Friday, June 29, 2012

Top Posts of 2012 (Through the First Half of the Year)

Every year I tabulate the most-read posts in this space and as the halfway mark falls on a weekend this year and in the midst of considerable turmoil in Europe, China and the United States, I thought I would provide a mid-year update for those who may be interested in doing some weekend reading.

The posts below represent those that have been read by the highest number of unique readers in 2012. Farther down there are links to similar lists going back to 2007, along with several other “best of” type posts that I have flagged for archival purposes.

For the record, each year I also attach the hall of fame label to a handful of posts that I believe have particularly compelling and/or original content, regardless of readership.

  1. Will TVIX Go To Zero?
  2. Volatility Becomes Unhinged on Friday
  3. A Million SPX Contracts Traded Today…A Contrarian Timing Signal
  4. Four Key Drivers of the Price of TVIX
  5. Credit Suisse Suspends Creation Units in TVIX: What It Means
  6. All About UVXY
  7. Who Is Trading TVIX?
  8. What the VIX Kitchen Sink Chart Says
  9. Natural Gas, Contango and UNG
  10. A VIX of 15!?! Meet the New Reality
  11. VXX Options Calm After Second Highest Volume Day Ever
  12. Third Steepest First-Second Month VIX Futures Contango Ever
  13. Dynamic VIX ETPs as Long-Term Hedges
  14. TVIX Premium to Indicative Value Creeping Back Up
  15. Implications of a Positively Correlated SPX and VIX
  16. Putting the Recent 2.6% SPX Pullback in Historical Context
  17. TVIX Creation Units Return; What It Means for Investors
  18. Geography, Focus and Strategy
  19. The Story of VIX ETPs Relative to Their Intraday Indicative Values
  20. A Look at Pullbacks of the 2009-2012 Bull Market
  21. Is TVIX Now Just a More Docile UVXY?
  22. The VIX-VXX Minotaur Trade
  23. Five Years of VIX and More
  24. The Ups and Downs of the New Premium in TVIX
  25. An Updated Field Guide to VIX ETPS

Related posts:

Disclosure(s): none

Thursday, June 28, 2012

The Evolution of European Equity Risk

There are many ways in which investors can evaluate risk related to the euro zone. Credit default swaps for sovereign debt are one way to evaluate the risk of country default. Sovereign bond yields are a good proxy for a country’s access to funding via the credit markets. The euro crosses and related directional moves are a barometer of the strength of the currency and the euro zone countries as a whole, while various Intrade contracts can lend a sense of the probabilities that investors assign to various events, such as to the risk of one or more countries dropping the euro.

On the volatility side, the VSTOXX (EURO STOXX 50 Volatility Index) the EVZ (CBOE EuroCurrency Volatility Index) provide a market assessment of risk and uncertainty in euro zone stocks as well as the currency.

One piece of analysis I have not seen, however, is an assessment of the relative risk and uncertainty for equity markets in some of the more important euro zone nations. Specifically, Spain, Italy, France and Germany. The chart below attempts to offer up that very information, using 30-day implied volatility for the various country ETFs over the course of the past six months:

  • EWP – Spain (red line)
  • EWI – Italy (blue line)
  • EWQ – France (green line)
  • EWG – Germany (yellow line)

Looking at the chart, what initially catches my eye is the recent evolution of the two-tiered risk system. In the first half of the year, the higher risk is clearly associated with Italy and France, whereas Spain and Germany appear to be considerably less risky in terms of implied volatility. By the March the risk appears to have lessened across the board and the distinctions between individual countries is more difficult to discern. Over the course of the last 1 ½ months or so, a new two-tiered system has appeared. This time around it is Italy and Spain where the risk to equities is considered to be the greatest, with France now joining Germany in the lower risk tier.

In essence, Italy has persisted in the high risk tier and Germany has been a constant in the lower risk category. Over the course of the past few months, the interesting development has been the switch between France and Spain, with the former improving from being a peer of Italy to a peer of Germany, while Spain has moved in the opposite direction.

One could certainly argue that all four countries are in the same boat (taking on water, with shoddy life preservers, in shark-infested waters and being one small mutiny away from having no captain…), but clearly investors think there are important distinctions to be made in terms of equity risk and uncertainty. Perhaps of more interest, these fortunes appear to be shifting, with little perceptible difference not just between Spain and Italy, but also between Germany and France.

Related posts:


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

Wednesday, June 27, 2012

Huge Gap Between VIX IV and HV, But Is The Direction Wrong?

It is not that difficult to come up with data and charts that have many investors wondering if risk and uncertainty are being underpriced in advance of the euro zone summit. Earlier today, I offered up one possible example in Euro Volatility and Risk. Since the VIX receives top billing in this space (and not too long ago carried the mostly tongue-in-cheek moniker, “Your One-Stop VIX-Centric View of the World…”), I thought a VIX-specific example might also be of interest.

The chart below shows the last three months of VIX data, with VIX candlesticks on the main chart on the top. The second chart from the top compares the 20-day historical volatility of the VIX (blue line) with the 30-day implied volatility of the VIX (red line), with the yellow area chart just below it calculating the HV minus IV. Much to my surprise the current 20-day HV is 144, while the current IV is only 98. In other words, the markets expect the VIX to be considerably less volatile in the month ahead than it has been over the course of the last month. I am not surprised to see the gap, but do the markets have the direction of the gap right? In terms of trading opportunities, if you disagree with the market consensus, then VIX straddles probably look fairly cheap right now.

The VIX IV also raises the question: just where is the fear in the markets right now?

Note that the CBOE recently launched the CBOE VVIX Index (VVIX), which is essentially a VIX of the VIX and is very similar to the VIX IV30 measure that is calculated by Livevol in the chart below. You can find more information about VVIX at the CBOE’s VVIX micro site. I will certainly have a lot to say about this intriguing index going forward.

Related posts:


Disclosure(s): Livevol and CBOE are advertisers on VIX and More

Euro Volatility and Risk

With the euro zone summit looming, investors are scrambling to find all sorts of measuring sticks to evaluate the risks of a sharp move in the financial markets. Based on some of the emails I have received, many are skeptical of the VIX right now, which is trading in the mid 19s, some 5% below its lifetime mean. At 27.54, the VSTOXX (EURO STOXX 50 Volatility Index) is showing much more uncertainty, but even that number is low relative to the range of the VSTOXX for the past three months.

Whether Spain, Italy or Greece is the fixation du jour, the questions investors really want answers to ultimately all cluster around the future of the euro. I have addressed this question relative to the risk of one or more countries leaving the euro in the context of various Intrade contracts (see links below), but another overlooked manner of measuring risk and uncertainty in the euro is the CBOE EuroCurrency Volatility Index (EVZ). Sometimes referred to as the “euro VIX,” EVZ uses the VIX methodology to measure the market’s expectations of future volatility in the euro. In theory, therefore, EVZ should also be a proxy for risk and uncertainty in the euro. One might even go as far as to consider EVZ as a euro zone fear indicator.

So what is a chart of EVZ telling us on the eve of another euro zone summit?

The chart below shows that at 11.27, EVZ is currently in the lower portion of its range of 9.23 – 20.34 for the past year. Indeed EVZ is only in the 18th percentile of the range of values over the course of the past year. Also of interest, the current 20-day historical volatility of EVZ (60) is lower than the 180-day historical volatility measure (65) – as has been the case for the majority of the last six months. Last but not least, EVZ has been on a notable downtrend since June 18th.

Headlines aside, traders do not see a lot of currency risk in the euro right now, at least relative to the last year or so and as far as the 30-day forward-looking window defined by EVZ is concerned.

So if you think the VIX is depressed and understating market risk, don’t expect the EVZ to be signaling something different. Currency risk and uncertainty seem surprisingly low at current levels. If you think the market has underpriced the potential for a large move in the euro, then consider some long straddles on the euro or its ETF counterpart, FXE.

Related posts:


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

Tuesday, June 19, 2012

Tracking the Fall in VIX Futures

The last four days have seen a dramatic decline in all things related to the VIX. The cash/spot VIX is down 26% from last Wednesday’s close as I write this and the VIX futures have followed the VIX down to varying degrees. The graphic below shows the changes in all the VIX contracts during the last four days – a period during which the entire VIX futures term structure has fallen sharply.

As is usually the case, the decline in the front month (June) contract is the sharpest of the group and has actually exceeded the decline in the cash/spot VIX during the same period. With the June contract set to expire at the open of trading tomorrow, it is not surprising that the contract have been as volatile as the VIX index in the last few days. Note that at the other end of the term structure, the back month (February 2013) VIX futures contracts have fallen only 6.8%, about ¼ of the decline seen in the front month futures. Given where we are in the current expiration cycle (right at the very end), the changes in the other months relative to the front month VIX futures are in line with historical norms.

Sharp-eyed readers will no doubt note evidence of the Holiday Effect in the dip in the December contract, where fewer trading days and bullish seasonal factors have a tendency to dampen volatility – and volatility expectations. [Which raises the question of whether the European sovereign debt crisis and the U.S. fiscal cliff will observe the holidays this year, but that is a post for another time…]

The bottom line is that even with the VIX hovering around the 18.00 line, investors are still anticipating a VIX in the 29-30 range for the beginning of 2013. While this may sound high to some, it is down from expectations of a VIX of 31-32 just last week.

One thing I am certain of: there will be a fair amount of entertainment value just in watching the gyrations of the financial markets for the next few quarters. One other thing I am nearly certain of: when the VIX futures make big moves, new opportunities are bound to arise.

Related posts:

[source(s): CBOE, Interactive Brokers]

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

Friday, June 15, 2012

Performance of Volatility-Hedged ETPs

An emerging area of interest in the markets in general and in this space in particular is the subject of how to blend volatility exposure – both long and short – into a portfolio.

Based upon feedback I have received, three recent articles that have touched upon this subject from different angles have all resonated with readers:

Clearly the role of volatility in a portfolio is a subject that warrants further analysis and discussion.

It is worth noting that issuers of exchange-traded products have taken several approaches to addressing volatility. The most obvious was the launch of VIX-based ETPs, such as the popular VXX (iPath S&P 500 VIX Short-Term Futures ETN,) which is a long basket of short-term VIX futures.

Subsequent products have tackled the subject of volatility in a variety of different ways, including:

  1. Utilize low beta stocks to minimize portfolio volatility (SPLV)
  2. Employ a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (VSPY)
  3. Employ a market timing mechanism that dynamically allocates between stocks and VIX futures according to measures of market volatility (VQT)
  4. Employ a market timing mechanism that dynamically allocates between long and short volatility positions (XVZ)

With the S&P 500 index down about 6.3% through yesterday’s close from its April 2nd high, it is reasonable to ask how these approaches have been performing during this bearish phase. The chart below shows the performance of SPY in red. Two of the approaches employed have had a performance trajectory that is almost indistinguishable from that of SPY: VQT (green line); and VSPY (dark blue line), which is thinly traded.

The two standouts during the past 2 ½ months are SPLV (light blue line) and XVZ (purple line). You can see from the graphic that SPLV has done exactly was it is supposed to do: minimize volatility. For the better part of the period in question, SPLV has been largely unchanged. Lately it has risen largely due to its substantial exposure to utilities and consumer staples. The other standout is XVZ, which essentially uses the slope of VIX futures term structure to determine how it allocates between long and short volatility positions. With the VIX futures in contango (front months less expensive than more distant months) since last November, this product has been able to capitalize on negative roll yield, while also providing protection against a spike in the VIX.

While this data should be of interest to traders who are looking for volatility-based hedges or even speculative applications going forward, today is definitely a case where past performance should not serve as a guideline for what to expect in the next week or two.

For those who are looking for more powerful VIX hedges, long positions in VIX calls and VXX calls (including the weeklys) will provide the most robust long volatility hedges. For those who are looking to minimize portfolio volatility going forward, the four approaches outlined above (as well as the links below) should warrant further investigation.

Related posts:


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

Tuesday, June 12, 2012

Greek Elections and the Future of the Euro

While this week’s news cycle has been Spain, Spain, Italy and Spain so far (reminiscent of an old Monty Python skit, but I digress), it is easy to forget for a moment or so that Greece is holding another round of elections on Sunday.

As Greek law prohibits polling or publishing poll results in the 14 days leading up to an election, we do not know how voter sentiment about the bailout and remaining in the euro may be ebbing or flowing. Greek voters have certainly a great deal to think about, some of which may have been complicated by the positioning of Syriza’s leader, Alexis Tsipras, who insists that it is possible to repudiate the bailout agreement, start afresh with a new plan that is based on stimulating economic growth and job creation – yet never have to leave the euro zone in the process.

So just how will the Greek elections influence the future of the euro?

Without polls, the Intrade contract that specifies “Any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012” now becomes an even more valuable informational resource. The problem is that in spite of a fair amount of activity, the price of the contract has remained essentially unchanged for the last month, hugging the 40 level (see chart below), which means that participants continue believe that the chance of a Greek exit (I refuse to say ‘Grexit’) by the end of the year is about 40%.

By Monday we will have a much more information, but once again, the process of forming a coalition government may prove to be troublesome…or worse.

For those looking for hedges against some panic in the financial markets next week, keep in mind that VIX options do not expire this week, but next Wednesday, June 20th. As such, VIX calls may prove to be an appropriate hedge against at least short-term post-election anxiety. For those looking for volatility hedges on a week-to-week rather than monthly basis, it might be helpful to investigate VXX weekly options (A Favorite Trade: VXX Weeklys) as well. Last but not least, a reader favorite is a thought piece on the process of constructing hedges is Cheating with Partial Hedges.

Related posts:


Disclosure(s): short VXX at time of writing

Sunday, June 10, 2012

Chart of the Week: The St. Louis Fed’s Financial Stress Index and Market Risk

Determining the risk in the financial markets should get easier with more data, more measures and more experience navigating crisis environments, right? Not so fast.

Right now, for instance, the CBOE Volatility Index (yes, the VIX does have a formal name) is just a shade above its lifetime average, yet the yield on the 10-Year U.S. Treasury Note is just a week away from its all-time low. Granted the Fed has been distorting interest rates with Operation Twist and other policy initiatives, but it has only been in the last month or so that yields have dipped below 1.7%.

One broad-based tool for measuring risk in the financial markets and related institutions is the St. Louis Fed’s Financial Stress Index (which I refer to as the STLFSI), which has 18 component measures that include a variety of interest rate and yield spread data, as well as the VIX, measures of bond volatility and other data that are correlated with market stress.

This week’s chart of the week below shows the movements in the STLFSI and the VIX since the beginning of 2007. Note that for most of 2012 the VIX has been indicating much less risk and uncertainty than the STLFSI. Only since the middle of May have I observed the VIX rise to a relative level that is consistent with the STLFSI. As of last week, for instance the STLFSI was at the 79th percentile of its lifetime range, while the VIX was in its 82nd percentile. For the record, the divergence was widest in the middle of March, when the STLFSI had a 68th percentile reading, yet the VIX was mired in the 23rd percentile. Financial historians might also be interested to know that the mid-March divergence was the largest since August 2008…

For more information on the components of the STLFSI and the index’s long-term performance, check out an earlier post, St. Louis Fed’s Financial Stress Index, as well as some of the other posts linked below.

Related posts:

[source(s): Federal Reserve Bank of St. Louis]

Disclosure(s): none

Saturday, June 9, 2012

New and Noteworthy:

As a blog where the central focus is on the VIX and related subjects, I always try to keep an ear to the ground for new sources of information, analysis, data, tools, etc. for the VIX and volatility.

When a particularly interesting new site catches my attention, I try to highlight it in this space. Launched just a couple of weeks ago, is once such site. Eli, who runs VIX Central, is an active trader in the VIX products space. After writing a program that uses real-time VIX futures quotes from his broker to create a real-time VIX term structure graph, he asked himself, “Why not make the VIX term structure information available in graphic form over the web? Perhaps others would find this information useful also.” The result is VIX Central.

The centerpiece of VIX Central is the main page is a VIX futures term structure graph (see below), which also tabulates the absolute price difference between each of the VIX futures adjacent months, as well as the percentage contango or backwardation between these months.

Another tab worth investigating is the Historical Prices tab. Here you can call up the VIX futures terms structure for any date going back to March 2007. This can be done for individual dates or for as many as twenty dates on one chart. To see multiple days superimposed on the same chart, click on the Multiple Dates per Graph button and start with a date like September 30, 2008, then keep clicking on the Next Date button to see how the term structure evolves.

I am not sure where the site is going from here in terms of new features, but Eli indicates he is currently evaluating some similarity algorithms that can indicate which term structure periods in the past are similar to the current one.

The bottom line: VIX Central is informative and a valuable piece of information for anyone who trades the VIX product space. The historical term structure data is both fun and educational. Keep an eye on this site and if you have any feature requests regarding similarity algorithms or other functionality, this would probably be a good time to click on the Questions, Feedback and Suggestions link.


Related posts:


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

Friday, June 8, 2012

A Favorite Trade: VXX Weeklys

I might as well admit this up front: weekly options are one of my favorite innovations in many years and VXX weeklys have become one of my preferred trades during the past few months.

Why? Several factors are at play. Huge implied volatility is a plus, as is growing liquidity, the ability to employ VXX for speculative and/or hedging purposes, and the applicability of VIX-based ETPs as trading vehicles for the news cycle.

The chart below shows the VXX weekly options that expire today and compares them to options on the standard monthly options expiration cycle, which still have one week left until expiration. Note that with three hours left in today’s trading session, the implied volatility (and skew) of the VXX options is distorted as we approach expiration. Whereas the options that expire next week have an implied volatility reading in the 77 – 125 range, today’s weekly options prices have IVs of over 700 on the call side and over 400 on the put side. While this may seem outrageous, given the fact that the VIX can spike without warning and the VIX futures and VXX will move sharply in conjunction with the cash/spot VIX, options prices (and thus IV) have to account for the possibility of a spike – particularly in light of the recent news cycle.

If you think VXX IV and options prices are crazy, then perhaps it’s time you considered trading the VXX weeklys.

To reiterate what I hope is obvious to everyone who follows the VIX and the options market, VXX options are extremely aggressive trades and are probably best traded as spreads or in other defined risk positions rather than those which expose the trader to unlimited risk.

More on this (these) subject(s) in the coming weeks.

Related posts:


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

Monday, June 4, 2012

Chart of the Week: SPX Andrews Pitchfork

With phrases like “inflection point” and “fiscal cliff” ricocheting around in their heads over the weekend, investors had quite a few extreme scenarios in mind for equities today, but for the most part, hovering around the unchanged line was not considered a likely outcome. Yet, 1 ½ hours into today’s session, stocks are essentially flat.

I mention all this because if one looks at a monthly Andrews Pitchfork chart for the last two decades, the moves in stocks over the last 2 ½ years or so look remarkably unremarkable, with stocks hugging the middle prong of the pitchfork, which currently points at a trend line “fair value” for the SPX of about 1265.

Part of the reason I am posting the chart below is that it shows a surprising degree of moderation and mean reversion in recent stock moves. The other reason I have attempted to shoehorn Andrews Pitchforks into the discussion is that the last two times I posted about these charts, I have received very strong reader feedback that suggests those who are seeing these charts for the first time are attracted to the visual simplicity and underlying logic of these charts. Going forward, this Andrews Pitchfork chart will provide some real value if it can help to define a channel and mean reversion target for stocks. With all the macroeconomic uncertainty out there, it would be nice if something in the technical toolbox can provide investors with some meaningful context that incorporates elements of both volatility and direction.

For more on Andrews Pitchfork charts, check out the two links below.

Related posts:


Disclosure(s): none

Friday, June 1, 2012

Current 9.8% Pullback Is Third Largest Since March 2009

A little more than two hours into today’s trading session, the S&P 500 index appears to have stabilized. Using this morning’s low print of 1282.94, the maximum peak-to-trough loss in the SPX is now 139.44 points – a 9.8% decline from the April 2nd high of 1422.38.

The table below summarizes what I consider to be all the significant pullbacks since stocks bottomed in early March 2009. Note that the current pullback is the third largest in terms of magnitude as well as peak-to-trough duration, which stands at 41 days as of today.

For those who may be interested in a graphical overview of the same data, A Look at the Pullbacks of the 2009-2012 Bull Market should help to put the current pullback into better perspective.

For those who are wondering just how low the SPX might fall if stocks were to replicate the 21.6% decline from 2011 or the 17.1% pullback from 2010, a comparable decline in percentage terms would put the SPX at 1115 and 1178, respectively.

Related posts:

[source(s): Yahoo]

Disclosure(s): none

Worst Post-2009 Week in Economic Data Relative to Expectations

This week ties the record for the worst week ever in terms of economic data relative to expectations – at least in the 2 ½ years I have been collecting this data and putting it through my proprietary analytics.

I last reported on my analysis of economic data vs. expectations in the middle of April in Stocks and Economic Data on Upswing Despite Disappointing Manufacturing and Housing Numbers. At that time, I expressed concern about, the relative weakness of the manufacturing and housing data I noted:

“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.”

With the benefit of the data through today’s employment report, ISM manufacturing index and construction numbers, it is clear that the weakness is no longer confined to manufacturing and housing, but has also dragged down employment and well as consumer spending and confidence.

The chart below shows the aggregated data picture across all categories, since the beginning of 2010 across all categories.  For the record, the only other time there was a week in which data was this poor relative to expectations was in the middle of February 2011, at which point the data was pulling back from an all-time high, about 2 ½ months before data and equities topped and began their swoon.

This time around the story is obviously much different, but keep in mind that for the last six months or so stocks have been more correlated with employment data than with any other measure of economic activity.

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

Related posts:

[source(s): various]

Disclosure(s): none

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