Tuesday, January 31, 2012

CBOE Adds Options to Emerging Markets Volatility Index (VXEEM)

Earlier this month, the CBOE launched futures on the CBOE Emerging Markets ETF Volatility Index (VXEEM) and barely three weeks later, VXEEM options began trading today.

For more information on VXEEM options, which are based on the popular EEM emerging markets ETF, a good first stop is the CBOE’s VXEEM options product specification page. Of particular note is the fact the options expiration cycle is the same for VXEEM options as it is for the futures products. Additionally, VXEEM futures and options have the same expiration cycle as VIX futures and options, meaning that they will expire on Wednesdays (February 15, March 21, April 18 and May 16), with the options last traded on the Tuesday immediately following the expiration. For more information, check out the CBOE’s VXEEM splash page and information circular.

In the graphic below, courtesy of LivevolPro.com, I have collected closing data for some of the primary U.S. volatility indices, including those which are volatility indices for ETPs and single stocks. The indices are sorted from highest to lowest and provide a good sense of the market’s perceptions of relative risk across various stocks, groups of stocks (sectors and geographies) and asset classes.

Partly due to today’s earnings announcement, VXAZN, the volatility index for Amazon (AMZN) tops the list, with volatility indices for silver (VXSLV), Goldman Sachs (VXGS) and gold miners (VXGDX) rounding out the top four. VXEEM ranks eighth of the twenty volatility indices at 27.97 and currently carries a 43.8% premium to the VIX. Is that 43.8% premium too high? Too low? With VXEEM options (and futures) now you can not only express your opinion, but benefit financially if you are correct.

Related posts:

[source(s): LivevolPro.com]

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

Monday, January 30, 2012

A Monthly Comparison of VXX and VXZ

Three years after their launch, VXX has about four times as many assets as its mid-term sibling, VXZ. When it comes to public relations and media column inches, I imagine the ratio is more like 50-1 in the favor of VXX. In many ways VXZ is the unloved stepchild of the duo.

I recently opined that when it comes to the inverse variants of these two ETPs, ZIV is Undeservedly Neglected. I believe the same case holds for VXZ. One of the great difficulties in trading VIX-based ETPs is that while the potential returns are enormous, when things move in the wrong direction, a bad trade can spiral out of control and trigger an extremely painful loss with surprising speed. This is a large part of what makes VXZ more attractive than VXX. Even though VXZ is relatively volatile, with a current 30-day historical volatility of 39.5, it pales in comparison to the 70.1 30-day HV of its rocket-fueled short-term brother, VXX. In this case, the slower the train wreck, the more easily it can be avoided and position risk becomes much more manageable.

In addition to the lower volatility, VXZ is also much less susceptible to the contango and roll yield issues that plague VXX. In fact, on average VXZ is only subjected to about 1/3 of the negative roll yield that impacts VXX, which is a large part of the reason why the long-term performance of VXZ is much superior to the numbers put up by VXX. To illustrate this point, the chart below shows the month-by-month performance data for VXX and VXZ going back two years.

In summary, if you are impatient and you like action, VXX is the better bet, but if you have some patience and want better odds, VXZ is often a better long volatility play.

Related posts:

[source(s): ETFreplay.com]

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

VXX Celebrates Third Birthday

It does not seem too long ago that I was the only person who thought VXX was worth mentioning.

Known formally as the iPath S&P 500 VIX Short-Term Futures ETN, VXX was launched three years ago today, alongside of its sibling, the iPath S&P 500 VIX Mid-Term Futures ETN, VXZ. Together these were the first VIX-based exchange traded product to be hit the market.

I have discussed in detail in this space the factors driving the performance of VXX (VIX futures, contango, roll yield, etc.) and the underlying causes of the persistent underperformance of VXX.

To bring the accounting up to date, VXX was down 68.4% in its first year, then lost 74.6% in its second year. During its third year of trading, VXX fared much better, but still managed to decline 18.6%. Of course there were pockets of excellent performance (notably a 66.4% jump in August, as the graphic below outlines), but over the course of a full year, the roll yield drag was more than the volatility spikes were able to overcome. In fact, VXX is now down 94% from its split-adjusted launch price.

Even with the above facts, it is still possible to trade VXX successfully from the long side, particularly if one keeps the holding periods as brief as possible and/or pays close attention to the VIX futures term structure.

Related posts:

[source(s): ETFreplay.com]

Disclosure(s): short VXX at time of writing

Expiring Monthly January 2012 Issue Recap

I may have been away on vacation for the last two weeks, but that doesn’t mean my brain was entirely at rest.

In fact I was particularly busy in the January 2012 edition of Expiring Monthly: The Option Traders Journal, which was published last week and is available for subscribers to download. As the table of contents below shows, this time around I penned three articles, all with a distinctive VIX flavor:

  • Reflections on 2011 and Thoughts on 2012
  • Using VIX Exchange-Traded Products as Hedges (Part Two)
  • Follow that Trade: A Seasonal Synthetic VIX–VXX Arb

As noted here last week in The VIX-VXX Minotaur Trade, the last of those three articles advances some of the thinking I first presented in the December 2010 issue of the magazine.

Since a number of readers have expressed some interest in a listing of all the titles of my articles for Expiring Monthly, I intend to post a full list of all those at the end of the week.

Finally, now that I am back on the grid, I can devote some research and analysis to some of the developments that transpired while I was away – so expect regular posting to resume later today.

For those who are interested in subscription information and additional details about the magazine, you can find all that and more at (the newly redesigned) http://www.expiringmonthly.com/. More information on prior issues (and some of my research interests) can be found by following all the posts tagged herein with the Expiring Monthly label.

Related posts:

[source: Expiring Monthly]

Disclosure(s): short VXX at time of writing; I am one of the founders and owners of Expiring Monthly

Tuesday, January 24, 2012

The VIX-VXX Minotaur Trade

[The following first appeared in the December 2010 edition of Expiring Monthly: The Option Traders Journal. I thought I would share it partly because I have an article, “Synthetic Seasonal VIX-VXX Arb,” which appears in the just published January 2012 issue of Expiring Monthly that expands upon some of the ideas presented below.]


In Greek mythology a Minotaur was a hybrid creature with the body of a man and the head of a bull. Such a creature provided the inspiration for a pairs trade involving short VXX at-the-money calls and long VIX at-the-money calls.

The holiday season has a shortage of trading days and a history of a bullish bias. As a result, December VIX futures have a tendency to remain relatively muted when compared to January VIX futures. Assuming I am able to establish this position for a net credit, a seasonal play on volatility involving short VXX calls paired with long VIX calls has an opportunity to profit if any one of three critical factors dominates:

  1. volatility declines and both options expire worthless
  2. the VIX futures remain in contango
  3. volatility spikes and the VIX is more sensitive to the spike than VXX

It is possible to back test this strategy, but sometimes I like to put the trade on, see how it develops and get a sense of some of the potential hurdles. I fully understand that the results will not be statistically significant and making any inferences about a strategy from one trade is dangerous, but I do find some value in what I call these “proof-of-concept” trades with real money.

With most trades, achieving maximum profitability at minimum risk is the only goal. With a proof-of-concept trade, profits are important, but so is information. For this reason, I have a tendency to leave proof-of-concept trades on longer than I would when trading with an established strategy.

In terms of ratios, my intent is to keep this simple. The VIX is trading at just under 49% of the VXX at the moment and my research indicates that VXX generally moves about 48% as much as the VIX on a daily basis, so with the VIX at about 22 and VXX at about 45, I elect to do this pairs trade on a 1:1 ratio basis, using 10 contracts of each to keep the math simple.

Setup and Entry

In a world of maximum profitability, I would probably wait for some sort of relatively high VIX level before entering this trade, but because I am also focusing on the informational value of the trade, I choose to open the position early in the trading day on November 22nd, with the VIX at about the middle of its 10-day range.

With the VIX at 22.03 and VXX at 44.98, there is a strong temptation to stay strictly at the money and short the VXX December 45 calls while going long the VIX December 22 calls. For ten contracts, the potential profit should both options expire worthless is less than $1000. Given my expectations for seasonally low volatility and also given the high level of contango in the VIX futures, I elect to shave the odds a little and short the slightly in-the-money VXX December 44 calls and go long the VIX December 22 calls. This raises the potential profit if both options expire worthless by another $200. After trying to work the order a little, I relent and take what the market gives me, recording slippage of $175 on the VIX side of the trade and $100 on the VXX side of the trade. I still manage to pocket $800 on the trade, which leaves me long VIX December 22 calls for 2.30 and short VIX December 44 calls for 3.10.

Position Management

The first important point to keep in mind while managing these two positions is that they run on different expiration cycles. The VIX options expire on December 17th and the VXX options expire five days later on December 22nd. For that reason, I anticipate that I will exit the position no later than December 16th, which is the last day the VXX options are traded.

Monday, November 22 – As luck would have it, the VIX fell 8.3% between the time the trade was executed and the end of the day, pushing both calls out of the money and securing a $500 profit for the position.

Tuesday, November 23 – The VIX reversed to the upside today and is now 0.60 higher than when the VIX calls were purchased. VXX lagged during today’s spike and is 0.06 below where it was when the VXX calls were sold. The relative weakness in the VXX sounds positive for my position, but VXX calls jumped 64% today while the VIX calls rose only 39%. The profitability of trade has turned from +$500 to -$175 in 24 hours.

Monday, November 29 – After some seesaw action immediately before and after Thanksgiving, the weekend saw the Irish bailout formalized and tensions heating up on the Korean Peninsula. Both the VIX and the VIX December (front month) futures closed near the 21.50 level, while VXX spiked up to 46.10. The VIX calls and VXX calls are both in the money and my position is now down $475 in one week. I am now the beneficiary of $36 of theta each day, but I am disappointed that the VIX spike has had more of an impact on the VXX calls than the VIX calls.

Tuesday, November 30 – The VIX closed at 23.54, its highest closing level since September, as concerns lingered about the future of the euro zone and the Koreas. My VIX long calls are now 15% in the money and my VXX short calls are 10.7% in the money, yet the VXX calls continue to be more sensitive to increases in volatility. Today the VXX calls jumped 62% while the VIX calls rose 54%. The position lost $975 today and is now down $1450 in aggregate. If this were not a proof-of-concept trade I would either be exiting the trade or making adjustments to limit risk at this stage. As it is, I will let the trade ride, as my preferred indicators suggest the VIX is ‘overbought’ and is ripe for some mean reversion. My $36 of theta is just a drop in the bucket now.

Wednesday, December 1 – Today was a huge turnaround. The VIX fell 10.2% and VXX declined only 5%, yet the VXX calls lost 50% of their value while the VIX calls dropped only 27%. The result saw the position swing $2000 to a gain of $550.

Friday, December 3 – After falling more than 10% on both Wednesday and Thursday, the VIX fell another 7.7% today, as geopolitical and macroeconomic concerns faded and were replaced by a rising sense of optimism. Over the course of three days, the VIX has fallen 23.5% from 23.54 to 18.0 while VXX has fallen 16.2% from 49.29 to 41.30. With both calls well out of the money and the aggregate gain in the position up to $825 (above the $800 profit target), here is where I would exit the position and lock in profits, but this is a proof-of-concept trade, so I will let it ride…

Friday, December 10 – The graphic below details the full lifecycle of this trade, which is coming to an end today. Of notable interest, during the last week the VIX was relatively steadfast, while VXX lost significant value due to negative roll yield and a general drop across the VIX futures term structure. The result is that VXX, which was 2.1% in the money when the calls were shorted is now 15.4% out of the money, with the calls fetching only 0.15. The VIX has fared much better, starting out 0.1% in the money and now 13.6% in the money. Due to the greater volatility of VIX options and also the extra five days in the VIX expiration cycles, the calls still hold a value of 0.55. For the last three days, the position has been registering a profit in the $1150-$1200 range. As this is almost certainly going to be whittled back to $800 in the 1 ½ weeks until expiration, I am electing to pull the plug on this trade.

Epilogue and Takeaways

The first key takeaway is that with a little patience, a VIX Minotaur trade with a net short VXX position can indeed be profitable. On the flip side, this trade can be highly volatile and requires that significant attention be given to risk management. In anything other than a proof-of-concept environment, I would have exited this trade for a loss long before it had a chance to work its way back to profitability.

I was a little disappointed that the VIX spike did not provide the same lift to VIX options that it did to VXX options. This was due to the fact that VXX options turned out to be much more sensitive to changes in the underlying than VIX options, which is a key learning. Future trades should attempt to establish whether this is a persistent theme.

Another important consideration is the timing of the two expiration cycles. In this instance the position benefitted from the fact that VIX options expiration was after VXX options expiration. In August and September VIX options expired before VXX options, so I would have expected a more challenging environment for this trade during those two expiration cycles.

Future efforts may wish to tweak the degree to which both the VIX and VXX options are out of the money and also adjust the units in the ratio to give a higher weighting to VIX options.

Finally, score one point for the proof-of-concept trade. When real money is on the line, perceptions are more acute, emotional responses and their interaction with the trade are more realistic and ultimately any lessons learned are more deeply etched in the trading psyche.

Related posts:

Disclosure(s): short VXX at time of writing; I am one of the founders and owners of Expiring Monthly

Friday, January 20, 2012

ZIV Undeservedly Neglected

Much to my amazement, next week will mark the third anniversary of the launch of the first two VIX ETPs: the S&P 500 VIX Short-Term Futures ETN (VXX) and the S&P 500 VIX Mid-Term Futures ETN (VXZ).

Some may recall that investors were slow to warm up to these ETNs (see Charting the Assets of Volatility-Based ETPs), but these two products are now #1 and #5 in the very successful volatility ETP space, with assets of $700 million and $188 million, respectively.

It is no secret that VXX has always been the darling of short-term traders, while VXZ has struggled at times to find a broad audience. As investors have become better educated about the influence of the VIX futures term structure and resulting roll yield on returns, interest in VXZ relative to VXX has picked up, but the latter, with its target maturity of five months, continues to play second fiddle to its short-term (one month target maturity) sibling.

I was curious see how this dynamic played out when VelocityShares rolled out two products that are essentially the inverse of VXX and VXZ in November 2010. Once again the short-term product captured the bulk of the interest of traders, as XIV quickly established itself as the #2 product in the VIX ETP space. While the love for XIV is certainly understandable, due to the history of persistent contango and negative roll yield in VIX futures, this product suffered a huge drawdown as the European sovereign debt crisis and resulting record backwardation wiped out 75% of the ETPs value from July through November 2011.

Against this backdrop, I am frankly surprised by the lack of interest investors have shown in ZIV, the VelocityShares Daily Inverse VIX Medium-Term ETN. In a nutshell, ZIV has many of the same benefits of long XIV and/or short VXX positions, with much less risk. Specifically, ZIV benefits from negative roll yield about 65% of the time, with VIX futures data going back to 2004 indicating that the annual benefit due to negative roll averages out at more than 20% per year. With XIV getting all the attention, I wonder if investors are aware that XIV is down and ZIV is up since the two products were launched.

Of course, like XIV, ZIV is exposed to sharp spikes in the VIX, as the chart below reflects. It is worth noting, however, that when the VIX spikes, ZIV can be expected to lose value at about half the rate of losses in XIV. For example, while XIV was falling 75%, ZIV was down 42%.  It bears repeating that one of the key features of inverse volatility products is that the potential for large short-term losses is significant, even though the long-term prospects are promising.

Finally, for those who are investing in or trading VIX-based ETPs, it is important to keep in mind that short-term returns are most likely to be a function of changes in the VIX and VIX futures, while long-run returns will be dominated by the VIX futures term structure.

Related posts:

[source(s): ETFreplay.com]

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

Thursday, January 19, 2012

VIX Views

Yesterday, I learned that the people at S&P 500 Indices and the CBOE have collaborated on a new blog with the name of VIX Views.

The best news about VIX Views is the high quality of contributors and content. The most recent posts, all of which have appeared since January 7, include the following:

  • Matt Moran (CBOE) – Why Are There Different Prices for VIX Spot and VIX Futures?
  • Matt Moran (CBOE) – VXEEM Futures: 1,106 Trading Volume on the 3rd Day of Trading
  • Siddhartha Oberoi (S&P Indices) – VIX ETPs Demystified: December 2011
  • Frank Luo (S&P Indices) – An Introduction to VIX
  • Berlinda Lu (S&P Indices) – Diversification Properties of VIX Futures Indices
  • Berlinda Lu (S&P Indices) – Volatility Benchmarks in Europe

I encourage readers to take advantage of this resource and the valuable information stored in the archives, which date back to November 2011.

In thinking about VIX and More as a repository of information on the VIX, volatility and related subjects, I am reminded that I have tagged quite a few posts with the educational label. While I consider almost every post here to be educational, those with the educational label stand out above the crowd, particularly for those who may be relatively new to the VIX and/or are in search of material which does not assume a great deal of pre-existing knowledge.

Some of these posts with the educational label have been included in the links below. I have also included several posts in which I have highlighted resources on the VIX and volatility that I thought readers should be aware of.

Going forward, I have some thoughts about how to bring together all the material on this site in a manner that is easier to browse, but for now at least, Navigating VIX and More by the Labels will have to suffice.

Related posts:

Disclosure(s): the CBOE and Livevol are advertisers on VIX and More; I am one of the founders and owners of Expiring Monthly

Wednesday, January 18, 2012


The more I think about it, the less I understand the need for even more low volatility ETPs. Sure, I understand that in high volatility markets many investors want a more conservative portfolio that is insulated against sharp moves in the wrong direction.

In that respect, I can somewhat understand the appeal of the hugely popular PowerShares S&P 500 Low Volatility Portfolio ETN (SPLV), which has now attracted more than $1 billion in assets in the eight months since it launched. Just last week, in Comparing SPLV and VQT, I noted that SPLV’s approach to lower volatility “is heavy on defensive stocks, with the current top sector allocations in utilities, consumer staples and health care stocks.” In fact, following its recent quarterly rebalancing, SPLV currently has approximately 31% of its portfolio invested in utilities, with another 30% in consumer staples. [see SPLV’s top holdings here]

So what is it that SPLV offers over and above an investment in a utilities ETF like XLU or a consumer staples ETF like XLP? Not much, as far as I can tell. I terms of performance, XLU trounced SPLV throughout 2011 and as the chart below shows, finding a distinction between the performance of SPLV and XLP since the former’s launch last May looks a lot like splitting hairs – though to be fair the gap may become more obvious with the recent rebalancing.

One can argue that other approaches which use low volatility stocks (e.g., XLU) are at least as effective in lowering volatility, as are those ETPs that use a dynamic hedging allocation based on an evaluation of market volatility and risk. I touched on two of these in Comparing SPLV and VQT, notably VQT and VSPY.

As I see it, jumping on the low volatility bandwagon is a lot like shunning air travel because of a fear of turbulence. While that is understandable, that cross-country train is going to make it a much longer trip to get to the same destination.

Considering the differences across the investment universe, I realize that not everyone embraces market volatility as a period in which enhanced opportunities arise, so in 2012 one of the themes I will periodically address in this blog will be how to reduce risk, hedge and generate income – though not necessarily all at the same time.

In the meantime, consider for a moment a personal motto, “In volatility, there is opportunity!

Related posts:

[source(s): ETFreplay.com]

Disclosure(s): none

Tuesday, January 17, 2012

EconomPic Data’s VIX and S&P 500 Performance Matrices

Last week, Jake at EconomPic Data took up the subject of the VIX as a Predictor of Equity Returns in a post that examined the daily returns of SPY based on the level of the VIX.

Today Jake has introduced another factor into his analysis in S&P 500 / VIX Matrix, where the performance of both the SPX/SPY and the VIX are evaluated based not just on the absolute level of the VIX, but also based on the performance of the VIX over the prior month.

The results are plotted in two matrices, one for SPX/SPY performance and the other for VIX performance.

Long-term readers of this blog will not be surprised to see that the VIX spike and mean-reverting aspects of the VIX dominate the key takeaways from this table, with high levels of the VIX creating some sweet spots in terms of predictability of future returns for both the SPX/SPY and the VIX.

Also worth noting is a point that I have mentioned here on many occasions in the past: that the mean reversion characteristics of the VIX are much less compelling for a low VIX than for a high VIX.

Finally, it is important to keep in mind not just the number of data points on the chart, but the events that these encompass. A good reference can be found in VIX Sets New Records, Suggesting Volatility Near Peak, which I penned in August 2011. The data in my August post should serve as a reminder that any set of data points which include a VIX of over 50 will be limited entirely to the 2008-2009 financial crisis. In contrast, just moving the relevant bucked down to 48 (on an intraday basis) will capture six other crises from the past two decades and provide enough diversity of experience from which to draw substantially more meaningful conclusions.

Related posts:

Disclosure(s): none

Monday, January 16, 2012

Navigating VIX and More by the Labels

Saturday’s Five Years of VIX and More received enough broad-based interest that apparently attracted quite a few new readers. Several of these new arrivals have asked me for some assistance in finding their way around the blog; and rather than continuing to respond individually, I thought making some of my thoughts public might provide assistance to a wider audience, both new and old.

First things first, if you arrived on the blog looking for information on a specific topic, the best place to start is with the Google custom search feature, which is in the right hand column of the blog, a box under which carries the label “Search the VIX and More blog” and lies just above the orange RSS feed icon.

According to Blogger, this is post #1483. If Google turns out to be too cumbersome of a way to find what you are looking for, labels may be a better and more targeted way to go. It turns out that I have applied 1065 different labels to these posts. The list of labels which I have associated with each post can be found at the very bottom of each post and serve as hyperlink filters that automatically pull up all posts which have been tagged with the same label. The labels include almost every ticker that has ever appeared on the blog, keywords, phrases and some general reference labels, such as hall of fame , archival, educational, lighter side, etc. I do my best to capture some of the recurring themes that run through the blog, but the labels are somewhat arbitrarily assigned by me and I must confess that there are times when I probably forget to use important labels or retroactively tag posts that are ideally suited for new labels.

Today I took the opportunity to examine the frequency of all the labels I have ever used on the blog. Topping the list was Chart of the Week, which refers to a feature I rolled out in November 2008 to help make sense of all the chaos of the times. This was a weekly feature through the end of 2010 and was phased out in the beginning of 2011. Now that I am increasing the frequency of my posting, I suspect I will bring back the Chart of the Week in short order.

Second on the list of most frequently used labels is VIX futures. This should come as no surprise to regular readers of the blog, as VIX futures are the foundation for understanding the entire VIX product space, including VIX options and VIX exchange-traded products.

In the third spot is VXX, which is the top ticker on the blog. Quite a few readers of this blog are VXX and volatility specialists and I take a great deal of pride in being the first destination site for that product and arguably still the best reference available for the broader list of VIX ETPs.

Scrolling down the list of labels, #4 is VIX spikes, one of my favorite subjects when it comes to trading the VIX. At #5 is VWSI, also known as the VIX Weekly Sentiment Indicator, which is the precursor to the Aggregated Market Sentiment Index (AMSI) that is featured exclusively in the VIX and More newsletter.

Looking farther down the list implied volatility comes in at #6 and historical volatility comes in at #10. This is not a big surprise, but it leads me to believe that I probably pay more attention to HV than most other traders – or at least than those who blog about the subject.

Just outside the top ten, the top index in the labels is the ISEE, a call to put ratio that is published by the ISE. The ISEE is also a component of the AMSI. It is something have not blogged about in a while – and I will be sure to remedy this soon.

Of the many ratios I track, the one with the most mentions on the blog is VIX:VXV, which was nearly flawless as a market indicator during its first 18 months following the launch of VXV, then struggled with some of the volatility idiosyncrasies that crept into the markets following the March 2009 bottom.

Also worth nothing is the top country, China, and the top options position, the strangle. China comes as no surprise, but the strangle does, as I consider myself more of a straddle guy than a strangle guy. My guess is that the ranking of options trades is somewhat distorted by that fact that when I translate some of my trading ideas for the benefit of others, I often make the trade idea a more simple or conservative one, such as substituting a strangle for a straddle.

Finally, there were three particular ‘blast from the past’ labels that remain among the all-time most used labels. These harken back to earlier incarnations and attitudes here, as well as a wider-ranging sense of subject matter:

  1. links – before Tadas Viskanta at Abnormal Returns and Charles Kirk at The Kirk Report created a near monopoly on link collections, many bloggers had their own link fests. Mine were heavy on volatility, ran from 2007-2009 and provide for an interesting historical perspective on what people were thinking about with respect to volatility and risk before, during and after the 2008 crisis
  2. wine pairing – imagine my surprise when I discovered that more posts were tagged with the ‘wine pairing’ label than with China, European sovereign debt crisis, VXV, VXN, etc. There was a time when a reader wondered aloud, mostly in jest, I’m sure, about how I might pair wines with the various VIX Weekly Sentiment Indicator readings. Never one to back away from a creative challenge, I jumped right in…
  3. CNBC Million Dollar Portfolio Challenge – I have no idea how many times CNBC has tried this contest, but I’m fairly sure the March-May 2007 version I participated in was the first one. I was new to blogging when I started posting about this, but I was surprised by how many people took some vicarious pleasure in my plight and also wanted more details about my approach in order to help them find the most volatile stocks and increase their chances of landing at the top of the charts. My rise was meteoric, but I risked it all in going for the win and fell back to earth just like Icarus.

Related posts:

Disclosure(s): short VXX at time of writing

Saturday, January 14, 2012

Five Years of VIX and More

One week ago marked five years since my first post at VIX and More. Since this anniversary fell just after my Top Posts of 2011 entry, it seemed like another retrospective look at the blog might be one too many. After a week of reflection I am now convinced that The 1000th Post is probably best left unchallenged (for now at least) as my definitive history of the ideas represented on this blog and a good reference for relatively new readers. Another link worth highlighting is the hopefully self-explanatory The Post of the Month: An Informal History of VIX and More. Last but not least, for those interested in the best of the archives, those few posts with the hall of fame label are among my personal favorites.

In order to mark the five-year anniversary, I have elected to highlight the ten most-read posts on the blog since its inception, with some commentary about each post.

  1. Ten Things Everyone Should Know About the VIX – If there is one post on this blog that everyone could benefit from – and new readers might wish to start with – this is the one. I last updated the contents of this post in 2010 and I will be sure to revise it again in the near future.
  2. How to Trade the VIX – This is a fairly basic explanation about how to trade the VIX that probably benefits from having a title that positions it well for Google searches. There are a number of related posts about how to trade the VIX (some of which are links in the original), but here is a case where I should also have an updated look at the subject, with some more comprehensive information.
  3. VXX Calculations, VIX Futures and Time Decay – I find it interesting that a post which was unable to crack the top ten in the year it was written (2009) is now in the top three of all time. I believe this was the first explanation anywhere went into the details of the VIX futures roll yield and the math involved persistent contango and the resulting price decay in VXX. As so many traders have taken up the cause in trading VXX and related products, this post has become an invaluable educational resource and is frequently linked to almost three years later.
  4. Why VXX Is Not a Good Short-Term or Long-Term Play – Written several months after the post above, this extended some of the ideas that I had fleshed out earlier in a manner that investors have found helpful regardless of the time frame in which they are trading.
  5. Prediction: Direxion Triple ETFs Will Revolutionize Day Trading – One thing I tried to do when I started this blog was to focus on educational material instead about talking about my trades or what I was expecting from the markets. Every once in a while, however, there were some things that I saw as very likely to happen that cut against traditional thinking. This triple ETF call was one of those and also helped to attract attention to these new products.
  6. Chart of the Week: Might Recent Volume Bottom Doom Stocks? – I was surprised to see this post on the last as the analysis is probably not among my best thinking. What I believed happened was that at the time this was written, investors had become concerned that stocks had rallied too sharply off of their March 2009 lows and were likely to run out of steam soon. As it turns out, stock sold off for about two weeks after this post, falling back to SPX 869, then resumed their bullish momentum.
  7. What Is High Implied Volatility? – This post from 2008 helped to explain several different ways of evaluating implied volatility relative to various benchmarks, at a time when investors were becoming increasingly concerned about volatility. Questions about implied volatility continue to be big issues for new options traders.
  8. SPX 15% Over 200 Day Moving Average for First Time in Ten Years – While I will probably never get a job writing headlines for the New York Post, every once in a while my research and analysis uncovers something that has widespread appeal and a catchy enough headline to attract a lot of attention. While this headline and the accompanying graphic sound ominous, stocks shook off the bearish warning and continued to rally.
  9. Rule of 16 and VIX of 40 – When people try to explain to me why they like the blog, what usually comes out is some sort of variation of, “You make very technical material easy to understand.” This post is probably one of the better examples of this. Many people struggle with some of the math associated with the VIX and having read this, I know the lights have gone for a number of investors.
  10. Lost in Translation: VXX and VXZ – This post preceded #3 and #4 on this list and  was probably the first piece published anywhere that talked about the beta of VIX, VXX and VXZ relative to SPX. Most investors had not figured out what to expect with VXX and VXZ in terms of VIX moves back in April 2009 – and quite a few still struggle with this issue to this day.

Finally, one recent development worth noting is the re-launch of EVALS (ETP Volatility Analysis Long-Short) in November. EVALS is now focusing on VIX-based ETPs and this has created some confusion from readers about what content is on the blog, what is in the newsletter and what is in EVALS. For this reason, I have created a content pyramid below which should help to differentiate between what can be found where. Of course the blog is free to all, while the newsletter and EVALS are available only to subscribers.

Related posts:

short VXX at time of writing

Friday, January 13, 2012

Comparing SPLV and VQT

Based on some of the questions and comments that came out of Wednesday’s Three New Risk Control ETFs from Direxion, there appears to be a significant portion of the investment community that is uncertain about just how some ETPs are attempting to dampen volatility and control risk.

Today I am going to differentiate between three types of risk control approaches and compare two ETPs that have a little performance history. The approaches and an example ETPs are as follows:

  1. Using low beta stocks to minimize portfolio volatility (SPLV)
  2. Using a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (VSPY)
  3. Using a market timing mechanism that dynamically allocates between stocks and VIX futures according to measures of market volatility (VQT)
While it may be partly semantics, I would not call SPLV a hedge in the sense that it does not attempt to hold securities that are negatively correlated with stocks. Instead, this approach is heavy on defensive stocks, with the current top sector allocations in utilities, consumer staples and health care stocks (see SPLV’s top holdings here.)

On the other hand, the approaches employed by VSPY and VQT are hedges in the traditional sense in that they switch into asset classes (bonds and volatility) that are generally negatively correlated with stocks when measures of volatility such as implied volatility and historical volatility signal an environment that poses greater risk to long equity positions.

As VSPY was just launched this week, it is too early to talk about the performance of this approach, but the chart below captures the performance of both SPLV and VQT since the launch of the former on May 5, 2011.

Note that both SPLV and VQT are less volatile than SPY, had a lower drawdown, had a smaller peak to trough drawdown during the August-October selloff, and dramatically outperformed SPY during the period covered by the chart. Once VSPY establishes some meaningful historical data, I will return to this subject and offer a more detailed comparison of all three approaches to controlling risk.

For those interested in pursuing some of these subjects further, there is a good deal of information in the links below.

Related posts:
[source(s): ETFreplay.com]

Disclosure(s): none

Thursday, January 12, 2012

Tight VIX Range Keeps Overbought Signals at Bay

Yesterday’s little dose of VIX trivia (VIX Has Smallest Intraday Range Ever!) was just the kind of post that I suspected would raise quite a few eyebrows, until everyone concluded that the headline was out of proportion to the actual data point. Ironically, that was a large part of the intent of the post: to poke fun at statistical outliers and extreme readings that have dubious predictive value.

The more I thought about the tight intraday VIX range, the more I believe it is a good segue to a more important related point: that a narrow trading range for the VIX – and also for stocks in general (10-day historical volatility in the SPX is down into the 12s) is allowing for stocks to rise without triggering any overbought signals.

One way I track whether the VIX is signaling an overbought or oversold condition is to use a ratio of the VIX to its 10-day moving average. To make this easy on the eyes, I am partial to using moving average envelopes (MAEs) which quickly flag when the VIX (or any other underlying) has strayed a large distance from its moving average, similar to the manner in which Bollinger bands measure outliers.

My personal preference is to use the VIX 10-day moving average as the baseline and set the MAEs to 10%, 12.5% or 15%, depending upon the underlying volatility in the market. In the chart below, I have set the MAEs to 10 days and 12.5%. The result is a VIX that has hugged the center line (the 10-day moving average) for the past 2 ½ weeks, never threatening the dotted blue MAE lines.

In many respects, the recent activity in the VIX is a microcosm of the action in general in the markets: stocks continue to rise, but not rapidly enough to trigger many of the favored overbought alarms.

Related posts:

[source(s): StockCharts.com]

Disclosure(s): none

Wednesday, January 11, 2012

VIX Has Smallest Intraday Range Ever!

If ever there was a day to be short the volatility of volatility, it was today. In fact, today established a new record for the smallest (in percentage terms) intraday range for the VIX, a mere 1.14%.

For those who are curious (and I know you are out there), the previous record of 1.24% dates from August 29, 2003.

The chart below includes weekly bars and dates from January 2003.  It puts the prior small range day into context with a green arrow marking the previous record. For those who are more curious about historical precedent, in the month or so following the old record, the VIX slowly drifted up from 18.63 to the 22s, briefly touching over 23 on one day. Then, of course, the influence of the bull market took over and a VIX of 25 was not seen until 2007.

[source(s): StockCharts.com, CBOE, Yahoo]



Three New Risk Control ETFs from Direxion

Today Direxion announced they have launched three ETFs whose intent is to match their exposure to an underlying equity index based upon current levels of market volatility. The new ETFs are as follows:

  • Direxion S&P 500 RC Volatility Response Shares (VSPY)
  • Direxion S&P 1500 RC Volatility Response Shares (VSPR)
  • Direxion S&P Latin America 40 RC Volatility Response Shares (VLAT)

The launch of these ETFs expands Direxion’s stable of what they call “rules-based index ETFs,” which began with two ETFs that are based on insider trading data: INSD and KNOW. The three new ETFs also arrive just five days after S&P announced a new S&P Dynamic Rebalancing Risk Control Index Series, which provides the basis for evaluating volatility and matching equity exposure to anticipated risk.

The intent of these ETFs is spelled out by Direxion:

“The Funds embody a rules-based investment approach that uses volatility as a gauge to determine equity exposure. They operate according to the principle that exposure to equities should be reduced during periods of higher overall market volatility, and increased during periods of a more stable (lower volatility) market environment. Each Fund has a target volatility level for its corresponding index. When volatility moves above those levels, the Funds will increase their exposure to U.S. Treasuries and decrease their exposure to equities. The Funds will proportionately increase exposure to equities during periods of low market volatility.”

Readers with sharp memories may recall that back in July 2010, Direxion was the first ETF provider to announce that they would be launching a product based on the S&P 500 Dynamic VEQTOR Index, which was an effort to mitigate risk with a dynamic allocation of VIX short-term futures, essentially the equivalent of sizing a VXX hedge based on observed levels of implied volatility and historical volatility. I am not sure why Direxion’s VEQTOR product never saw the light of day, but Barclays ended up with one of the few successful VIX ETPs in 2011 (see VIX Exchange-Traded Products: The Year in Review, 2011) with its Barclays ETN+ S&P VEQTOR ETN (VQT) product, which I made a strong case for back in October 2010 in The Case for VQT.

One of the interesting aspects of the approach taken by VSPY, VSPR and VLAT is that these products will tend to have minimum exposure when the VIX is at its highest – and as anyone who has ever looked a chart of the VIX and SPX/SPY knows, this is typically when stocks bottom and begin a sharp bullish move.

With impeccable timing, EconomPic Data just happened to publish a study yesterday, VIX as a Predictor of Equity Returns, which concluded that for the most part, SPY daily returns were much higher with an elevated VIX than with a historically low VIX.

All this raises the question of how to play increased volatility and risk. In the land of ETPs, there are quite a few alternatives, including:

  • Barclays ETN+ S&P VEQTOR ETN (VQT) – dynamically hedge with a long VIX futures position
  • Direxion’s VSPY and VSPR to dynamically adjust exposure to equities
  • PowerShares low volatility (SPLV) and high beta (SPHB) approaches for manual market timing
  • ETRACS Fisher-Gartman Risk On ETN (ONN) and ETRACS Fisher-Gartman Risk Off ETN (OFF) – for those who wish to manually time the multi-asset class risk on/risk off trade

Investors who believe they are more adept at timing the market may prefer to avoid the rules-based products that dynamically adjust exposure based on a static risk measurement mechanism. For those who prefer not to watch their portfolio closely or are not convinced that they can do a better job than the likes of VQT, VSPY and perhaps SPLV, the new category of dynamic risk exposure products should provide some excellent tools for portfolio augmentation and in some cases, portfolio replacement.

Related posts:

Disclosure(s): short VXX at time of writing

Friday, January 6, 2012

VXV Heralding a Return to Normalcy

With the political season heating up, it seemed like an opportune time to work “normalcy” into one of my posts again and what better way to do that than by putting under the microscope one of my favorite overlooked indices: the CBOE S&P 500 3-Month Volatility Index, which I typically reference with the more pithy VXV ticker symbol.

For those not familiar with VXV, I am fairly sure I was the first person to discuss this index back in 2007, talk about the merits of the VIX:VXV ratio (which is a great way for someone without VIX futures quotes to keep on top of the VIX futures term structure), devote an entire Barron’s column to the subject (Take a Longer View on Volatility) and promote VXV as a better reflection of long-term and structural/systemic volatility than the VIX, which is better suited to measuring short-term event volatility.

For those who desire some additional background and context, there are shiploads of prior posts on the subject and the links below should provide for some excellent jumping off points.

Getting back to VXV, I think it is important to note that while the VIX remains above its December lows, VXV has now moved below those lows and it plumbing levels that have not been seen since early August – and as VXV is a better gauge of structural and systemic risk than the VIX (not to mention largely untouched by the holiday effect), I think this is an important development to watch.

Frankly, the VXV chart looks a lot like it did back in early April 2009, when I penned Chart of the Week: VXV and Systemic Failure.  At that time I concluded, “The key takeaway: systemic healing is continuing and the risk of systemic failure is diminishing.” Based on the VXV chart, it appears as if we are at a similar moment in time right now.

Related posts:

[source(s): StockCharts.com]

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

Thursday, January 5, 2012

VIX and More and the 2012 Bespoke Roundtable

I was delighted to be invited back for the third year in a row to share my thoughts about 2011 and 2012 as a part of Bespoke Investment Group’s third annual Roundtable.

As someone who trades options, just predicting what one stock or index will do over the course of a four-week expiration cycle can be a humbling experience. Since I rarely focus the bulk of my thinking more than two or three expiration cycles into the future, I always embrace the process of what I have come to think of as Bespoke’s comprehensive 37 question “take-home final.” Of course you don’t have to have an opinion about every issue out there to be a successful investor, but being informed about as many issues as possible makes you better prepared when the next surprise hits. As I noted in The Education of a Trader, anyone who has ever uttered, “Do we have to know this for the test?” is not cut out for trading, as every day in the financial markets is an open book pop quiz.

When it comes to formulating answers to these 37 questions, I tried to balance what I think are the most likely scenarios with more provocative comments about some low probability scenarios that I believe that a higher likelihood of coming to fruition than the rest of the crowd. The result is typically a patchwork of the unexciting and the outrageous. In 2012 it looks like I am leaning more toward the unexciting end of the scale, which is not difficult to do in a year in which the Mayan calendar may be predicting the end of the world, while many pundits are calling for at a minimum the end of the euro zone as we know it. That being said, I do think I have some provocative things to say about a wide range of issues, from Apple (AAPL) vs. Google (GOOG) to social networking and beyond.

The full set of my comments for 2012 is here.

For those who are curious how my crystal ball has fared in years past, my archived predictions for 2010 are here. If I can locate a link to my (decidedly less impressive) 2011 predictions, I will post that here as well.

I also recommend reading through some of the comments from the other participants in the 2012 Bespoke Roundtable. A splash page for the full set of predictions is here.

Related posts:

Disclosure(s): none

Tuesday, January 3, 2012

Covered Calls Finish Strong in 2011

Just looking back at The Year in VIX and Volatility (2011) is enough to make one’s stomach churn. Try to tell someone who has acrophobia that even the scariest roller coaster ride ends up right where it started and you will likely not assuage any fears. Something similar is at work for hikers, bikers or mountain climbers. The amount of effort they will need to call upon has nothing to do with ending up at the same elevation they started, but rather it is the cumulative elevation gain over the course of the trail, road or mountain. As with many things in life, it is all about the journey, not the destination.

For those who may have a touch of acrophobia, prefer their hikes to put less stress on their cardiovascular system and want a portfolio that matches the way they wish to experience the world, covered calls or buy-write strategies might be the answer. I have addressed the subject of covered calls and buy-writes a number of times in the past in this space (see links below), but essentially this is a strategy which sells calls against an existing (covered call) or new (buy-write) long position in order to generate income off of the underlying. Covered calls and buy-writes will generally beat the SPX/SPY if stocks decline, move sideways or rise slowly. The cost to implementing one of these strategies is that if the markets make a sharp bullish move, gains are capped by the covered calls.

In the ETP world, there are two choices when it comes to buy-write strategies:

  • PowerShares S&P 500 BuyWrite Portfolio ETF (PBP)
  • iPath CBOE S&P 500 BuyWrite Index ETN (BWV)

PBP is by far the more liquid of the two alternatives, but some investors may have a reason to prefer BWV’s approach and performance.

In the chart below, I have captured the equity curve of PBP vs. SPY over the course of the second half of 2011 – a period in which stocks generally moved sideways and volatility remained high. In other words, a period that was tailor-made for buy-write strategies. Note that PBP outperformed SPY by 7.7% during this six-month period, with considerably less volatility and also a less peak-to-trough drawdown…or what alpinists would probably call cumulative elevation loss.

Should high volatility persist in 2012 and stocks end up near where they started the year, both PBP and BWV are likely to outperform the major market indices once again.

Related posts:


[source(s): ETFreplay.com]

Disclosure(s): long PBP at time of writing; TradeKing is an advertiser on VIX and More

Monday, January 2, 2012

The Year in VIX and Volatility (2011)

One of the most-loved charts I assemble each year is my retrospective look at the year in volatility. I already touched on some of the highlights of event volatility in text form in Expectations, Surprises and Fear in 2011, but this is one case in which I believe a picture does a better job of telling the story in the context of a timeline for the entire year.

From a volatility perspective, the first half of 2011 was relatively benign, even though the global social and economic fabric was ripped by Arab Spring and the Japanese trio of disasters which came in the form of the earthquake, tsunami and nuclear meltdown.

Things were much more promising during the middle of the year when the Greek parliament voted in favor of austerity and the euro zone agreed to expand the European Financial Stability Facility (EFSF) to €780 million.

For a while, there was considerable angst surrounding the bipartisan politics associated with the U.S. debt ceiling deadline at the beginning of August, but only after the Democrats and Republicans failed to come up with a meaningful debt reduction deal did investor anxiety shift back to Europe. Ironically, the downgrade of the U.S. debt from AAA to AA+ had very little impact on Treasury securities, which actually began to rally sharply after the downgrade. When Europe returned to the center stage, however, the sovereign debt crisis was escalating rapidly and it was now Italy that was in the crosshairs. The VIX shot up to 48 on August 8th and was regularly above 30 through the end of November, setting a new record for persistent backwardation in the VIX futures in the process.

The VIX was a high wire act throughout August and September, with multiple excursions into the 40s. Even after the S&P 500 index bottomed on October 4 at 1074, the VIX remained stubbornly elevated in October and November, before finally falling into the 20s in December. While the SPX was essentially unchanged for the year, the VIX ended 2011 at 23.40, up 31.8% over 2010’s close of 17.75. At the same time, the VIX futures are calling for a VIX of between 29 and 30 by the mid-point of 2012, suggesting that volatility will climb higher once again in the coming months.

In a year where most asset classes struggled mightily, volatility was one of the few great long positions. With a higher starting point going into 2012, it will be difficult for the VIX to repeat its market-beating performance once again, but if the euro zone and some of the geopolitical flash points fail to make progress, 2012 may indeed be the year of the VIX.

Finally, since I had so many requests for a high-resolution version to download last year, I am going to preemptively offer a full resolution PNG screen capture of the graphic below for download here.

Related posts:

[source(s): StockCharts.com]

Disclosure(s): none

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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