VIX and More: April 2012

Sunday, April 29, 2012

Chart of the Week: Sector Winners and Losers

While there was a lot going on in the sector space during the rally from October to April and the pullback earlier in the month, I have yet to see any sort of detailed explanation of what happened during these two periods.

This week’s chart of the week below attempts to bridge this gap, with a four-chart comparison of the bull move from October 4, 2011 to April 2, 2012 as well as the bear pullback from April 2 to April 10, 2012. The top two charts cover the bull move, with the left chart capturing absolute sector performance and the right chart capturing sector performance relative to the changes in the S&P 500 index as a whole. The bottom two charts also have absolute sector performance on the left and relative sector performance on the right, but this time during the April 2-10 pullback.

The absolute data show that all sectors moved up during the bull move and fell during the bear move. The relative data allow for a more nuanced analysis that shows financials (XLF) were the main engine behind the bull move and also the largest contributor to the pullback. While financials shared some of the credit with consumer discretionary stocks (XLY), industrials (XLI) and technology (XLK) on the way up, it was materials (XLB), energy (XLE) and industrials that helped to pull the broader index down. Only two sectors have outperformed the S&P 500 index on the way up and on the way down: technology and consumer discretionary stocks. Conversely, energy has been the only laggard in both directions.

While not reflected in these charts, in the three weeks since the April 10^th bottom, consumer discretionary, materials and industrials have been the biggest contributors to bullish moves. Interestingly, technology has now flipped to being the biggest drag on performance.

One could make a fairly good case that the ability of the S&P 500 index to make a run at 1500 (take a bow, James Altucher) will in large part be a function of the degree to which technology returns to a leadership role.

[source(s): StockCharts.com]

Disclosure(s): long XLY at time of writing

Friday, April 27, 2012

Weekly Options Coming on Strong

When the CBOE made a push to expand interest in weekly options about two years ago, their efforts were initially met with a fair degree of skepticism. Over time, however, weekly options have found a dedicated following, with the CBOE “weeklys” growing from 1% of total volume to about 15% today. Two years ago there were a handful of index weeklys, as well as a handful of weekly options based on ETPs and individual stocks. The list of weekly options changes every week, but the current list for weeklys expiring on May 4^th now includes options on six indexes, 26 ETPs and 119 individual stocks. What was once a curiosity is now a groundswell.

Personally, I have found quite a few uses for weekly options. On Tuesday, for instance, I tweeted that the VXX 18/19 call spreads had the same price for the weekly options as next month’s standard May 19^th expiration.

Part of the appeal of the weeklys can be seen in the graphic below of the skew in Amazon (AMZN), where today’s April 27^th weeklys (red line) have a huge implied volatility (and therefore price) premium to their counterparts with more distant maturities. Looking at the graphic, one can see that it is not that difficult to construct positions with weekly options (which also include the May 4^th options, shown with a yellow line) in which one leg has implied volatility that is 50-100% higher than another leg. If you have a bias toward selling options, as I do, this can sometimes offer up an irresistible mathematical edge.

Lately when I find myself editing my various watch lists, one of the first things I check for is whether the underlying in question has weekly options. If you have weeklys, you are in the big leagues and there are so many more trading opportunities. With ZNGA weekly options being added this week, for instance, the ease and flexibility of trading this issue around yesterday’s earnings report was dramatically improved.

If you haven’t tried weeklys yet, you are missing out. And if you think the volumes are too small and the markets are too thin, think again.

[Note that an excellent source of information for all things related to weekly options is the CBOE Weeklys splash page.]

[source(s): LivevolPro.com]

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

Thursday, April 26, 2012

Whither Social Media Stocks?

Back in October 2007, sensing a little too much froth in the stock market, I created something I called the OHFdex, which began as a “watch list of Overripe High Fliers” and quickly evolved into an index designed to track 14 such stocks. When the markets turned down, the group was pummeled, with some spectacular crashes from the likes of CROCS (CROX), Las Vegas Sands (LVS), DryShips (DRYS) and others.

As stocks have continued their rise, I have thought about resurrecting the OHFdex, but I have not found sufficient reason to do so, until recently. The rise of social media stocks and some of the attendant valuations are the reason for my reconsidering the OHFdex. Clearly there will be winners as well as losers in this space, but relatively high valuations for LinkedIn (LNKD), Groupon (GRPN), Zynga (ZNGA), Pandora (P), Yelp (YELP), Angie’s List (ANGI), Jive Software (JIVE) and others have raised my eyebrows and even the launch of a Social Media ETF (SOCL, holdings) is enough to give me pause. The problem is that I have trouble picking the big winner from this group, particularly when adjusted for current market capitalization. The temptation is to short them all, but for now at least, it is time to put these stocks and counterparts such as RENN, YOKU, SOHU, REDF, DMD, FFN, etc. into a social media OHFdex and see how things play out.

I’m not saying this is October 2007 or tech media bubble 2.0, but every coal mine needs at least one canary.

As an aside, while I am lukewarm about the prospects for social media as a whole, I have been living on the bleeding edge of technology hardware and software for decades and am about as far from being a Luddite as one can be. I was surfing the Internet in the 80s, dragged my laptop on planes for at least two years before I saw anyone else do the same, had a US Robotics before it was branded “Palm Pilot,” bought my first digital camera in 1996, was on Facebook when it existed only inside two universities, and sometimes think that too much of my life has been spent as an inadvertent beta tester.

That being said, while it can be lots of fun to play with v0.9 of what might be the next big wave in technology, I wouldn’t recommend buying too many v0.9 stocks, particularly those that are based on nascent technologies.

Finally, if you have any interest in shorting these stocks and can’t find any shares available to short, consider buying puts, selling calls or creating a synthetic short position by doing both at the same time.

[source(s): StockCharts.com]

Disclosure(s): short GRPN, ZNGA, P and YELP at time of writing

Tuesday, April 24, 2012

A Brief History of Apple Earnings, in Pictures

If a picture is worth a thousand words, then perhaps I can save quite a few keystrokes and maybe even a few tweets with the compendium below.

This is a visual post, so I will keep my comments brief, except to note that the graphics below originate from LivevolPro.com and provide a graphical history of Apple (AAPL) earnings from July 2010 to the present.

Each column represents one earnings reporting cycle and includes three charts and four earnings periods:

Top candlestick chart shows eleven days of AAPL stock prices, with five days before and after the earnings report
Middle chart shows the prices of straddles in the front month and second month for AAPL options (useful for determining the degree to which investors under or overestimated the post-earnings price move)
Bottom chart shows 30-day implied volatility derived from the front month and second month AAPL options (similar to what is now available from VXAPL)

Remember that you don’t have to have an option about Apple’s earnings report, but since everyone else does and the markets have one priced in, it may be helpful to put the current situation into historical context.

[source(s): LivevolPro.com]

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

Friday, April 20, 2012

The Case for Selling Apple Puts

Lately it seems as if everyone with a keyboard is aflutter about the two weeks of selling in Apple (AAPL). I was about to label this a correction, but really, which is more correct: AAPL at 644 or AAPL at 582? How about the Topeka Capital Markets analyst that put a 1001 price target on the stock?

With earnings due out on Tuesday, there are rumors circulating about possible revenue beats and misses, what may emerge from the product pipeline when, etc.

There are a lot of investors out there that would like to own AAPL or add to an existing position. Many of those see the stock as an excellent value at 582, but are worried about the possibility of a negative earnings surprise, so they are not sure what to do.

Yesterday I tweeted the following trade idea:

“Simple idea: pick a price at which you would like to own $AAPL and sell the puts”

“$AAPL May 520 puts at 7.25. Think of it as being paid 7.25 to see if you can get the stock at a $70 discount”

One of the reasons I love options is that they allow for so much trading flexibility. Jared Woodard of Condor Options likes to say that options allow for a more nuanced language with which to express an idea about the markets. Rather than having the debate be about whether AAPL is a buy at 582, a better question might be, “What sort of ‘stink bid’ do I think might reasonably get filled in AAPL and how much can I get paid for making that bid?”

Looking at the AAPL options graphic below, the May 550 puts (right column) are currently available for 15.10, so if the short put expires in the money, the net cost for these shares will be 535. The May 520 puts referenced yesterday are still available for 7.25, which translates into a cost basis of about 513. It is even possible to sell the May 500 puts for about 4.30, which would mean a cost basis of about 496.

So if you really want to own AAPL and don’t want all of the risk associated with next week’s earnings announcement, consider selling some out-of-the-money puts. You can collect some premium for those puts and if that worst case scenario comes true, you can also lock in the stock at a nice discount to today’s price.

Finally, for those who may be interested in following me on Twitter, you can find @VIXandMore at Twitter.com/VIXandMore

[source(s): LivevolPro.com]

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

Tuesday, April 17, 2012

Stocks and Economic Data on Upswing Despite Disappointing Manufacturing and Housing Numbers

In many respects, today is a microcosm of the first 4 ½ months of 2012: industrial production and housing starts data fell short of expectations, yet stocks pushed higher regardless.

This is the third year I have been periodically publishing some proprietary data I developed with respect to economic data vs. expectations that I variously present in an aggregated format or across five groups of economic activity (manufacturing/general, housing/construction, employment, consumer and prices/inflation.) This time around I have elected to do both, with the aggregated data in the top chart and the detailed breakout in the lower chart.

The aggregated story tell the picture at 30,000 feet: economic data have been consistently topping expectations since late September and the stock market has risen in conjunction with better-than-expected news. The detail chart tells a more nuanced story. Here one can see positive surprises almost across the board in the fourth quarter of 2011, yet a rash of disappointments in 2012 in housing/construction as well as manufacturing/general economic data.

In both 2010 and 2011, it was the end of positive surprises in manufacturing and general economic data that coincided with bearish downturns in stocks. So far in 2012, the disappointments in manufacturing and general economic data have not been able to put a dent in the stock market rally. My sense is that this data and the stock market will be moving in the same direction within the next month. Whether that means an uptick in the data or a downtick in stocks remains to be seen.

[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).]

Disclosure(s): none

[sources: various]

Sunday, April 15, 2012

Chart of the Week: Don’t Blame China

Last week’s financial headlines were dominated by Spain and China. In the case of Spain, this was largely due to increased borrowing by Spanish banks from the European Central Bank. For China the culprit was Q1 GDP growth of only 8.1%, which was down from 8.9% in Q4 2011 and well short of the 9.0% whisper number that made the rounds in the day leading up to Friday’s announcement. In fact, once could certainly argue that it was China’s GDP whisper number that was the main catalyst for Thursday’s big rally that was essentially reversed on Friday.

The chart of the week below shows the performance of SPY as well as country ETFs for Spain (EWP), Italy (EWI) and China (FXI) since stocks put in a top two weeks ago tomorrow. The chart shows that while SPY has been declining, country ETFs for Spain and Italy have been falling approximately three times as quickly as their American counterparts. And China? Well, don’t blame China for the woes in the U.S. stock market. While U.S. stocks have been selling off, the performance of the popular iShares FTSE/Xinhua China 25 Index, FXI, has managed to post a 0.9% gain.

[As a side note, about a year ago I discontinued the Chart of the Week, an extremely popular feature in this space since its launch in 2008, as my posting had become sporadic. Going forward I hope to be able to continue my recent regular posting and make this a weekly feature that not only shines a light on key developments of the past week, but also has some archival value as well.]

[source(s): StockCharts.com]

Disclosure(s): none

Friday, April 13, 2012

Banco Santander Finally Tackles One Huge Problem: Its Ticker

With Spain firmly in the crosshairs of Act N+1 of the European sovereign debt crisis, it was with great comfort that I noted yesterday’s announcement from Spain’s largest and most important bank, Banco Santander (STD), that the company was finally addressing what I considered to be a seriously overlooked problem, its ticker symbol. After kicking the can down the road for what must have been countless meetings and conference calls, the marketing and PR people can finally claim a small victory now that Banco Santander has indicated it will change the NYSE ticker symbol of its American Depositary Shares from “STD” to “SAN” effective at the commencement of trading on June 14, 2012.

In the meantime, traders continue to favor STD puts and puts from Spain’s second largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), both of which have a more liquid options market than that of Spain’s ETF, EWP.

The top chart below shows put activity (red columns in bottom section of graph) ramping up in STD over the course of the last two weeks or so. The lower chart, however, puts recent options activity in the context of the August-October peak in the sovereign debt crisis, with a graphic that dates from July 1, 2011 and shows peak put activity (28.791 contracts per day) and implied volatility (111) dating from the week of August 4 – August 11, 2012.

As far as options traders are concerned, the current situation, while fraught with potential land mines, still pales in comparison to the challenges on the horizon six months ago.

Of course a new ticker won’t help address the underlying problems facing Banco Santander and Spain as a whole, but at least it might cut down on the snickers…

[VIX and More occasionally tilts at humor. For more on these efforts, check out posts with the “lighter side” label.]

[source(s): LivevolPro.com]

Disclosure(s): short STD and BBVA at time of writing

Thursday, April 12, 2012

Buying SVXY Calls when the VIX Spikes

Based upon some of the emails I have received this week, it appears that a number of readers have been focused on buying some of the inverse VIX ETPs, notably XIV and SVXY, when they saw the VIX spike. Some have preferred shorting VXX, TVIX and UVXY, based partly on availability, while others have preferred to trade VXX options, generally by buying puts or limiting risk with the likes of a bear call spread.

I had thought that my recent Options on UVXY and SVXY Open Up New VIX ETP Trading Approaches might nudge some traders into considering strategies involving the +2x leveraged long VIX short-term futures ETF (UVXY) and perhaps utilize the -1x short VIX short-term futures ETF (SVXY) as well, but based on the volumes, these issues are still in the process of gaining a broader audience. In fact, UVXY did see record call volume of 7300 contracts on Tuesday, but SVXY has been the laggard so far, as the graphic below illustrates.

So here is a thought: the next time the VIX has a significant spike, one of the first trades you should investigate is fading that spike by buying SVXY out-of-the-money calls. This is a simple trade and has the potential to be quite profitable. The SVXY April 90 calls, for instance, have jumped 40% from Tuesday’s close.

The exciting news about options on SVXY and UVXY is that traders can now easily structure a broad variety of trades that involve defined risk and substantial upside. While VXX (and VIX) options are still the gold standard in terms of liquidity, SVXY and UVXY options also deserve some love – even if the spreads are still wider than those of VXX.

[source(s): LivevolPro.com]

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

Tuesday, April 10, 2012

Performance of VIX ETP Hedges in Current Selloff

It was only a week ago that I discussed the performance of 31 VIX and volatility-based exchange-traded products in VIX ETP Returns for Q1 2012 and barely a month ago that I examined in some detail the workings of two VIX ETPs, VQT and XVZ, in Dynamic VIX ETPs as Long-Term Hedges. When stocks fall and volatility rises, however, which VIX ETP hedges work the best?

The answer is not so simple, unless you know when volatility will begin to spike, how far it will go and how long it will take to get there. Even then, it would still be helpful to know what happens to the VIX futures term structure along the way. Also, there are liquidity constraints that will probably limit the choices for most investors to a half dozen or fewer alternatives.

That being said, the current selloff can be used to highlight some important heuristics and alternative approaches. The first graphic below, for instance, illustrates the performance since the April 2 close of five representative and relatively liquid VIX ETPs (TVIZ was excluded on the grounds of liquidity; its performance during the period was similar to that of VXX) that can be used as hedges. For the most part, the performance trend is the opposite of what was observed during the first quarter.

The three fixed allocation VIX ETPs have been excellent performers during the last five trading days. With +2x leverage and a short-term (weighted average of one month) maturity, TVIX (red line) was the standout in the group. The second best performer during the selloff was VXX (blue line), a +1x short-term product. The +1x mid-term (weighted average of one month) maturity VXZ (green line) ETP has also been a strong performer, certainly worthy of a bronze medal. All three hedges have gained more than 10% during the last five trading days, while the S&P 500 index (black line) has fallen 4.3%. In sharp contrast to their fixed allocation brethren, the two dynamic allocation VIX ETPs have both hovered around the unchanged line during the selloff, with XVZ (fuchsia line) eking out a small gain after a small bounce today, while VQT (aqua blue line) has posted a loss during the same period.

Obviously, anyone who bought TVIX (or VXX or VXZ) on April 2 is sitting on a nice profit, but the second graphic, which tracks performance of the same ETPs since the beginning of the year, lays out the big picture conundrum succinctly. In short, the most responsive hedges (TVIX, VXX, etc.) are those which have a fixed allocation and are most susceptible to losses due to contango and negative roll yield while one is waiting for a hoped-for VIX spike to materialize. The dynamic allocation VIX ETPs, on the other hand, are tweaked to minimize losses due to contango and negative roll yield and thus can be left in place for extended periods, but there is enough lag time built into their dynamic allocation rules so that they offer little protection from sudden and short-lived VIX spikes, while doing a better job of protecting portfolios during extended periods of volatility, such as the peak of European sovereign debt crisis during August-September 2011.

So…if you know when the fireworks are going to start, TVIX and VXX are excellent choices as volatility hedges for long equity portfolios. If the timetable is uncertain (which is often the case) and the goal is to protect against a period of extended high volatility, then VXZ and VQT are likely to be more compelling alternatives.

[source(s): StockCharts.com]

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

Friday, April 6, 2012

E-Mini S&P 500 Futures Fall 1.4% on Disappointing Nonfarm Payrolls

In case you missed it earlier this morning, after a nonfarm payrolls report that indicated 120,000 jobs were created in March, approximately 80,000 short of consensus expectations, equity futures fell approximately 1.4%, with the E-mini S&P 500 futures (/ES, shown in graph below) falling to 1372 – a level not seen since March 13^th.

Coming on the heels of three days of declines, another 1.4% move down would bring the peak to trough pullback to about 3.5%, which represents half of the 7.0% median pullback we have witnessed since stocks bottomed in 2009. [See Putting the Current 2.6% SPX Pullback in Recent Historical Context for additional details.]

Investors who have benefitted from the 32% gain in the S&P 500 index since the beginning of October are no doubt going to be quick to protect profits in an environment where the consensus is that stocks are long overdue for a pullback. What we have lacked until recently has been a catalyst for that selloff. Tuesday’s FOMC minutes, in which the Fed seemed to be much less inclined to move in the direction of QE3 or other stimulus measures seemed to catalyze sellers. Today’s nonfarm payrolls data provided another catalyst, but it may not be as powerful as some expect. Initial jobless claims continue to trend down and suggest an employment market that is flat or improving, which raises the possibility that the March nonfarm payrolls were a statistical outlier and/or will look stronger in light of future revisions to today’s data.

Perhaps most important, however, weakness in employment is exactly the issue that will cause the Fed to rethink the likelihood of further stimulus measures, up to and including QE3. At the very least, today’s nonfarm payrolls undermines concerns about the growing hawkish stance evident in Tuesday’s FOMC minutes from the March 13^th (there is that date again) meeting. Whether it is current out-of-the-money or at-the-money, the looming presence of a Bernanke put should not be overlooked.

[source: thinkorswim/TD Ameritrade]

Disclosure(s): none

Wednesday, April 4, 2012

VIX Premium to SPX Historical Volatility at Record High in Q1

Back in September 2010, in VIX and Historical Volatility Settling Back into Normal Range, I presented an earlier version of the chart below to explain that in spite of the protestations of the time, the relationship between the VIX and historical volatility (a.k.a. realized volatility) was actually right in line with historical norms.

The same claim cannot be made for 2012.

In fact, as low as the VIX appears to many, for the first three months of 2012 the VIX has been tracking at 177% of the 10-day historical volatility of the S&P 500 index. This ratio is well above the long-term average of 129% and also above the record for a single year – 162% in 1995 – which was back in the time when the premium of the VIX over realized volatility in the SPX (“volatility risk premium”) was routinely much higher than it has been in recent years.

Consider for a moment that from January 27 to March 7, 10-day historical volatility of the SPX never crossed above 10.00. Had the VIX volatility risk premium been at the typical historical level of 129%, the VIX would have been below 13.00 for this entire period. Of course, the VIX never traded below 13.00 during this six-week period. Instead, investors were unwilling to accept a VIX this low (i.e., drop prices in SPX options) in spite of low realized volatility, which is part of the reason (perhaps along with disaster imprinting and related issues) why the volatility risk premium was at a record high during the first quarter.

Going forward, one can reasonably expect that either realized volatility will increase or the VIX will continue to fall so that the volatility risk premium approaches historical norms – and more likely that the future will combine elements of both scenarios.

Now that I have opened another Pandora’s box here, expect more to follow vis-à-vis the volatility risk premium.

[source(s): CBOE, Yahoo]

Disclosure(s): none

Tuesday, April 3, 2012

VIX ETP Returns for Q1 2012

Back in my consulting days, I convinced myself that there were rare instances when an ugly chart crammed full of data should take precedence over a clean and simple graphic that focused on the key takeaways. For my purposes at least, the graphic below, while unlikely to garner accolades from the likes of Information Aesthetics of Flowing Data, is one of those instances and suits my purposes perfectly. [After all, this blog is really just a place for me to archive my own idiosyncratic ideas and the two million interlopers are just a curious side effect, but I digress…]

Getting back to the main point, the graphic below updates the VIX exchange-traded products (ETP) landscape (the only additions are two new red 0s to indicate that UVXY and SVXY are now optionable) and adds performance data for the first quarter of 2012.

Of course anyone who has checked in on this space periodically certainly has already realized that the first quarter saw record contango and negative roll yield across the full spectrum of the VIX futures term structure. As a result of this, the long volatility products had a horrendous three months, the inverse ETPs racked up huge gains and those products with dynamic allocations (VQT and XVZ) or offsetting long and short volatility legs (XVIX) were able to manage small(er) gains.

Following the usual pattern, the products with the shortest target maturities were the most volatile, while those with longer target maturities saw much less movement.

Also notice the symmetry of the return structure. For all the long products that were getting whacked (TVIX, UVXY, VXX, TVIZ, etc.) there were corresponding inverse products (XIV, SVXY, ZIV, etc.) that were racking up larger gains than the losses suffered by their long volatility counterparts.

Last but not least, perhaps the distribution of the returns will help to explain why I have organized my previous VIX ETP ‘field guides’ in this fashion.

This graphic should implicitly raise a bunch of issues and the links below are good jumping off points for further exploration regarding a number of those issues.

For the time being I will leave additional analysis to those in the comments section.

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

Monday, April 2, 2012

TVIX Premium to Indicative Value Creeping Back Up…

If you thought the TVIX (VelocityShares Daily 2x VIX Short-Term ETN) story was behind us, you might want to think again.

No, I am not talking about the recent news that FINRA is “looking at the events and trading” associated with TVIX and more generally that the regulator has “a review under way looking at a host of issues relating to ETNs and other complex products.”

Instead, my interest is in the return of some meaningful premium in TVIX relative to its Intraday Indicative Value (a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities) during the last three days.

For some historical perspective, consider that in the months prior to Credit Suisse (CS) suspending creation units on February 21, TVIX typically traded at a premium of about 0.5% above its indicative value. After the creation units were suspended, the premium vacillated wildly (as seen in the graphic below), though for several weeks the premium was locked in a relatively narrow range of 10-20%. That premium over indicative value spiked to 89% on the day before the announcement that Credit Suisse was resuming creation units. Once that resumption of creation units was announced, the premium in TVIX fell all the way back to 2% in just three days, no doubt signaling to many that it would soon be business as usual in TVIX trading.

During the last three days, however, the TVIX premium is has remained largely in the 10-15% range, ending today at 11.4%.

The knee-jerk conclusion here is that there Credit Suisse may be considering the possibility of suspending the TVIX creation units once again. Another interpretation is that while Credit Suisse indicated they would reopen issuance of TVIX “on a limited basis,” it is now likely that the limited flow of TVIX creations units has not been sufficient to establish a price equivalence between TVIX and TVIX.IV, suggesting that an imbalance of supply and demand is persisting. Given the low trading volumes for the last three days, I am inclined to believe the that imbalance is more of an issue of supply constrains than one of excess demand, but here the simple interpretation of the data may not be the proper explanation.

The fluctuations in the TVIX premium will be very interesting to watch going forward. One could argue that in spite of my many posts on TVIX, including a (pre-suspension) reminder that the pricing supplement to the prospectus states in no uncertain terms, “The long term expected value of your ETNs is zero,” many investors had no idea what they were buying when they purchased shares of TVIX. In the six weeks since creation units were suspended, the public has had a reasonably thorough if sometimes painful education on the matter, even if some of this has come too late to avoid large losses.

Can this wiser and better educated investor class help to create another huge spike in TVIX premium? I have my doubts, but will certainly be watching in earnest. Remember that anyone who pays a 11% premium over fair value for TVIX should anticipate that the premium will evaporate sometime in the near future and that any short-terms gains will likely have to come in the form of other investors who are willing to pay an even larger premium to own an ETN that is likely to underperform UVXY if the VIX does spike.

As an editorial aside, while TVIX may be taking it on the chin in terms of publicity, had this product been launched prior to the 2008 financial crisis, I have little doubt that many investors would have been genuflecting in front of it during the terror that gripped the stock market during its transition to a post-Lehman world.

[source(s): thinkorswim/TD Ameritrade, Yahoo]

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

Sunday, April 1, 2012

EVALS Update and a Look Under the Hood

I have fielded so many questions about EVALS that I finally decided to put up a summary post that discusses various aspects of the mechanics of the EVALS model portfolio as well as some performance data. In EVALS Q1 2012 Update, I address such issues as monthly returns, maximum drawdown, trading frequency, average holding period, correlation with the SPX, etc. for the first 4 ½ months since inception.

For those seeing more comprehensive information, EVALS Relaunches, Now Focusing on VIX Exchange-Traded Products might also be of interest. Readers who wish to see a graphic that explains the differences between the content in this blog, in the newsletter and in EVALS are encouraged to review the content pyramid in Five Years of VIX and More.

Finally, in the event that anyone needs a more provocative teaser to visit the EVALS blog, I will disclose that there you will find some information relating to the 52.60% return in EVALS in the 4 ½ months since the November 17, 2011 launch.

Disclosure(s): none