Friday, December 30, 2011

CBOE To Launch Futures on Emerging Markets Volatility (VXEEM)

One of the predictions I made for 2011 was that the trend toward what I have labeled “atomic volatility” (a lessening of the scope of the underlying for options contracts and/or the duration of those contracts) would accelerate.

Back in March 2011, the CBOE helped to usher in the atomic volatility era when they rolled out volatility indices using the VIX methodology for six sector and geography ETFs:

  • iShares MSCI Emerging Markets Index Fund (VXEEM)
  • iShares Trust FTSE China 25 Index Fund  (VXFXI)
  • iShares MSCI Brazil Index Fund  (VXEWZ)
  • Market Vectors Gold Miners Fund (VXGDX)
  • iShares Silver Trust (VXSLV)
  • Energy Select Sector SPDR (VXXLE)

Later in March, the CBOE rolled out futures based on the gold volatility index (GVZ), which was launched back in August 2008, at the same time as the euro volatility index (EVZ) and several weeks after the launch of the OVX, known affectionately as “the Oil VIX.” [Those who are interested in the sequencing of the launch of various volatility measures should refer to The Evolution of the Volatility Index Family Tree.]

Now the CBOE is taking the next step with VXEEM, the volatility index that is based on the popular emerging markets ETF (EEM), and offering futures on that index. The launch of these futures contracts is set for January 9th and will initially include contracts with expirations in February, March, April and May. Note that the expiration cycles for these contracts are the same as those for the VIX futures and options, meaning that they will expire on Wednesdays (February 15, March 21, April 18 and May 16) and can last be traded on the Tuesday immediately following the expiration. For more information, check out the CBOE’s VXEEM splash page and information circular.

One of the reasons I think products based on EEM and VXEEM have a good chance of being successful is that emerging markets are typically a highly volatile area – much more so than the basket of stocks included in the S&P 500 index on which the VIX is based. Right now, for instance, EEM has a 60-day historical volatility that is more than 50% higher than that of the SPX. All this means that short-term traders should find VXEEM products (futures as well as options and ETPs, assuming they are in the pipeline) to be the types of high-octane trading vehicles that are well-suited to some of their favorite strategies, much like leveraged ETPs and VIX-based products.

Additionally, as the chart below reminds us, emerging markets sometimes move in cycles that are distinct from U.S. stocks. Note that the ratio of EEM to SPX has varied wildly over the course of the past five years and has had different bottoms and tops than the SPX has. Whether this phenomenon will continue into the future (influenced strongly by China) remains to be seen, but the role of emerging markets relative to developed markets should be watched closely in 2012.

Related posts:


Disclosure(s): none

Thursday, December 29, 2011

Top Posts of 2011

It seems hard to believe, but next week I will celebrate the fifth year anniversary of my first post (VIX and More: An Introduction) at VIX and More. Traditionally I have set aside some time at the end of the year to recognize the top 25 most read posts for archival purposes and as a proxy for how well some of what I have written has resonated with a broad base of readers. For the record, each year I also attach the hall of fame label to a handful of posts that I believe have particularly compelling and/or original content, regardless of readership.

Looking at the top posts of the year below, this is the first year there has been a strong representation from shorter more Twitteresque posts, with a diminution of the long-winded more academic research pieces that have populated these lists in past years. Part of this is no doubt due to timing. By way of illustration, when the VIX is over 40, pretty much anything I post is going to attract a wide audience of people who want to know how to interpret recent market moves and understand the implications for the direction of stocks and volatility going forward. On the other hand, when I write one of my better thought pieces and the VIX is at 14, it is sometimes a struggle for that post to find a broad audience.

Another theme I noticed this year is that the list is heavier than usual on the VIX, VIX-based exchanged-traded products and volatility subjects. In previous years I have enjoyed straying for the central themes of this blog and have used features such as the Chart of the Week (discontinued in February when my blogging took a back seat to family matters, but likely to return in 2012) as an excuse to focus on a broader basket of investment themes.

This year has been a target-rich environment in the volatility space and I hope I have been able to expand the knowledge base of those who visit here on a regular basis. Thanks to all whose efforts have contributed to making VIX and More what it is and best wishes for a healthy, happy and prosperous 2012.

  1. VIX Term Structure Evolution Over the Last Ten Days
  2. VIX Suggests Investors Don’t Believe Rally Is Sustainable
  3. Shorting VXX and Long XXV or XIV
  4. The Year in VIX and Volatility (2010)
  5. VIX Backwardation Commentary
  6. Echo Volatility and Another VIX Double Top
  7. Managing Risk with a Short VXX Position
  8. S&P 500 Index 20-Day Historical Volatility Hits 39-Year Low
  9. Front Two Months of VIX Futures Slip Back Into Contango
  10. SPX Pullback History, 2009-2011
  11. VIX Over 31 and SPX Down 12.5% from Peak as Bottom Nears
  12. Chart of the Week: The Year in Economic Data (2010)
  13. Chart of the Week: World Food Prices
  14. VIX Sets Some New Records, Suggesting Volatility Near Peak
  15. Chart of the Week: VXX Celebrates 2nd Birthday
  16. New VIX Backwardation Record
  17. VIN, VIF and an Obsolete VIX
  18. Now Sixteen Volatility ETPs, Four of Which Are Optionable
  19. Economic Data Not Supporting Gloom and Doom Forecasts – At Least for Now
  20. VIX Reflecting Skepticism About Rally
  21. Initial Thoughts on Using the iPad for Trading
  22. The Convergence of VIX and VIX Futures at Expiration
  23. Is Volatility a Better Play for Silver Than Direction?
  24. December Is the Cruelest Month…For the VIX
  25. Chart of the Week: the VIX Since 2007

Related posts:

Disclosure(s): none

Expectations, Surprises and Fear in 2011

For the last three years, the holiday season has been leaving me something new in my stocking: a detailed questionnaire from Bespoke Investment Group that provides the raw material for the annual roundtable…and undoubtedly more than a couple of snickers for Justin, Paul and the gang.

In the inaugural year of the Bespoke roundtable, my crystal ball guesstimates for 2010 proved to be surprisingly accurate, naturally leading me to debate the relative influence of luck vs. skill when I had a chance to reflect back on the events of the year.

When I made my predictions for 2011, I had serious concerns about Europe and China in particular, but before January was over, the dawning of the Arab Spring had begun to change the world in a profound and dramatic way, cutting across religious, political and economic dimensions. While the VIX remained in the teens for almost all of January and February, I suspect that when we reflect back on the events of 2011 in another decade or so, the widespread tumult in Northern Africa and the Middle East is likely to produce a more profound long-term effect on the world than any of the other events of the year.

As the Arab Spring continued its geographic spread, a trio of disasters shook Japan, starting with the magnitude 9.0 Tohoku earthquake and tsunami, which was followed by a nuclear meltdown at the Fukushima Daiichi nuclear power plant.

So while Europe and China were simmering on the back burner, two huge and unforeseen events reverberated around the world, both of which triggered a large number of downstream consequences.

Events in Europe began heating up in the middle of the year, but they were largely overshadowed by the growing angst over the U.S. debt ceiling crisis and the political gridlock that seemed poised to prevent a solution to that crisis.  Only after a partial ‘solution’ to the debt ceiling issue was agreed upon and S&P downgraded the credit rating of the U.S. from AAA to AA+ did the European sovereign debt crisis return to the center stage, this time roiling the markets throughout the remainder of the year.

In retrospect, being able to anticipate some of the surprises of 2011 would have required expert knowledge of such far-reaching fields as Arab social unrest, plate tectonics, and the inner workings of governments in the U.S., Greece and elsewhere. On top of all this, it is never easy to discern when a seemingly harmless development will suddenly mushroom out of control into a crisis. Knowledge of this type is much more elusive and requires an understanding of concepts like “fingers of instability” which is discussed by Mark Buchanan at length in Ubiquity: Why Catastrophes Happen – and which is a topic I shall pursue in more detail in 2012.

The bottom line is that many of the big risks for 2012 are obvious: Europe, China, Iran, North Korea, etc.

What keeps option sellers up at night and often puts oversized dents in portfolios are those unknown unknowns lurking just below the surface.

Related posts:



Wednesday, December 28, 2011

Italy’s Sovereign Debt Schedule and the VIX

When I think about the risks posed by the European sovereign debt crisis in 2012, the first thing that comes to mind is the huge amount of debt that Italy has to roll over next year. In yesterday’s staff meeting/run with Logan (What My Dog Can Tell Us About Volatility) I even floated the semi-sexy label of “peak refinancing.” He was not particularly impressed…

But I’m sure that somewhere under that calm demeanor, Logan too is worried about Italy and how well that pivotal country will manage the burden of refinancing. Of particular concern is that the refinancing schedule has a three month stretch from February through April in which the debt that is coming due is particularly large – €91.7 billion, just under half of the total redemptions for the entire year.

The table below summarizes the monthly estimates of Italy’s 2012 issuance (per HSBC), as well as the schedule of redemptions and net issuance minus redemptions for each month.

In planning for the timing of elevated anxiety and perhaps a full-blown crisis in Europe in 2012, one would think that Italy’s debt schedule would figure prominently into those calculations. I would also expect to see some of that timetable translated into elevated VIX futures, which I have included at the bottom of the table below. In fact, the 2012 VIX futures term structure is very similar to what it looked like prior to the August selloff, with no hint at all that volatility might peak in February, March or April.

When it comes to pricing options for 2012, keep Italy’s debt schedule in mind, regardless of whether the VIX futures are paying attention to this issue.

Related posts:

[source(s): Italy Department of Treasury, HSBC, Interactive Brokers]

Disclosure(s): none

Tuesday, December 27, 2011

Q & A: The Historical Volatility of VQT

Questions from readers are where I get to learn which aspects of volatility cause the most confusion and consternation among investors, so one of the things I will strive to do in 2012 is take more of the Q&A exchanges that might be buried in the comments sections of previous posts and shine some light on them here.

I was reminded of the importance of Q&A when I stumbled upon the following comment to VIX Exchange-Traded Products: The Year in Review, 2011, which I fear may have been lost in the holiday shuffle. [For the record, I tagged that post with my elusive “hall of fame” label, which I typically use to honor only handful of posts each year.]

The comment/question was posted as follows:

Thank you for alerting me to VQT. Where does one find the realized volatility number on it...or is this number just the VIX?

Before I dive into the issue of the realized or historical volatility (the two terms are synonymous) of VQT, I would be remiss in not pointing out that the question suggests some confusion between realized volatility and the VIX.

First things first, realized volatility is also known as historical volatility because it is based on past price moves, has already been observed, and can be calculated with great precision (see Calculating Centered and Non-Centered Historical Volatility for more details.) This is essentially what an investor sees out his or her rear view mirror.

Implied volatility is a very different animal from its realized/historical cousin. It boils down to the market’s best guess as to what (historical) volatility will look like in the future, based on how much investors are currently paying for options. The VIX is a specific instance of implied volatility and is based on options on the S&P 500 index over the course of the next 30 days. To return to the car analogy, it is what the consensus of drivers believe will be around the next bend and over the horizon.

Getting back to VQT, the chart below captures historical volatility based on past daily price moves in VQT for lookback periods of 10 days, 20 days, 30 days, 50 days and 100 days. As these are calculated based on price moves, they are necessarily based on trading days, not calendar days, which are the unit of time used for implied volatility data.

Looking at the table, these historical volatility numbers for VQT are in 10.50 - 10.90 range for the past 30 trading days. The 100-day lookback window takes us back to early August, so it is not surprising that 100-day historical volatility is higher at 14.30.

I have also included some historical volatility data for the S&P 500 index (SPX) for comparison purposes. Note that historical volatility for the SPX has been 100 – 130% higher than it has been for VQT during the same lookback periods.

One can find historical volatility data on sites from brokers that specialize in options (optionsXpress, TradeMonster, Trade King, thinkorswim/TD Ameritrade, etc.) or from options data providers such as Livevol and iVolatility.

Related posts:


optionsXpress, TradeMonster, Trade King and Livevol are advertisers on VIX and More

Friday, December 23, 2011

VIX Exchange-Traded Products: The Year in Review, 2011

The year is not quite over, but I can safely predict that it when it is in the books, there will be no doubt that 2011 has been a bull market for VIX exchange-traded products (ETPs). After seeing two VIX ETPs launched in 2009 and ten in 2010, this year has witnessed the launch of 20 VIX ETPs.

In the week ahead I will provide some commentary about the evolution of VIX ETPs in 2011 and what to look for in 2012, but for now I wanted to share a performance table for a cross-section of VIX ETPs that were open for the full year.

Before I touch upon on the graphic below, I wanted first to comment on the time periods used for the performance data. Now perhaps my life is too complicated, as it seems I have to simultaneously sync it to three different calendars: the standard Gregorian calendar, the options expiration calendar (particularly the standard Friday monthly and weekly expirations) and the VIX options expiration calendar (featuring VIX options and futures expiration on those Wednesdays highlighted by purple squares in the preceding link.) The graphic below uses the VIX options expiration cycle, specifically measuring from Tuesday’s close immediately before VIX options expiration to the next Tuesday’s close just prior to VIX options expiration the following month. This means that the January 2011 entry includes the full VIX options expiration cycle for that month: December 22, 2010 – January 18, 201. This also means the most recent December 2011 data covers the full December VIX options expiration cycle: November 16, 2011 – December 20, 2011.

In the graphic below, I have highlighted the best performing (VIX expiration cycle) month for the SPX in green and the worst performing month in red. Note that over the course of the full year (December 22, 2010 – December 20, 2011) each of the VIX ETPs (long volatility in green and short volatility in red) managed to lose value, even though the VIX was up over 40% during that period. The one exception is VQT, which consists largely of a SPY position, with a dynamic allocation of VXX that ranges from 2.5% to 40% of the ETPs holdings. [For more information on VQT, refer to The Case for VQT and Barclays VEQTOR ETN (VQT) Begins Trading.]

While it is interesting that both the long and short volatility ETPs were unable to turn a profit for the year, there were stretches during 2011 that various VIX ETPs produced extraordinary gains.

As promised, I will delve more into the performance of the universe of VIX ETPs and their suitability as speculative and hedging plays before the end of the year and in the weeks and months ahead.

Related posts:

Disclosure(s): long XIV, ZIV and VQT; short TVIX and VXX at time of writing

Friday, December 16, 2011

VIX and St. Louis Fed’s Financial Stress Index Moving in Concert

Last year I talked about the St. Louis Fed’s Financial Stress Index (which I am calling the STLFSI in order to lower my carpal tunnel risk) as a measure of financial market risk that I consider complementary to the VIX and in some cases perhaps even a superior alternative.

Given the fact that some investors have difficulty coming to terms with the “holiday effect” and the seasonal swoon in the VIX, I thought it might be timely to update a chart I have posted here previously which captures the movements in the more broad-based STLSFI. Note that the chart dates from January 2007 and includes all the data from the financial meltdown of 2008, as well as the various permutations of the European sovereign debt crisis that have plagued the financial markets during the last two years or so. [Data are through the last update to the STLFSI, 12/9/11.]

Looking at some of the spikes in the chart, the first thing that strikes me is just how closely the two measures of risk have moved during the past five years. Also worth noting is the fact that both the VIX and the STLFSI indicate that the degree of risk/stress in the financial markets over the last few months has been slightly higher than what happened in one of the earlier Greek chapters of the euro zone debacle back in May and June of 2010.

More importantly perhaps, both the recent VIX and STLFSI data suggest that the current threats to the global financial markets are at least an order of magnitude lower than what we experienced in late 2008 and early 2009. This is not to say that both the VIX and STLFSI cannot spike much higher in short order, only that according to both measures, we now appear to be on the downhill side of the crisis.

For more information on the components of the STLFSI and the index’s long-term performance, check out St. Louis Fed’s Financial Stress Index.

Related posts:


[source: Federal Reserve Bank of St. Louis]


Thursday, December 15, 2011

The Year in Safe Havens

Earlier today, in Safe Haven Options Shrinking? I noted the recent failure of some of the safe haven trades in volatility, gold and crude oil securities to hedge the latest decline in stocks.

A question many observers have is how well these “big five” safe haven trades – volatility (VXX), gold (GLD), crude oil (BNO), the dollar (UUP) and U.S. Treasuries (TLT) – have fared over the full extent of the 2011 volatility storms, from the Arab Spring and Japanese earthquake/tsunami/nuclear disaster duo during the first quarter, to the U.S. debt ceiling debacle and the seemingly endless wave of disasters associated with the European sovereign debt crisis that plagued investors for the balance of 2011.

The graphic below, courtesy of, shows the year-to-date performance of big five safe haven ETPs, as well as historical volatility and drawdown data.

It is worth noting that while VXX is up for the year, it may be difficult to think of anything as a safe haven that was down 46.6% peak-to-trough earlier in the year.

Looking back with 20-20 hindsight, if one could have switched between safe haven vehicles at the most opportune time of the year, Brent crude would have been the best bet throughout the Arab Spring and up until early June, at which point gold would have been the horse to ride until August, with volatility the best play through the beginning of October and Treasuries the ideal hedge for the last two months. While the dollar has turned up as of late, the relatively low volatility in the currency market (assuming no use of leverage) means that the dollar is a better place to park investing capital until the perceived threat passes than to be employed as a hedge against a downward move in stocks.

Related posts:


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

Safe Haven Options Shrinking?

Back in February, in Chart of the Week: Flight-to-Safety ETPs, I examined the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade: volatility (VXX), gold (GLD), crude oil (USO), the dollar (UUP) and U.S. Treasuries (TLT). At that time, the Arab Spring was considered to be the main risk to portfolios and I noted that with the exception of crude oil, none of these supposedly safe havens had been profitable for the first two months of the year.

Ten months later the risk landscape is a much different one and TLT (+33.7), GLD (+10.2%) and VXX (+8.4%) have all lodged fairly impressive gains. While the dollar is flat, the picture in crude oil depends on where you look, with USO down 6.0% and BNO (a much better measure of global crude oil prices) up 15.7%.

So while it seems as if the safe havens have had a good year, a large part of that picture has changed during the first two weeks of December. Most notably, implied volatility, gold and crude oil have declined sharply in concert with stock prices, with all three acting as ‘negative hedges’ and adding insult to injury for those who were looking to cushion losses instead of exacerbate them.

Of the big five flight-to-safety vehicles, this leaves just U.S. Treasuries and the dollar as having been successful during the first half of December. With rates on the U.S. Treasuries at all-time lows and seemingly everyone waiting to time the Bill Gross short trade better than the bond master himself, this leaves only a currency that is less debased than most of its competition.

So where is the safe haven? Not too many years ago, many thought real estate was the best safe haven.

Right now one interesting short-term play is EUO, the ProShares UltraShort euro ETF, where the ETFs objective is to move -2x the daily direction of the euro.

Related posts:


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

Wednesday, December 14, 2011

High and Low Volatility ETPs

Since Barclays/iShares launched the first VIX-based exchange-traded products (ETPs) three years ago next month, the landscape of volatility ETPs has been dominated by products that are based on VIX futures. This should come as no surprise to investors, since the cash VIX (or VIX index quoted on CNBC and elsewhere) cannot be traded directly.

In early May, however, PowerShares elected to go in a different direction and launched the PowerShares S&P 500 Low Volatility Portfolio (SPLV) on one end of the spectrum and the PowerShares S&P 500 High Beta Portfolio (SPHB) at the more volatile end of the spectrum. [I’m guessing that a “High Volatility” moniker didn’t make it very far with either the legal or marketing folks…]

Three weeks after the PowerShares products, Russell Investments peppered the market with a launch of ten different “factor ETFs” which also address investor demand for products with high and low volatility, beta, momentum, etc. over the Russell 2000 and Russell 1000 universe, later followed by three international variants. Since then, several other issuers have entered the market with similar products.

By far the products that have received the most attention from investors have been the low volatility ETPs, with SPLV leading the pack with a market share of around 80%.

So far these volatility/beta ETPs have attracted approximately $800 million in assets, about 1/3 of the amount that is invested in VIX-based ETPs.

While the low volatility products have performed quite well since their launch and I understand the visceral desire to hold low volatility products in a high volatility world, as I see it, holding low beta stocks (SPLV top holdings) is just another way at market timing and not necessarily better over the long haul than diversifying with bonds or even more cash.

Going forward, I will spend some time analyzing the performance of SPLV, SPHB and some other ETPs in the volatility/beta group. In the meantime, give some thought to the possibility that even though utilities (XLU) have been superb performers in 2011, these are not necessarily the best long-term investments for most of us.

Disclosure(s): none

Tuesday, December 13, 2011

December Is the Cruelest Month…For the VIX

It seems well-nigh impossible for a December to pass without some sort of movements in the CBOE Market Volatility Index (the formal name of the VIX, for those who may have a short memory) that leave investors scratching their heads. In light of this, it appears I will be responsible for at least one December post reminding investors about the idiosyncrasies of implied volatility and the VIX during the holiday season.

There are a number of ways to look at the typical holiday swoon in the VIX, which I have labeled (the holiday effect or calendar reversion) for easy tagging and backtracking. From a strict fundamental perspective, the biggest change during the December/January holidays is fewer trading days, which means a shorter runway for stocks to depart for some unusual destinations. The other big factor is one of seasonality, specifically the tendency for December to be a bullish month for stocks.

I have chronicled how these factors influence the VIX and the strange prints they sometimes leave on the charts in posts from previous years (see links below.)

This year I am offering a chart which shows that in any given year, there is about a 40% chance that the VIX will make its annual low in December and as I discussed last year in VIX and the Week Before Christmas, the bottom usually comes in the last half of the month and most often just before Christmas.

In three trading sessions the VIX is already more than 20% off of its 30.91 close from last Thursday. It seems rather far-fetched to think that the VIX will plummet all the way below the current 2011 low reading of 14.27 from April 28th of this year (a date that is provisionally included in the chart below,) but stranger things have happened.

Even if you think the European sovereign debt crisis will see several more eruptions before the end of the year, don’t be surprised if the VIX is sleeping with the fishes for the next week or two.

Related posts:

Disclosure(s): none

[source:  CBOE, Yahoo]

Monday, December 12, 2011

The Low Fear Selloff

Steven Place of Investing with Options has a video post up this morning, Options Market Does Not Care About Selloff, in which he discusses how the implied volatility in various asset class volatility indices (VIX, GVZ, EVZ) are showing a very muted reaction to today’s selloff in stocks.

As noted here previously, the VIX generally moves about -4x in percentage terms the direction of the SPX. Mondays generally see a slightly larger move in the VIX relative to the SPX (usually an incremental 0.5% - 1.0% increase over Friday’s close) due to calendar reversion or the weekend effect, so today one would expect to see the VIX moving at least 4x in the opposite direction of the SPX.

In fact, as I type this the SPX is down about 1.9% on the day and the VIX is up only 3.9% -- so the VIX is about half as sensitive to changes in the SPX that is typical for a Monday trading session.

This is not to say that investors are oblivious to the risk that remain in Europe (and elsewhere) or that today’s move is just a head fake by stocks, but it does mean that the consensus expectations for immediate downside risk are quite low.

Santa may pay a visit after all, assuming he manages to survive all the austerity measures that I am certain his government has saddled him with…

Related posts:

Disclosure(s): none

Saturday, December 10, 2011

Aggregate View of U.S. Data vs. Expectations

Yesterday I posed and (to some extent) answered the question, How Good Has the U.S. Data Been Lately?

Today I have aggregated the performance relative to expectations across five groups of economic activity (manufacturing/general, housing/construction, employment, consumer and prices/inflation) and present those data and the S&P 500 index for the past two years.

As the graphic below shows, both the data and the SPX has retraced about half of the decline since the late April (stocks) to early May (economic data) peaks.

Looking at the chart, one could certainly make the case that data underperformed stocks from April to September, but has been outperforming stocks for the last 2 ½ months.

While conventional wisdom says that stocks lead economic fundamentals for 6-9 months, this graphic does not support that idea. Instead, it will be interesting to see which of the two assumes a leading role now that at least some of the European angst appears to be in the rear view mirror.

[Readers who are interested in more information on the component data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).]

Related posts:

Disclosure(s): none

[sources: various]

Friday, December 9, 2011

How Good Has the U.S. Data Been Lately?

At some point investors are going to have to change their watches back from Central European Time to Eastern Time (or Central Time if you are an options trader) and pay more attention to what is going on inside the borders of that sometimes overlooked nation just south of Canada.

Whenever that time comes, the first question on the agenda on the minds of most investors will be whether the relatively robust economic performance (at least by current global standards) will be able to continue. Earlier this week, in Global Manufacturing Recession or Noise? EconomPic raised the question of whether the U.S. and a handful of emerging market economies would be able to lift the global economy up or whether Europe and the Pacific Rim nations would end up dragging down those few economies that are currently thriving.

I do not have an answer to that question at this point in time, but I do believe the answers are most likely to come out of U.S. economic performance relative to expectations, which I have been tracking in some detail for the past two years. The graphic below shows how the United States has been faring relative to expectations in five groups (manufacturing/general, housing/construction, employment, consumer and prices/inflation) since the beginning of 2010.

The graphic below shows a definite upturn in positive surprises across all categories during the past 2-4 months. Should these trends continue, it bodes well for global activity and for stock prices as well – especially if the European disaster discount can be marked down.

Readers who are interested in more information on the details of the economic data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).

Related posts:

Disclosure(s): none

[sources: various]

Taking Profits in VIX Options (and ETPs)

Two hours into today’s session, the trading idea I mentioned yesterday, going long VIX puts, is doing quite well. The VIX Dec 27.50s are up more than 50% and the Dec 30s puts have advanced about 45%.

One question that I believe is much trickier with VIX options than options for most other securities is when and how to take profits. A large reason why taking profits in VIX options has an extra layer of complexity and difficulty is due to the mean reversion tendencies of volatility in general and the VIX in particular.

Another potential complicating factor regarding the management of VIX options positions has to do with their underlying. I hope that by now readers of this blog have had it drummed into their head that the VIX futures are the best proxy for the underlying in VIX options, not the cash VIX or VIX index, which is the VIX that is most often quoted in the media. Anyone holding positions in VIX options – and VIX ETPs for that matter – should be monitoring the VIX futures.

Looking at the changes in the first two hours of trading, one can see the typical pattern in which the front month (December) VIX futures (-6.3%) are moving about 80% as much as the cash VIX (-7.9%), with the second month (January) futures (-4.4%) moving about 56% of the cash VIX. This is right in line with historical norms. For an additional data point, VXX, which is a blend of front month and second month VIX futures, is down about 4.7%, which makes sense in that hold a disproportionate amount of front month futures at this point in the options expiration cycle.

So what does this all mean for taking profits in VIX options?

First, I cannot overstate how important it is to watch the VIX futures and understand how they move in relation to the cash VIX.

Second, because the VIX has a tendency to mean revert and thus often reverse recent sharp moves in either direction, it is important to take at least partial profits when one is the beneficiary of a significant favorable move in volatility. I like to take profits in 25% or 50% of my position, for instance, if my VIX options appreciate by 50%.

Third, keep in mind that the long VIX puts mentioned above are still out of the money and have no intrinsic value. As a result, they are subject to significant time decay (theta) each day and therefore will lose value if there are no additional favorable moves in volatility.

The bottom line is that harvesting VIX profits can be a challenging task and should be thought of as part art and part science. One only has to look at the many steeple-shaped VIX spikes to appreciate just how fleeting large profit opportunities in VIX options can be.

Besides, who knows what the next rumor out of Europe will be and how much the masses will panic or unpanic.

Related posts:



Disclosure(s): short VXX at time of writing; Livevol is an advertiser on VIX and More

Thursday, December 8, 2011

VIX Puts Looking Attractive

A lot can happen to the financial markets in the course of the next day or so and by my unofficial reckoning, quite a few of those are not just scary, but could have a 2008 flavor to them.

With the VIX at 30.60, implied volatility certainly is high, but not as high as it has been in recent months. This sounds like it may be a good time to buy some VIX calls, but I have a contrarian thought. VIX puts are relatively overlooked right now. The ask for the VIX Dec 27.50s is 1.00 and for the Dec 30s it is 2.30. Should we see a post-summit volatility crush, then even with some of those bearish scenarios, it is possible that the VIX will be declining as the anxiety over event volatility is behind us.

I like to say that the best time to buy VIX calls as portfolio protection is when the VIX is cheap, not when you think you need it. The corollary to this is that a good time to buy VIX puts is when everyone else is snapping up the calls at inflated prices.

Keep in mind that VIX options have their own options cycle. This month they expire on Wednesday the 21st and the last time they can be traded is on Tuesday the 20th.

Related posts:


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

Tuesday, December 6, 2011

VIX Under 30 Five Days in a Row?

The day is still young and the rumor mill has been eerily quiet so far, but I think it is worth noting that the VIX appears ready to make it five consecutive days (green box) without breaching the psychologically significant 30.00 level (dotted black line) for the first time since July.

For those keeping score at home – or in the office – it has now been two months (as of yesterday) since the VIX has moved above the 40.00 level.

The chart below shows the path of the VIX so far in 2011, which somewhat resembles either Nessie or a cobra that has reared up and is poised to strike. Call it a Rorschach amphibian, if you will.

I have also added a 10-day rate of change study below the main chart to emphasize that while the absolute level of the VIX is important, the recent rate of change can sometimes be a better gauge of evolving market sentiment.

Given all the uncertainty surrounding a group of 17 diverse actors with very different motivations arising from divergent national agendas, economic interests and domestic political situations, it is reasonable to expect the VIX and other measures of uncertainty to climb going into the end-of-week summit. With four hours in the books, today’s action in the SPX is the tightest single-day range in five months ago. When will the next sabot fall?


Disclosure(s): none

Sunday, December 4, 2011

Major Changes to the VIX and More Newsletter and to EVALS

Just a quick update to let readers know that there have been some substantial changes recently to the VIX and More subscriber newsletter and to VIX and More: EVALS.

Back in July I moved the publication of the VIX and More newsletter from Sundays to Wednesdays, due to subscriber feedback. At the time I also dramatically changed the focus of the newsletter content, again based on subscriber feedback, placing an increased emphasis on the analysis of VIX ETPs and ideas about how to trade them.

Two weeks ago I also completely overhauled EVALS so that it now focuses almost exclusively as a model portfolio for VIX ETPs.

Rather than go into the details of these changes in this space, those who are interested in more information are encouraged to check out:

A large part of the reason for these changes is to link the newsletter and EVALS more tightly and also have EVALS complement and extend the analysis found in the newsletter.

Thanks to all those who have provided feedback along the way to enhance the value of these two services.

Disclosure(s): none

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