% in just four months and is up a staggering 239% over the course of the past two years to a new all-time high. Meat prices are also at new highs, but while the sugar price index currently stands at 398.4, meat has only risen to 142.2. Note that all index values reflect a baseline of 100 that is derived from the 2002-2004 average prices.

Commodities prices have both economic and political implications. The economic implications are particularly severe for emerging markets in which food costs represent a disproportionately high percentage of the typical household budget. Here the incremental increase in food prices can have a disastrous impact on the family cost structure. There are also some countries where the possibility of food riots and related civil unrest has the potential to destabilize those who are in power and in some cases perhaps even thrust the political system into chaos.

So far rising food prices have triggered only a mild backlash here and there, but should prices continue to rise at the current rate of more than 20% per year, it is not possible to rule out catastrophic consequences across the globe.

Related posts:

• Wheat and the Commodity ETF Space
• LSC Long-Short Commodities ETF Struggling Mightily
• Chart of the Week: Impact of Falling Euro on Stocks and Commodities
• Chart of the Week: Commodities and the Dollar
• Chart of the Week: Breaking Out Recent Commodities Moves
• CME to Use VIX Methodology for New Crude Oil, Corn, Soybean and Gold Volatility Indices
• Agricultural Commodities vs. Base Metals
  

[source: United Nations]

Disclosure(s): none

Shorting VXX and Long XXV or XIV

If you are interested in the VIX and related options and futures products, 2010 saw the arrival of an excellent new blog which is all over that space: Volatility Futures & Options.

The content is of such consistently high quality that I have made a mental note to feature some of it here from time to time and today seems like a good day to kick things off. The reason for my enthusiasm is a post from this morning called Case Solved: No Arbitrage, which follows a previous post on the subject: VXX-XXV Arbitrage?

I have probably received hundreds of questions and comments related to the advisability of shorting VXX and some of the obstacles in being able to execute such a strategy successfully. With the arrival of XXV, some investors thought that the inverse version of VXX might be a better way to accomplish the same goal. As it turns out, XXV has not performed as well as a short VXX position and Case Solved: No Arbitrage dives into the math and reverse engineers an excellent formula for calculating just how XXV performs relative to a short VXX position. I highly recommend clicking through to review the details.

Finally, I have noted on a number of occasions, including at some length in my subscriber newsletter, that the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) is a better product for replicating a short VXX position than XXV. Investors have yet to arrive at the same conclusion as I have that 2011 will mark “the runaway success of VIX-based ETNs and ETFs, notably the recently launched XIV, which will prove that volatility vehicles can be good buy-and-hold investments,” but I am standing by my prediction and watching with interest to see how long it takes for money to start flowing into XIV.

Related posts:

• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• XXV Has Arrived!
• XXV and the New VIX ETN Landscape
• VIX and More and the 2011 Bespoke Roundtable

Disclosure(s): short VXX and long XIV at time of writing

CBOE to Publish VIX-Style Volatility Indices for Individual Stocks

The volatility space continues to expand in the direction of the atomic level, with today’s announcement by the Chicago Board Options Exchange (CBOE) that it will begin disseminating implied volatility data utilizing the VIX calculation methodology for five stocks as of Friday, January 7^th.

The five stocks are:

• Amazon (AMZN): volatility ticker: VXAZN
• Apple (AAPL): volatility ticker: VXAPL
• Google (GOOG): volatility ticker: VXGOG
• Goldman Sachs (GS): volatility ticker: VXGS
• IBM (IBM): volatility ticker: VXIBM

My initial thought include some of the following:

• It will be interesting to see how much divergence there will be between the CBOE NASDAQ 100 Volatility Index (VXN) and the volatility indices for some of the key components of the NASDAQ-100 index, notably Apple, Google and Amazon
• A Goldman Sachs volatility index will be particularly useful in terms of financial crisis
• IBM is an interesting choice for a fifth wheel here, as IBM does not have the same bellwether status that it once did
• Finally, first with weekly options and now with volatility indices for individual stocks, the CBOE has managed to shorten the scope of volatility analysis both at the issue level and in terms of the time frame. I’m calling this the march toward atomic volatility.

Related posts:

• The Evolution of the Volatility Index Family Tree
• Weekly Options Gain Momentum
• CME to Use VIX Methodology for New Crude Oil, Corn, Soybean and Gold Volatility Indices

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

High Resolution Version of “The Year in VIX and Volatility” Chart Available

I had so many requests for a high resolution version of my chart from The Year in VIX and Volatility (2010) that I elected to make it available for download here. As an added bonus, a similar chart for 2009 is available here.

Related posts:

• The Year in VIX and Volatility (2010)
• Chart of the Week: The Year in Economic Data (2010)
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)

[source: StockCharts.com]

Disclosure(s): none

The Year in VIX and Volatility (2010)

One of everybody’s favorite charts from a year ago was the basis for Chart of the Week: The VIX and Volatility in 2009, in which I created a fairly concise annotated summary of the year in VIX and volatility.

For some reason, the same chart seemed harder to create for 2010, partly because the volatility triggers were less discrete and seemed to arrive in recurring waves, each time apparently posing a different size threat. The European sovereign debt crisis is a prime example of the waves of threats, as are the concerns about China’s ability to navigate the dual hazards of slowing growth and rising inflation. In the U.S., concerns about a double-dip recession waxed and waned, while investors scratched their heads wondering just how much to worry about the foreclosure crisis or events on the Korean peninsula.

On the volatility side, the highlights of 2010 included the ‘flash crash’ in May and an even bigger VIX spike (to 48.20) toward the end of the month as the European sovereign debt crisis threatened to snowball out of control, pushing the VIX to a higher close than at any point prior to the 2008 financial crisis.

Investors also struggled under the psychological weight of the Deepwater Horizon oil spill in the Gulf of Mexico, which imparted a sense of helplessness across the U.S. and helped to dampen any sort of optimism about the economy and perhaps even technological progress in general.

In spite of all this, stocks rallied impressively for the last four months of the year, due in part to a second round of quantitative easing on the part of the Fed.

The year saw record volumes in a number of VIX-related products and included new daily record volumes in VIX options (June 11), VIX futures (November 16) and the increasingly popular iPath S&P 500 VIX Short-Term Futures ETN, which most investors know by its ticker symbol, VXX (November 23).

Volatility made its mark as a peripheral asset class in 2010, with VIX-based ETNs, making it much easier for retail investors to make direct investments in volatility. My guess is that this development is just a beginning and 2011 could mark a watershed year in terms of recognizing of volatility as a mainstream asset class.

Related posts:

• Chart of the Week: The Year in Economic Data (2010)
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• Chart of the Week: Visualizing the Flash Crash
• VIX Approaches Pre-2008 Record Highs
• Turmoil in the Oil Patch
  

[source: StockCharts.com]

Disclosure(s): short VXX at time of writing

S&P 500 Index 20-Day Historical Volatility Hits 39-Year Low

Since I haven’t seen it mentioned anywhere else, I thought I should note that 20-day historically volatility in the S&P 500 index hit its lowest level since April 1971, the same month that the Rolling Stones released Sticky Fingers and Charles Manson was sentenced to death.

Now there are multiple ways to calculate historical volatility. I outlined my preferred non-centered methodology in Calculating Centered and Non-Centered Historical Volatility, which yielded a 20-day HV of just 4.57 as of Friday’s close, barely 25% of the VIX’s closing value of 17.75 from the same day.

Of course, some of this disconnect is due to the holiday effect or calendar reversion, but given that we are seeing near-record lows in some volatility measures just two years and a couple of weeks removed from a VIX of 80+ should certainly raise some eyebrows.

In terms of implications going forward, today’s big(ger) move should herald the return of more normal volatility, as well as more middling implied and historical volatility measures.

Related posts:

• Calculating Centered and Non-Centered Historical Volatility
• What Is Historical Volatility?
• Thinking About Volatility (First in a Series)
• VIX and the Week Before Christmas
• Chart of the Week: Historical Volatility Plummets in Seasonal Swoon

Disclosure(s): none

Chart of the Week: The Year in Economic Data (2010)

One of the blog’s surprise hits in 2010 was a series of charts I began which started out with the unwieldy title of Trends in Economic Data Relative to Expectations.

I have utilized this chart format to track the performance of key economic data releases relative to consensus expectations.

The data are sorted into five groups and include economic reports such as the ones highlighted below:

• Manufacturing/General – GDP, ISM, Industrial Production, Capacity Utilization, Durable Goods, Factory Orders, Regional Fed Indices, Productivity, etc.
• Housing/Construction – Building Permits, Housing Starts, Existing Home Sales, New Home Sales, Pending Home Sales, S&P/Case-Shiller Home Prices, Construction Spending, etc.
• Employment – Employment Report, Jobless Claims, etc.
• Consumer – Retail Sales, Consumer Confidence, Consumer Sentiment, Personal Income, Personal Spending, etc.
• Prices/Inflation – Producer Price Index, Consumer Price Index, etc.

For each report, I evaluate whether the data exceeds or falls short of consensus expectations. I then aggregate the data over time to see the extent to which certain segments of the economy are trending higher or lower relative to expectations.

The chart tells a couple of interesting stories for 2010. First, it was the manufacturing sector which provided the bulk of the positive surprises during the first half of the year and the propelled stocks to their April highs.

Manufacturing began to turn down in May, following stocks down. This was just about the time that housing and construction started to provide some evidence of positive surprises, but that sector did nothing to stem the tide of falling stock prices.

When stocks started to turn around at the end of August and make their big bullish move for the year, this coincided with an improving employment picture, a rebound in manufacturing and an upturn in the consumer.
Over the course of the year, economic data came very close to meeting expectations for all sectors except housing and construction, which was the surprise winner in the data vs. expectations sweepstakes.

Finally, as the year came to a close, it was employment which was most highly correlated with changes in stock prices, followed closely by a virtual dead heat between housing/construction and the consumer.

Related posts:

• Economic Data Frozen Until Next Thursday
• More Upticks in Economic Data vs. Expectations
• Economic Data Trends Improving
• Chart of the Week: Updated Economic Data Trends
• Economic Data Trends in Advance of Nonfarm Payrolls
• Trends in Economic Data Relative to Expectations
  

Disclosure(s): none