VIX and More: February 2012

Wednesday, February 29, 2012

Recent TVIX Volume and VIX Futures Volume

I managed to let a couple of days pass without mentioning the suddenly white-hot topic of the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) only to discover at a Bloomberg Volatility Symposium in San Francisco last night that there appears to be an insatiable demand for more information on the subject. While the links below should present the lion’s share of the background and context about the key issues related to TVIX, today I am presenting some additional information related to the volume of TVIX for the first two months of 2012 and the corresponding volumes in the front month and second month VIX futures. The graphic below plots daily volume in TVIX (solid black line) on the right Y-axis and volume in the front two months of VIX futures, using settlement prices from the CBOE Futures Exchange (CFE), on the left Y-axis.

Once again I will let the graphic do most of the talking, but clearly when Credit Suisse (CS) announced a suspension of new creation units in TVIX after the close of the regular trading session on February 21, volume in both TVIX as well as the front month (dotted dark blue line) and second month (dashed medium blue line) dropped dramatically, almost in lockstep.

What it will take for the VIX futures and related markets to get to a point where Credit Suisse feels comfortable about reopening the creation units window for TVIX remains to be seen, but for now at least, the new normal in the VIX futures markets and to some extent for TVIX is beginning to resemble the old normal of two months ago.

[source(s): CBOE Futures Exchange, Yahoo]

Disclosure(s): short TVIX at time of writing

Tuesday, February 28, 2012

ETRACS Volatility ETPs

While the likes of TVIX and UVXY have become overnight sensations during the last few weeks, one group of VIX exchange-traded products (ETPs) that continues to toil in relative obscurity is the dozen ETRACS VIX ETN that UBS launched in September 2011.

The ETRACS products are simple in their conception: they are based on the VIX futures and include both long and inverse products with target weighted average maturities of 1 month, 2 months, 3 months, 4 months, 5 months and 6 months. The tickers are straightforward as well: VXAA for the 1month long product, with AAVX for the 1 month inverse product; VXBB for the 2 month long product, with BBVX for the 2 month inverse product; etc.

In essence, the ETRACS volatility products have the potential to allow investors in a standard brokerage account the ability to be long or short almost any portion of the VIX futures curve without having to trade in a futures account and deal with the additional regulatory, margin and other complexities of maintaining a futures account.

In practice, the ETRACS products have found a limited audience. The total volume across all twelve produces was less than 10,000 shares today and unfortunately that is a typical trading day for the ETRACS suite.

Even if you elect not to trade any of the ETRACS volatility ETPs, studying their price movements can yield a fair amount of insight. All were first traded on September 8, when the VIX was trading at about 34. In the intervening period, all the long VIX products have lost ground (from -8% to -38%, depending upon target maturity), while all the inverse products have made money (from +5.9% to +15.8%, depending upon target maturity), as shown in the graphic below. Due largely to the ravages of term structure and negative roll yield, the losses have been larger than the gains and the mean performance across all twelve ETPs (solid bright red line) has been a loss of 5.6% during the five months and twenty days since these products were launched.

Should these ETRACS product turn out to have a long life (and they will likely need a lot more fans if this is going to be the case), then they will paint a fascinating picture of the evolving VIX term structure and the consequences of negative and positive roll yield. As it is now, even the short-lived mirror image lines tell a story that is worth paying attention to.

[source(s): Yahoo]

Disclosure(s): long BBVX; short TVIX and UVXY at time of writing

Monday, February 27, 2012

The Biggest VIX Spike Ever: A Retrospective

Here is a thought experiment: when was the biggest one day VIX spike ever recorded? If you said February 27, 2007 – five years ago today – then I imagine you are in the distinct minority, even among active traders of VIX products.

There were a number of factors which helped to trigger the mostly forgotten record VIX spike back in 2007 – and with it a 3.5% decline in the S&P 500 index. Most media reports at the time focused on a drop in Chinese stocks. In fact, as I noted later, concerns about the Chinese government raising interest rates to discourage speculation helped to trigger an 8.8% loss in the Shanghai Composite Index and a 9.9% loss in the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI. Various other news reports pointed to concerning U.S. economic data and there were some who were apparently spooked by a Taliban suicide bombing attack in Afghanistan that targeted Vice President Dick Cheney.

Interestingly, concerns about a sub-prime crisis or a real estate bubble were almost nowhere to be found at the time.

Of course the world was a lot different back in 2007. I had just started blogging one month before the VIX spike and in a world where a sub-10 VIX was common, I added the tongue-in-cheek tagline to the blog: “Your One-Stop VIX-Centric View of the Universe…” Twitter was in its infancy, CNBC hadn’t even thought about the idea of running a VIX ticker across your TV screen and most people didn’t even know what the VIX was at that time.

For those who may be interested in a little financial archeology, I put up eight posts that day to chronicle the magnitude of the move and offer an interpretive wrapper for those who were looking for more information:

…and added some trading ideas in another post prior to the next day’s open:

Four Ways to Play VIX Options Following a Record 64% Move to 18.31

Note also that the blogging world was much smaller and more intimate in those days, so I was not surprised to see that David Merkel, Trading Goddess, Option Pundit, Jim Kingsland, Headline Charts, Lauriston Letter and other blogging luminaries of that era dropping by to add their thoughts in the comments section.

Of course this is where I typically get peppered with dozens of, “So what does a big one day spike in the VIX mean?” questions, so I have taken the liberty of highlighting the ten largest single day VIX spikes over the last 22 years (which includes reconstructed VIX calculations). As I see it, these one day spikes are typically instances in which a number of investors suddenly get their first glimpse of a dark gray swan and they panic, not knowing what is around the corner. For the most part, the panic turns out to be an overreaction. Of course, occasionally the big spike can look like a precursor of doom in retrospect, as was the case on September 29, 2008, when the VIX spiked 34.5%, just before stocks went into their plunge. When I see a big VIX spike, however, the first thing I do is get out my mean reversion trading kit.

[source(s): StockCharts.com]

Disclosure(s): long FXI at time of writing

Sunday, February 26, 2012

All About UVXY

With the media feeding frenzy surrounding the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) during the past week, a similar product, the ProShares Ultra VIX Short-Term Futures ETF (UVXY), has been largely overlooked. This is unfortunate, as UVXY has a great deal to recommend it.

I talk of UVXY and TVIX as equivalent instead of equal, largely because UVXY is an ETF while TVIX is an ETN. The magnitude of this distinction is debatable, but suffice it to say that with UVXY an investor holds VIX front month and second month VIX futures that are used to mimic two times the moves in the S&P 500 VIX Short-Term Futures Index. With TVIX, the story is a little different, as this ETN is a debt security in which Credit Suisse (CS) essentially promises to pay investors two times the performance of the S&P 500 VIX Short-Term Futures Index. With the Credit Suisse TVIX product, therefore, there is some risk that these “senior, unsecured obligations” may not be repaid in some future scenarios.

There are other important distinctions between ETF and ETNs that I will not delve into here, but two important ones are the differences in tracking error (ETFs should not have any tracking error) and tax treatment, which is often a murky subject that is open to interpretation. I should know: I married a CPA/tax attorney and in spite of that fact, my knowledge about tax matters is only incrementally greater than when I was a single man…

The graphic below captures the performance of UVXY and TVIX since UVXY’s launch on October 4, 2011. Now it may just be a coincidence, but TVIX made a 52-week high of 109.17 on the very same day that UVXY was launched. As the graphic below shows, in the intervening 4 months and 3 weeks, both UVXY and TVIX have fallen in excess of 80%. For the most part, these two securities have tracked each other step for step across a variety of market conditions. That relationship was disrupted on Tuesday when Credit Suisse suspended creation units in TVIX. During the last three trading sessions, UVXY has continued to fall -11.6%, while the supply-demand imbalance has limited losses in TVIX to just 2.1%.

With TVIX trading essentially as a closed-end fund, its price will be much more difficult to predict going forward, which should make UVXY more attractive to investors. Clearly UVXY is already gaining fans in this new market environment, where it set new volume records on Thursday and Friday, with over 5 million shares changing hands on both days. Just two weeks ago UVXY’s volume was about 5% of what TVIX was trading. As of Friday, that number has jumped up to 38%.

With UVXY’s price now down in the 5s, I would expect to see a reverse split soon, perhaps even a 1-10 reverse split.

From the UVXY prospectus:

“If the Sponsor believes that the per Share price of a Fund in the secondary market has fallen outside a desirable trading price range, the Sponsor may direct the Trust to declare a split or reverse split in the number of Shares outstanding and, if necessary in the Sponsor’s opinion, to make a corresponding change in the number of Shares of a Fund constituting a Creation Unit.”

ProShares is no stranger to reverse splits for their ETFs. In April 2010, ProShares initiated reverse splits in nine ETFs, with the majority of those being 1-5 splits, but UYG and ZSL subjected to a 1-10 reverse split.

During the last week, the media have focused most of their attention on TVIX and the suspension of creation units. For traders and investors, however, their attention appears to be pivoting in the direction of UVXY. The rising popularity of UVXY could have some interesting consequences, not the least of which might be a more favorable environment for Credit Suisse to consider re-opening the creation unit window.

[source(s): StockCharts.com]

Disclosure(s): short TVIX and UVXY at time of writing

Friday, February 24, 2012

The Story of VIX ETPs Relative to their Intraday Indicative Values

This week has seen an explosion of interest in the VIX exchange-traded product (ETP) space, most of which has been due to the suspension by Credit Suisse (CS) of creation units (think ‘new shares’) in the VelocityShares Daily 2x VIX Short-Term ETNs (TVIX).

For those who are late to the story and/or would like some background, the links below should suffice, but for today I am interested in some data that might indicate how much stress there is in the market for TVIX shares, for VelocityShares products other than TVIX and for a ProShares product that is similar to TVIX, but is an ETF rather than an ETN: the ProShares Ultra VIX Short-Term Futures ETF, UVXY.

For this analysis, I have evaluated the prices of a handful of VIX ETPs relative to their Intraday Indicative Value (a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities) for the last week. The graphic below shows the premium for five VIX ETPs as a percentage of their indicative values, normalized to a 100 point scale.

The chart shows that prior to the suspension of new creation units in TVIX after the close of regular trading on Tuesday, February 21^st, these VIX ETPs generally traded very close to their indicative values. In fact, the norm for the long ETPs (TVIX, UVXY, VXX and VIIX) was to trade at a slight premium to the indicative value, generally less than 1% higher. By contrast, the one inverse ETP on the list, XIV, tended to trade at a slight discount to indicative value, again, generally less than 1%.

Once Credit Suisse closed the door for new creation units, the price of TVIX has drifted steadily higher relative to its indicative value, even trading at a 20% premium just a few minutes ago.

In terms of other market dislocations, however, the evidence is not compelling. UVXY, which is an excellent substitute for TVIX, doubled its prior record volume yesterday and is on schedule to top that today, but after seeing a slight lift in the premium relative to indicative value, UVXY’s premium is now back to historical norms.

Looking at some of the other VelocityShares products, the two next most popular after TVIX are XIV and VIIX. Here again, there have been some minor fluctuations since the Credit Suisse announcement, but nothing that has pushed these products more than 1% away from their indicative value.

Based on the indicative value data, then, so far the only market dislocation has been in the TVIX product, with no evidence of a spread to competing products (UVXY) or other products in the VelocityShares stable, such as XIV or VIIX.

[source(s): Yahoo, VIX and More]

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

Thursday, February 23, 2012

TVIX Premium Spikes to 13%

A little more than two hours into today’s regular trading session, the premium in TVIX is has spiked to 13.5% above its intraday indicative value.

The graphic below shows the difference between TVIX and TVIX.IV over the course of the past three trading sessions, using 5-minute bars and reflecting the extended hours trading sessions in the grayed-out blocks.

At this juncture, longs are likely betting that the prospect of a short squeeze, perhaps in combination with a VIX spike, could land them some significant windfall profits. Shorts, on the other hand, are assuming that it is just a matter of time before Credit Suisse (CS) reopens the creation units window for TVIX, which should restore the supply-demand equilibrium and dissolve the 13% premium in the form of a different type of windfall profit.

[It is generally my policy not to comment on individual holdings other than to note them in the disclosure section below, but suffice it to say that as the TVIX premium increases, I find it increasingly difficult to make the bull case in terms of anticipating an additional expansion of that premium.]

[source(s): thinkorswim/TD Ameritrade]

Disclosure(s): short TVIX at time of writing

Wednesday, February 22, 2012

The Ups and Downs of the New Premium in TVIX

After 2 ½ hours of trading in today’s regular session, it looks as if the market is starting to get a handle on what sort of premium is appropriate for the VelocityShares Daily 2x VIX Short-Term ETNs (TVIX).

Yesterday I noted that Credit Suisse (CS) suspended creation units in TVIX due to “internal limits on the size of the ETNs.” Today it is possible to track the impact of that decision on shares of TVIX relative to its intraday indicative value and/or relative to a similar ETF, UVXY.

The graphic below, which is created in thinkorswim/TD Ameritrade using a “ticker” of TVIX-TVIX.IV shows the difference between TVIX relative to its indicative value. Note that this difference was as high as 1.04 points (6.0%) earlier in today’s session and has fallen as low as 2.3% in the last few minutes.

For those who are unable to generate TVIX.IV quotes with their data provider, just look at today’s percentage change in TVIX minus the change in UVXY to get a sense of the new TVIX premium.

Clearly the markets believe some sort of premium is appropriate, perhaps in anticipation of a possible short squeeze in TVIX.

Anyone who had a position in TVIX coming into today’s session has clearly been impacted by the imbalance between supply and demand. Going forward, the appropriate question for new longs or shorts is whether the current TVIX premium level will increase, decrease or remain the same. Before anyone jumps to conclusions based on a couple of hours of trading, it would be helpful to see what happens to the TVIX-TVIX.IV relationship during the next big VIX spike. I would certainly not assume that the current premium is appropriate for all market conditions.

For another perspective on TVIX (as well as some top notch research on GAZ and some other ETP anomalies), check out Kid Dynamite’s excellent TVIX – Not Your Daddy’s Blue Chip.

[source(s): thinkorswim/TD Ameritrade]

Disclosure(s): short TVIX at time of writing

Tuesday, February 21, 2012

Credit Suisse Suspends Creation Units in TVIX: What It Means

After today’s regular trading session, Credit Suisse (CS) announced in a brief press release that it has “temporarily suspended further issuances of the VelocityShares Daily 2x VIX Short-Term ETNs (TVIX) due to internal limits on the size of the ETNs.” The company added that “[t]his suspension does not affect the Early Redemption rights of noteholders as described in the pricing supplement. Other ETNs issued by Credit Suisse are not affected by this suspension.”

The announcement by Credit Suisse raises a lot of questions and I will see what I can do to answer some of the more pressing ones this evening.

While this is all speculation, based on the “internal limits on the size of the ETNs,” it sounds as if the recent exponential growth in TVIX has violated a position size risk control rule relative to the VIX futures products that comprise the S&P 500 VIX Short-Term Futures Index ER [excess return] on which TVIX is based. Of course we do not know how much the volatility of those VIX futures products is factored into the position size issue, but given the overhang of events in Europe, China and Iran, I can certainly make the case for a very conservative approach to risk control for any VIX futures exposure at the moment.

The suspension of creation units means that the 40,725,000 shares outstanding represents the upper limit for Credit Suisse. While Credit Suisse describes the action as temporary, there is no particular reason to believe the suspension will be a matter of days. It could possibly be weeks or longer before Credit Suisse agrees to issue new TVIX creation units. Back in 2009, for instance, the United States Natural Gas Fund (UNG) experienced regulatory approval issues for creation units and suspended new creation units for seven weeks. At one point in time, UNG traded as high as 16% over net asset value, but that premium turned out to be a temporary spike. Suspension of creation units, while unusual, does happen on occasion. Less than two weeks ago, to pick a recent example, Deutsche Bank (DB) halted creation units on seven of its commodity ETNs.

The big question for investors is whether the suspension of creation units will mean that TVIX trades at a premium or discount to its net asset value. Given that supply is constrained and demand is not, the most likely scenario is that TVIX will trade at least as high as net asset value or possibly at a premium. Valuation will be highly dependent upon arbitrage opportunities and there are quite a few arbitrage opportunities should TVIX begin to separate from its NAV. VIX futures provide an attractive source of arbitrage firepower, as does the very similar 2x VIX futures ETF, UVXY, formally known as the ProShares Ultra VIX Short-Term Futures ETF. Arbitrage opportunities are also available via VXX, VIX options as well as options on SPX/SPY, etc.

In terms of the reaction in the markets, we have some after-hours market data to give us an initial sense of the response to the TVIX announcement. TVIX closed the regular session at 17.01 and was last traded at 17.02 when the news crossed the wire and volume spiked. TVIX initially rose a little more than 1% to 17.26, gave back most of those gains, then rose again as high as 17.31 before finishing the after-hours session at 17.28, up 0.27 or 1.6% from the close.

Traders should be aware that each ETP has an Intraday Indicative Value (IV or sometimes IIV), which is essentially a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities. These quotes are updated every 15 seconds and can help determine the extent to which a security has deviated from this measure of fair value. In the graphic below, I have captured the difference between TVIX and TVIX.IV during the last hour of the regular trading session and throughout the (grayed out) after-hours trading session, where TVIX rose to 0.29 above its intraday indicative value.

During tomorrow’s session, keep an eye on TVIX relative to TVIX.IV and also the ratio of TVIX to UVXY. At yesterday’s close, TVIX was trading at a multiple of 2.625 times that of UVXY.

In the short-term, I would expect a small premium to creep in to the price of TVIX, but arbitrage to keep that premium in check. Over the longer term, the price of TVIX will continue to respond to the Four Key Drivers of the Price of TVIX I outlined yesterday, in addition to any market dislocations caused by the suspension of creation units for TVIX.

Should the VIX futures market continue its recent growth trajectory and Credit Suisse ratchet down their relative exposure to that growing market, I would expect to see the resumption of creation units in TVIX in the relatively near future. The timing of this development is difficult to project, as there are quite a few things that can happen in the world of volatility between now and then.

[source(s): thinkorswim/TD Ameritrade]

Disclosure(s): short TVIX, VXX and UNG at time of writing

An Updated Field Guide to VIX ETPs

With the sudden success of TVIX, it seems as if the entire VIX exchange-traded product (ETP) space has a large number of new converts. Growing from just two products at the end of 2009 (VXX and VXZ) to 12 by the end of 2010 and 31 by the end of 2011, VIX ETPs are a growth industry.

For those who trade or invest in the VIX ETP space, I thought the graphic below – a field guide of sorts – might be of assistance. The intent of the graphic is to differentiate between the various VIX and volatility-based ETPs primarily by mapping them according to target duration and leverage. The key at the bottom of the graphic highlights some additional distinctions, such as:

ETPs that hold some non-VIX securities in their portfolio are marked by a black triangle. These include VQT and CVOL, which hold long or short positions in SPX/SPY
ETPs that include both long and short VIX positions in their portfolio (VQT, XVZ and XVIX) are flagged with a red/green rectangle
ETPs with a dotted outline (VQT and XVZ) have a rule-based dynamic allocation of volatility components
the red ovals highlight those five VIX ETPs that are currently optionable
the large light red shaded area incorporates all the ETPs that use 2x leverage (there are no 3x VIX ETPs)
the large orange shaded area incorporates all the ETPs which have a target average weighted one month duration and thus are particularly susceptible to the influence of contango and negative roll yield in the VIX futures portion of their holdings

There are some other important distinctions that are difficult to work into the chart, but one I did incorporate was to flag VIX ETFs (from ProShares) in a black font, while all the ETNs are in a blue font.

For the sake of completeness, I also included a necrology of the two VIX ETPs that were closed last year. Interestingly, both were immediately succeeded with virtually identical products that trade under a similar ticker.

Going forward I fear that the next round of VIX ETPs may make it impossible to capture the same level of detail as I have done in this single page, but for now at least, this is my reference of choice for VIX ETPs.

Disclosure(s): long XVZ, short VXX and short TVIX at time of writing

Monday, February 20, 2012

Four Key Drivers of the Price of TVIX

TVIX (VelocityShares Daily 2x VIX Short-Term ETN) is the new rock star in the VIX exchange-traded product (ETP) space.

Far from being a one-hit wonder, I predicted just two weeks after it was launched (toward the end of 2010) that “TVIX will hit a tipping point and become the darling of day traders.” If anything, I am surprised that it took so long for TVIX to attract this much attention.

With all the new attention, however, comes quite a few new investors who do not fully understand what factors are driving the price of TVIX. I have addressed some of these points over the course of the last week or so, but here are the four key drivers of the price of TVIX that every investor should understand:

Volatility – this seems obvious, but in the short-term, the movements of the front month and second month VIX futures explain almost all of the change in the price of TVIX. For day traders, TVIX becomes essentially a substitute for trading the VIX futures and with the exception of leverage, the other factors below are inconsequential.
Leverage – another obvious factor, the 2x leverage in TVIX means that on average it moves about as quickly up and down in percentage terms as the VIX does and twice as quickly as a basket of front month and second month VIX futures. In the short-term, leverage means mostly that the moves in the underlying are exaggerated; in the long-term, leverage enhances volatility compounding and has a negative impact on price.
Contango – thanks to the emergence of VIX ETPs as the cornerstone of volatility as an asset class, issues related to the VIX futures term structure in general and contango and negative roll yield in particular have become among the most frequently discussed issues in this space. Simply stated, the front month and second months of VIX futures are in contango more than 75% of the time, with the result being a monthly drag on TVIX’s price that exceeds the current annual yield on the 30-Year U.S. Treasury bond.
Volatility compounding – the more volatility a leveraged security exhibits, the more that volatility will have a negative impact on performance over an extended period. The issue is the same as someone who owns a dress shop and marks the dress down 50% and then up 50% or reverses the chronology and marks the dress up 50% and then down 50%. Either way, the value of that dress declines by 25%. The same is true for leveraged ETPs and the degree of the price decay is a direct function of volatility.

If you combine all four factors you have a product that is ideal for day trading, as it can skirt the contango and volatility compounding issues in a compressed time frame. For buy and hold investors, however, contango plus volatility compounding is a recipe for big losses.

The graphic below lays out the gamble in visual terms. For the most part, those who are long TVIX for extended periods will be subject to losses that are substantial and persistent, but there is always the chance of catching a brief move in which all four forces are aligned with the bulls and TVIX moves sharply higher, as was the case in August and September 2011. Unfortunately, this is rarely the case.

The bottom line is that if you are already invested in TVIX or are considering an investment in TVIX and do not fully understand each of the four issues above and their impact on investments in TVIX over the short-term and long-term time horizon, then it is probably time to stop trading and increase your knowledge base (hence the links below) before you learn some expensive lessons.

[source(s): ETFreplay.com]

Disclosure(s): short TVIX at time of writing

Sunday, February 19, 2012

Will TVIX Go to Zero?

The sudden surge of interest in TVIX (VelocityShares Daily 2x VIX Short-Term ETN) made it the most heavily traded VIX exchange-traded product (ETP) on Friday, as TVIX vaulted over the former king of the mountain, VXX.

Part of the appeal of TVIX is to retail investors who have embraced this product with surprising swiftness in the last week or two. Some of the appeal of TVIX is a function of its volatility: this is a product that jumped from 15 last August to over 109 in early October, before falling as low as 13 earlier this month. Based on some of the questions I have received, it is also obvious than many new investors in TVIX do not understand the product they are trading.

First things first, for those who are new to TVIX, make sure you understand what VXX is, why it has underperformed for the past three years and why it has shortcomings both as a short-term and long-term investment. For the most part, TVIX is the equivalent of VXX, with 2x leverage. [If you start from the bottom of the links below and keep reading up, the key points regarding VXX should come into focus fairly quickly.]

I periodically receive inquiries about whether TVIX, VXX and some of the other VIX ETPs were “designed to go to zero.” This is not the case. In fact, TVIX and VXX can be excellent products for those who wish to benefit from a short-term increase in volatility. It is important to note that these products were designed to be short-term trading instruments only, with the expectation that they would have a much greater appeal to institutional investors than to retail investors.

Unfortunately, over a long-term time horizon, long positions in TVIX, VXX and many of the other VIX ETPs will be a losing proposition. For those who doubt this, read the prospectus for TVIX. Start with the Risk Factors discussion on page PS-26 and make sure you read as far as the first paragraph of PS-28, where you will encounter the following statement:

“The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.”

This is the situation in a nutshell and helps to explain why TVIX is down more than 80% since its launch at the end of November 2010 – in spite of a meteoric 7x rise from July to October of last year. Will TVIX go to zero? No. As is the case with a number of other VIX ETPs, should TVIX continue to decline in price, a reverse split will likely be used to inflate the share price.

Tomorrow I will delve into the four key drivers of the price of TVIX and implications they have for short-term traders and long-term investors.

[source(s): StockCharts.com]

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

Saturday, February 18, 2012

The Upcoming 2012 CBOE Risk Management Conference

Last year I had the pleasure of attending the 27^th annual CBOE Risk Management Conference and wrote about that experience in The VIX Summit, a.k.a. the CBOE Risk Management Conference.

Some of my comments on last year’s conference include:

“I have little doubt that if VIXophiles were only to attend one conference per year, this would be the one.”

“Where else can you find several hundred like-minded souls who obsess about the VIX and volatility on a daily basis?”

“Where else could you holler out ‘Hey, Mr. VIX?’ in a crowded room and expect at least a dozen heads to turn?”

The 2012 version of the CBOE Risk Management Conference is being held at the Hyatt Regency Coconut Point Resort and Spa at Bonita Springs, Florida and runs from March 11-13. This year’s agenda looks to be an interesting one and includes sessions such as:

Today’s Volatility Environment and What to Do About It
Options-Based Strategy Benchmarks
Technical vs. Fundamental Drivers of Volatility
How to Manage Tail Risk and Add Alpha
Dispersion and Correlation Trading: What Worked, When, Why, and How?
Cross-Asset Volatility
Options Pricing Theory Revisited and the Impact on Long-Dated Index Options
Smart Hedging and Alpha Generation with VIX Options

In addition, the conference also offers two parallel introductory tracks for investors and traders that consist of three sessions each and are intended to provide those who are relatively new to the subject matter with a strong foundation in advance of the general presentations noted above.

If you trade VIX products and you want to find out what some of the top practitioners in the field are thinking and doing, the CBOE Risk Management Conference is a great place to get that information first-person and do some networking in the process.

To register or get more information, check out http://www.cboermc.com/.

[While a family conflict will prevent me from attending this year’s conference, I intend to make this a conference part of my annual southern migration, as it is in Florida in the even years and southern California in the odd years.]

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

Disclosure(s): the CBOE is an advertiser on VIX and More; VIX and More is a sponsor of the CBOE Risk Management Conference

Friday, February 17, 2012

TVIX Topples VXX as Highest Volume VIX ETP

With just a few minutes before the close, it is now almost certain that TVIX (VelocityShares Daily 2x VIX Short-Term ETN) is going to dethrone VXX as the most heavily traded VIX exchange-traded product (ETP), with TVIX trading 29 million shares and VXX at 25 million.

VXX, which just celebrated its third birthday at the end of January has reigned supreme in volume and assets since the first week it was launched. TVIX has a long way to go before it matches VXX in terms of assets, but the gap is narrowing quickly.

Based on some questions I have received from retail investors, it seems as if many who are new to the TVIX party do not understand the nuances or even the basics of this product – so it looks like another round of education is in order.

For the record, not only has TVIX dethroned VXX, but VelocityShares has also overtaken Barclays/iPath as the #1 provider of VIX-based ETPs in terms of volume. It will be interesting to see how Barclays addresses this in terms of future products.

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

Thursday, February 16, 2012

Monitoring VIX Futures and Their Impact on VIX ETPs

This morning was one of those mornings where stocks were up, the VIX was up and some of the VIX futures were up even more than the cash VIX – at least before the latest round of news from Greece hit.

It is on days like these when my inbox invariably receives several questions from traders who are relatively new to VIX exchange-traded products (ETPs) such as XIV or ZIV and cannot understand why these are not moving with the SPX or in the opposite direction of the VIX. The answer, of course, is that these products do not track the SPX or even the cash VIX, but the VIX futures.

The reason many traders have so much difficulty with the VIX futures component of VIX ETPs is that their brokerage account is authorized for stocks and ETPs and in some cases options, but not futures. Further, most stock brokers do not have futures available to trade and a large portion of those who do allow futures trades do not have VIX futures on the menu (largely due to the regulatory split between the SEC and the CFTC, but I digress…)

So what is a VIX ETP investor to do?

Well, VIX futures quotes are always available at the CBOE Futures Exchange (CFE) on their main splash page. Unfortunately, these quotes are delayed 15 minutes.

There are, however, two popular options brokers who also have VIX futures quotes. The first of these, Interactive Brokers (IBKR), is known for their wide range of products available to trade, technology and low transaction costs. They are not known for hand-holding and high levels of customer service. If you already have an account there and know your way around or you are used to figuring out most things for yourself and are partial to a self-service model, this is probably your best bet for VIX futures quotes.

For those who are new to VIX futures and prefer to have a strong customer service safety net, a better choice is probably optionsXpress, which was acquired by Charles Schwab back in March 2011. Optionsxpress has an excellent tool set for the options trader and also has a fair amount of functionality for futures traders. Whereas Interactive Brokers excels at a low-cost self-service model, optionsXpress has more of a high touch model and charges more for the additional service component. In short, optionsXpress is likely to be a better choice for those who are new to futures and VIX ETPs.

Below I have captured a (customizable) VIX futures watch list that I created in optionsXpress and have sorted by last trade date (LTD), as well as a snapshot of one of their streaming charts for the VIX March 2012 futures contract, VXH12. Note the fairly substantial amount of data, as well as a highly customizable chart.

There are other brokers out there, but my hunch is that those who are new to VIX ETPs are more likely to have an existing account with optionsXpress than any of the other stock/options brokers that also let you trade VIX futures. If not, optionsXpress is still a good place to get started in futures and specifically in VIX futures trading.

[source(s): optionsXpress.com]

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

Tuesday, February 14, 2012

Who Is Trading TVIX?

As action in the TVIX heats up again today (up 15% on 21 million shares traded), I gave some thought to who might be trading what I called in this space over a year ago “day trading rocket fuel.”

Fortunately, we have the optionsXpress Trading Patterns feature to help answer this question.

In the graphic below, it appears that TVIX is part of the arsenal of those who favor the high volatility products that are ideally suited to short-term trades. These include the 3x leveraged ETPs (TNA and TZA), the 2x leveraged ETP for silver (AGQ) and a handful of futures products based on the S&P 500, Dow Jones Industrial Average and crude oil. Two high flying stocks are also on the list, Renren (RENN) and BroadVision (BVSN) – the latter of which just happens to be the first or second internet stock I ever purchased, some 16 years ago.

It turns out I cannot type fast enough to keep up with market events. As I was typing this, there appeared to be another short squeeze in TVIX (see VXX Options Calm After Second Highest Volume Day Ever for details on the last one), though the markets seem to be settling back down once again.

Finally, a quick reminder that today is the last trading day for VIX February options. VIX February futures can be traded through tomorrow’s pre-market session, which runs from 8:00 – 9:15 a.m. ET. Both products settle with a special opening quotation (VIX SOQ) at the beginning of tomorrow’s regular trading session.

[source(s): optionsXpress.com]

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

Monday, February 13, 2012

VXX Options Calm After Second Highest Volume Day Ever

Options volume in VXX (iPath S&P 500 VIX Short-Term Futures ETN) surged to their second highest level ever on Friday, with 344,777 contracts trading and put volume (56%) outpacing call volume (44%) by an unusually high margin.

The chart below shows the options activity in VXX going back to the beginning of August 2011. Note that record options volume in VXX dates from August 5^th and occurred just before VXX spiked from 30 to the upper 50s. On that day and most of the other high volume days in VXX options the calls (green vertical bars on bottom portion of chart) saw more action than the puts (red bars), as investors were most likely betting on an increase in volatility – or hedging against that potential scenario.

Friday’s volume was unusual, just as it was on January 26^th, in that put volume dominated. On balance, traders generally buy and sell more VXX calls than puts. In today’s session, so far the volumes in VXX options are much lower than they were on Friday and the activity in puts and calls is balanced and relatively calm.

This is not to say that VXX options investors are particularly prescient and should not be considered contrarian sentiment indicators. Instead, I am merely suggesting that there was no panic in Friday’s VIX spike.

In fact, the rumor I heard (via a commenter on the blog) that makes the most sense is that someone who had a position consisting of VIX futures, SPX straddles and the TVIX ETP (and supposedly about 90% of the open interest in TVIX) had their position liquidated by a clearing house – and some of the banks that got wind of what was going on were able to front run that move. Take it all with a grain of salt, but that kind of scenario is a good fit for the prints I saw and the facts as we know them.

Finally, keep in mind that the February VIX futures and options expire at Wednesday’s open. February VIX options are last traded tomorrow, while the February VIX futures are last traded in Wednesday’s pre-market session, from 8:00 – 9:15 a.m. ET.

[source(s): LivevolPro.com]

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

Saturday, February 11, 2012

Volatility Becomes Unhinged on Friday

Over the course of the last week, the VIX has risen 21.6% while the S&P 500 index has been essentially unchanged (-0.17%). During this period, the VIX has decoupled from the technical changes in stock prices and become more focused on event risk or event volatility associated with the latest act in the Greek tragicomedy spinoff of the European sovereign debt crisis.

If you are anything like me, you are constantly recalibrating your answer to the perplexing question of just how seriously we should take the possibility of a Greek default. Well, so are the markets. The added complexity is that everyone has to digest the simultaneously changing probabilities of certain events happening, the magnitude of the impact of those events, the potential reverberations over time – and periodically (seemingly daily, often at 3:58 p.m. ET) some important new events to consider.

If anyone has a probability tree diagram of just the Greek portion of the European sovereign debt crisis, I think it would be fascinating to look at these. I’d imagine it would be something like Johnny Appleseed meets Edward Scissorhands.

Getting back to the spiking VIX, the decoupling of the VIX and the SPX became quite notable during Friday’s trading session. In the graphic below, I have captured the full trading day of the SPX and TVIX (VelocityShares Daily 2x VIX Short-Term ETN), which is equivalent to a 2x version of the popular VXX (iPath S&P 500 VIX Short-Term Futures ETN). For the record, TVIX targets 2x the daily return of a portfolio that holds front month and second month VIX futures with a constant average weighted maturity of 30 days.

In the graphic below, I have drawn a large red rectangle around a period of approximately 83 minutes (10:36 a.m. – 11:59 a.m. PT) in which the SPX trended steadily higher, yet TVIX split with tradition and rose in dramatic fashion, logging a gain of 8.9% during the same time frame. For two securities that typically trade in opposite directions, this is a highly unusual decoupling. In fact, decoupling may be understating the change in the relationship, which became completely unhinged during the day. Note the yellow ovals that marked the two low points in the SPX some five hours apart. The SPX was unchanged over the course of these five hours, yet TVIX spiked 15.5% (!) during the same five hours. This is as big of an intraday deviation from the normal negative correlation that I can recall observing.

[source(s): QuoteTracker/TD Ameritrade]

Returning to the 21.6% weekly jump in the VIX while the SPX remained flat, this is not the first time the VIX has taken flight in such a dramatic fashion while the SPX was unchanged. In fact, it just so happens that a little more than three years ago the VIX gained 25% in a week in which the SPX eked out a 0.3% gain. That week was the week of September 15, 2008, when the Lehman Brothers filed for bankruptcy.

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

Thursday, February 9, 2012

Implications of a Positively Correlated SPX and VIX

For those who missed today’s market action and just looked at the post-mortem reports, today probably looked like just another in a series of uneventful days. For those who were paying attention to the likes of the VIX futures and ETPs based on VIX futures such as TVIX (+10.7%) and VXX (+5.2%), however, the tension in the air was obvious.

But the SPX, DJIA and NASDAQ composite indices were all up today, so what’s the big deal? It turns out that investors are easily spooked if the VIX (+2.6%) and the SPX (+0.1%) both move in the same direction. As the graphic below shows, the VIX and the SPX move in the same direction about 22% of all trading days. I think the real issue behind the concern about the direction of the VIX and the SPX is related to a hypothesis I laid out yesterday in What the VIX Kitchen Sink Chart Says:

“…the general consensus seems to be that stocks just do not deserve their current lofty valuation. In this type of environment, many investors become particularly susceptible to confirmation bias and scramble to find one or more indicators which will tell them what they have already begun to believe: that a major correction is likely just around the corner.”

The last time I crunched the numbers for VIX and SPX daily correlations, was in May 2007 and in looking at data from 1990-2007, I concluded that a High Positive Correlation Between VIX and SPX Often Signals Market Weakness. When I ran the numbers this time around, it turns out that the market gyrations surrounding the financial crisis of 2008 and subsequent bullish rebound did little to change the overall conclusions. The full data set (1990-2012) now shows that when both the VIX and SPX are up on the same day, the mean returns for the next 1-100 trading days trail the typical returns for the full data set by a substantial margin and are negative through the first five trading days.

In terms of key takeaways, it now appears that stocks perform best following days when the SPX is down and the VIX is up (the ROI +1 column refers to the performance of the SPX one day hence) and worst on days like today when the SPX is up and the VIX is up. I have sorted the rows according to ROI +10 and in looking at the date, it is clear to me that some mean reversion is responsible for a good portion of the performance characteristics following the various VIX-SPX daily return permutations. [For the record, the data in the table below includes Fridays and Mondays, so it is possible that calendar reversion may have had an impact on the results.]

Now I will be the first to admit that stocks are overdue for a pullback, but just because the VIX and SPX both advanced on two consecutive days does not necessarily mean the planets are aligning for an Aquarian selloff. If investors are looking for that market reversal silver bullet, the SPX-VIX correlation data, while bearish, fall short of hinting at a major reversal.

Below is a larger than usual set of links for those who may be interested in digging into the history of some of the SPX-VIX correlation themes in this space.

Last but not least, thanks to sharp-eyed reader Lee, whose sleuthing helped me uncover an errant spreadsheet formula that led to some bad data in an earlier version of this post.

[source(s): CBOE, Yahoo]

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

Wednesday, February 8, 2012

What the VIX Kitchen Sink Chart Says

One of the more interesting developments of 2012 has been to watch the diminution of the strident bearish narrative that has been focused largely on the collision course between a preponderance of debt and low or negative growth. The bullish beginning to 2012, however, has not prompted many in the way of converts to the bullish camp. Instead, there have been whispers of “…overbought…” that have turned into a soft murmur and are now verging on becoming a loud chorus. Suddenly the general consensus seems to be that stocks just do not deserve their current lofty valuation.

In this type of environment, many investors become particularly susceptible to confirmation bias and scramble to find one or more indicators which will tell them what they have already begun to believe: that a major correction is likely just around the corner.

For better or for worse, a look at the VIX is often one of the first stops for those who are looking for evidence of a market reversal.

In the chart below, I have updated and extended a chart from three years ago that I call my “VIX kitchen sink chart” – as it pokes and prods the VIX in a number of different ways. Standard VIX analysis attempts to determine whether the VIX has strayed too far from historical norms, whether this be in the form of moving averages, Bollinger bands or other mechanisms. I have even included a separate rate of change study (with its own Bollinger bands) and a Bollinger band width study below the main chart in order to provide a couple of additional analytical twists.

The bottom line, however, is this: if stocks are overbought and a correction is indeed just around the corner, the VIX does not appear to be aware of any such inevitability. Instead, it looks a lot more like business as usual in the land of the CBOE Volatility Index.

[source(s): StockCharts.com]

Disclosure(s): none

Monday, February 6, 2012

Geography, Focus and Strategy

Way back in 2007, in Bicoastal Trading…Or Are You Trading in the Right Time Zone? I offered some thoughts on my experience trading on the West Coast versus the East Coast. At the time, I speculated that the Mountain Time Zone might be the best place to have a trading life that was seamlessly interwoven with the rest that life has to offer.

In the intervening years, I have made a few trips to Hawaii and am now convinced that at least for those who are content being an end-of-day trader, Hawaii may indeed be the ideal trading paradise – and certainly one with the most alluring geography dividend.

Last month, when I was taking some time away (or mostly away) from the markets, it struck me how much geography has influenced what I focus on, what and how I trade, and more broadly what strategies I implement.

When I am on the East Coast, for instance, I place much more emphasis on the European markets and economic data that is released just before or after the opening bell. I am much more likely to trade futures and focus my attention on the many blue chips whose earnings are released before the market opens. I may even break with tradition and turn on CNBC. In short, I have a much greater BMO focus.

By contrast, when I am on the West Coast, I find that I focus more on the Asian markets (checking in before I go to bed), trade a preponderance of West Coast technology stocks that generally report after the markets are closed and also find myself trading in the after-hours session much more often.

In Hawaii, everything is different. The markets close at 11:00 a.m. (10:00 a.m. during daylight savings time) and my routine switches to glancing at the markets, going out for a run, checking to see if the markets are relatively quiet when I return, showering and going for breakfast, then making any position adjustments just prior to the closing bell. All strategies become end of day strategies and short-term trades are much more likely to be multi-day swing trades than day trades.

In a nutshell, my geography determines where (and when) I focus my attention, and that focus has important implications for what I trade, when I trade it and what my anticipated holding period is for each position. Strategy, therefore, becomes a byproduct of geography.

There is nothing like Hawaii-Aleutian Standard Time to put the world in a different perspective and to serve as a reminder that no matter where you are – either as a visitor or with roots firmly in the ground – it is important to match your strategies and focus to your geography and time zone.

[Future naked options sellers line up for another grueling day of work at Shipwreck Beach, Kauai]

Disclosure(s): none

Sunday, February 5, 2012

Economic Data: Divergence or Confirmation for Stocks?

The last time I checked in on the performance of U.S. economic data relative to expectations, some two months or so ago, I observed:

“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.”

With the benefit of hindsight, clearly the stocks have been in the driver’s seat and to some extent, the increase in stock prices has had a positive effect on the economic data. For the better part of January, there was a substantial divergence (see dotted red box in graphic below) between stocks and economic data, with stocks in a marked uptrend, while economic data were falling short of consensus expectations on a regular basis.

It is possible that last week’s nonfarm payroll data and ISM services index marked a turning point in the performance of economic data relative to expectations, yet it is also clear that the data trend still lags the stock price trend by a significant margin.

For this update, I have annotated the graphic with arrows to show where manufacturing and employment have been the economic underpinnings of a rise in stocks. This time around the employment data seem to be moving in the right direction, but manufacturing has had trouble living up to expectations – at least for the past two months.

[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).]

[sources: various]

Disclosure(s): none