Thursday, March 31, 2011

Using the iPad for Trading

Unless FedEx (FDX) and Apple (AAPL) have their facts wrong, today the iPad 2 will arrive at my door step.

Since I passed on the iPad 1, this will be my first chance to play with something that I have no idea what I will ultimately end up interacting with. This could turn out to be new computer in a different form factor a toy or anything in between.

While I will try to integrate the iPad into my trading, I am not sure how this is going to happen either. I am not a big fan of using my iPhone for trading unless my environment does not allow any alternatives. As for the iPad, I can imagine it as a complement to my main trading setup, an excellent portable alternative to the iPhone and perhaps filling a bunch of other roles that I am not able to anticipate.

I would love hearing from other traders about how they use the iPad in their trading, whether it means news, charts, quotes, trade execution or whatever. If I get enough responses of note – either here or on Twitter ( – I will summarize the information in a future post and add in my own experiences as well.

Related posts:

Disclosure(s): none

VIN, VIF and an Obsolete VIX

Mark Sebastian at Option Pit has an interesting post up, Could the VIX Become Obsolete? that I suspect VIX and More readers will enjoy pondering. In it Mark argues that because of the VIX calculation methodology, SPX weeklys frequently offer a better insight into the state of current volatility than the VIX. Mark takes this analysis one step further by wondering aloud if this development could mean the demise of the VIX.

For those who are not familiar with the details of the VIX calculation methodology, the VIX bases its calculations on the front month and second month of the SPX for the majority of the expiration cycle. Eight days prior to the VIX options expiration, the SPX options used for the calculations roll forward one month to the second and third month.

Keeping in mind that the VIX blends SPX options with two different expiration dates to arrive at a constant maturity 30-day weighted average of SPX implied volatility, an example may help to illustrate what is happening. Next month the VIX options expire on Wednesday, April 20th. From today up to Monday, April 11th, the VIX is calculated based on the SPX front month (April) options as well as the second month (May) options. On April 11th, eight trading days prior to VIX options expiration, the SPX options used in the VIX calculations roll forward one month so that the near-term month used in the calculations is May and the far-term month used in the calculations is June.

Now, here is the fun part. It is a little known fact that the CBOE actually maintains separate indices for the near-term month VIX (VIN) and the far-term month VIX (VIF). Just pop those tickers into your streaming quotes and you too can watch not just the VIX, but the two components used in the VIX constant maturity blend. Right now, for instance, I show a VIX of 17.88, a VIN of 16.98 and a VIF or 18.23.  Just be sure to keep track of the SPX options series roll eight trading days before the VIX options expiration.

Of course the VIX really isn’t about to become obsolete. Just like any index, it suffers some limitations from being only one number. If you want a quick snapshot of where market volatility is, the VIX is the gold standard. If you want some more details and are one of those who likes to look under the hood and tweak the engine a little, the VIX futures and the SPX options themselves are probably the most important groups of market volatility data to study. For those who do not have easy access to VIX futures data, consider adding VIN and VIF to your watch list, to broaden your understanding of what is driving the level of the VIX.

Related posts (some excellent information in this group of posts and a particularly helpful graphic in XXV and the New VIX ETN Landscape):

Disclosure(s): none

Wednesday, March 30, 2011

Fukushima Daiichi and ‘Event Theta’

I am generally not a fan of so-called air quotes, nor am I a fan of the gratuitous use of quotation marks for added emphasis in print. That being said, I have this tendency to invent new concepts and attach labels to them that I pull out of the sky. When I do so, as is the case with event theta, the quotation marks are merely shorthand for warning readers that I am making stuff up and cloaking it in somewhat fancy-sounding attire. In other words, if you Google “event theta” you will find a lot of information about sorority functions and the like, but nothing (as far as I can tell) about options concepts.

So what is event theta and why do I think it is important enough to invent a label for it?

Nineteen days ago, Japan was hit by a 9.0 magnitude earthquake and a subsequent tsunami that measured at least 30 feet high in some places. As everyone now knows, the earthquake and particularly the tsunami damaged the Fukushima Daiichi nuclear power plant and set off a chain of events that resulted in a partial core meltdown, damage to at least one containment vessel, overheating of spent fuel rods and dangerous levels of radiation leaks. The situation has been a fluid one, with a limited flow of information, particularly during the early stages of the disaster.

As these events unfolded, seemingly like a slow-motion train wreck, I kept asking myself whether time was in favor of or working against the efforts of those who were trying to limit the damage to the nuclear facility and surrounding areas. In other words, was this a positive theta event (time in our favor) or a negative theta event (a fight against the clock.) Not being an expert in the field of nuclear energy and knowing that certain factors could spiral out of control quickly, but also knowing that efforts were underway to stabilize some of the processes in the plant, I was left to guessing whether current efforts were more likely to fall short and result in a vicious cycle or were expected to stem the problem and turn the tide in favor of the rescue team.

Knowing whether this was a positive or negative theta event also has substantial implications for investment strategies. From a hedging perspective, event theta could influence the selection of hedging vehicles, the anticipated timing for those hedges, how the hedges might be structured and what sort of prices might be appropriate. For the speculative investor, event theta can also help to determine the risk-reward payoff structure and how it varies over time. Anyone who trades in VIX futures and deals with the VIX term structure on a daily basis should have some insights into potential mismatches between event theta and term structure.

Event theta is an idea that complements some of the thinking I have presented in this space earlier regarding event volatility. I maintain that it applies to Libya, the European sovereign debt crisis, and almost every other threat to the financial markets. Going forward, I will give event volatility and event theta some additional treatment in this space as conditions warrant.

Related posts:

Disclosure(s): none

Tuesday, March 29, 2011

The VIX Summit, a.k.a. the CBOE Risk Management Conference

About a month ago I had an opportunity to attend the CBOE Risk Management Conference, which could easily had been called the VIX Summit. This was the first time I attended this conference and in retrospect, I have little doubt that if VIXophiles were only to attend one conference per year, this would be the one.

Where else can you find several hundred like-minded souls who obsess about the VIX and volatility on a daily basis? Where else could you holler out “Hey, Mr. VIX?” in a crowded room and expect at least a dozen heads to turn?

This year’s agenda tells part of the story. Some of the sessions I had the pleasure of attending included:

  • VIX Option Strategies
  • Tail Risk Protection: A Panel Discussion on Why and How Investors Might Hedge Downside Risk
  • Volatility ETNs and ETFs: A Panel Discussion on the Construction and Usage of Volatility-Based Investment Products
  • Equity Correlation and Macro  Investment Decisions, Crash Risk and Correlation Trading Paradigms
  • What the Derivatives Markets Tells us About the Macro Economy
In addition to the sessions above, there were also sessions on cross-asset class volatility strategies; short and relative value volatility strategies; long-dated equity index volatility, etc. Of course, the real value in this type of event is getting an opportunity to meet people in the business and cross-pollinate not just ideas but also relationships.

I went to the RMC hoping that some of the ideas that I would be exposed to might change how I viewed my trading and give me some thoughts about how I might tweak some of my existing strategies or branch out into new strategic soil. The conference certainly accomplished that objective and in a most enjoyable setting, at Dana Point, California.

So, when it comes to planning out next year’s itinerary, give some strong consideration to attending the 28th annual Risk Management Conference, which I believe is scheduled to return to Florida (it alternates between the East Coast in even years and the West Coast in odd years) for 2012.

Finally, note that some of the presentations from prior years have been archived, so that those who believe good ideas have a meaningful half-life can access them at their leisure.

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

Monday, March 28, 2011

Expiring Monthly March 2011 Issue Recap

Just a quick reminder that as Expiring Monthly: The Option Traders Journal publishes on the Monday following options expiration, the March issue was published a week ago today and is (still) available for subscribers to download.

Note that the Expiring Monthly web site was recently overhauled to make for a better user experience, offer archived articles and provide a better platform for further content enhancements. While I may be biased, there is no doubt it is a substantial improvement over the previous version of the web site.

The March issue includes a feature article from guest author Michael McCarty and is titled, A Multi-Dimensional Look at Implied Volatility: Several New Releases from the CBOE. My contribution is a complementary one: Evaluating Volatility Across Asset Classes. Among the other articles of interest is an interview with Jeff Augen, whose recent publications have helped to shed light on the workings of volatility, particularly at the end of the options expiration cycle and at earnings announcements.

I should also note that last month I did not provide a recap of the February issue of Expiring Monthly. That issue had a feature article on non-directional trading and some additional content related non-directional trading, including an article I authored for the diagnostically-oriented trader, which is titled, What Is a Non-Trending Market?

In keeping with tradition, I have reproduced a copy of the Table of Contents for the March issue below for those who may be interested in learning more about the magazine. Thanks to all who have already subscribed. For those who are interested in subscription information and additional details about the magazine, you can find all that and more at

Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Sunday, March 27, 2011

Webinar: Using Volatility as an Asset Class

I recently participated in a webinar sponsored by AdvisorOne which tackled the subject of volatility as an asset class. Cliff Stanton of Prima Capital was the featured presenter and he presented the highlights from a white paper he authored, Volatility as an Asset Class. For those who are interested, I recommend clicking through the link above (free registration required) to review the white paper, which takes an in-depth look at the VIX over the course of 17 pages, from the index and its idiosyncrasies to the VIX futures and the first generation of VIX ETNs, VXX and VXZ.

As far as the VIX white paper is concerned, it would be a stretch for me to take issue with any of the analytical work or conclusions derived from the data. Instead, I chose to define the problem of volatility as an asset class more broadly and look at short volatility strategies, long-short strategies and VIX strategies that focus on the VIX futures term structure. In doing so, my comments build on my January 12th Barron’s article, Ways to Turn Volatility into an Asset Class and make what I believe is a strong case for volatility products as an asset class.

AdvisorOne has archived the full Using Volatility as an Asset Class webinar here (free registration required)

Finally, since I have already gone out of my way to proclaim 2011 as the year volatility becomes a mainstream asset class, I will have a lot more to say about this subject in the weeks and months ahead.

Related posts:

Disclosure(s): none

Tuesday, March 8, 2011

CBOE Rolls Out a New Blog; I Am a Guest Contributor

The Chicago Board Options Exchange (CBOE), the same people who brought you the CBOE Volatility Index (VIX) and a host of other volatility products, recently joined the blogosphere with the launch of What’s On Our Minds...

For starters, the new blog is an excellent way to get inside the heads of the popular instructors from The Options Institute, which serves as the educational arm of the CBOE. Regular blog contributors from the Options Institute’s staff include Jim Bittman, Marty Kearney, Peter Lusk and Russell Rhoads.

In addition to the CBOE staff, What’s On Our Minds... draws upon the knowledge of a wide range of guest contributors, including familiar names such as Larry McMillan, Price Headley and Michael Thomsett. I will also be contributing to the CBOE blog from time to time. My initial contribution to the CBOE blog is titled Volatility and Revolutions. In it, I crunch the numbers on volatility during the Cuban Missile Crisis and in the wake of the Pearl Harbor attack and the (first) Gulf War. My conclusion?

“…geopolitical crises frequently fail to delivery market volatility that matches the extreme level of fear and anxiety being experienced by investors, diplomats and ordinary citizens.”
If you are a VIXophile – or even if you are not – you should definitely add the CBOE blog to your daily reading list.

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

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