Wednesday, January 30, 2013

VXX and VXZ Celebrate Fourth Birthday

What better way to celebrate your birthday than by ripping off a huge gain. That’s what VXX must have been thinking today as it gained 6.2%, while it’s often overlooked sibling, VXZ, gained 2.2%.

Of course, the last four years have not been kind to these VIX exchange-traded products in the aggregate, but for selected periods, they have been remarkable performers. Just ask anyone who was short VXX when it spiked 198% during a period from July to October of 2011.

In spite of that impressive short-term performance, both VXX and VXZ have lost ground in each of the four years since their launch. To be fair, though, so did the VIX, if one measures each ‘performance year’ from January 30th.

The table below shows the performance of VXX, VXZ, the VIX and SPY during each of those January 30th performance years. When one considers that in each of those yearly measurement periods the SPY advanced and the VIX declined, it is a little bit easier to swallow the performance of the two pioneering VIX ETPs.

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

In spite of some of the concerns expressed about the performance of VXX and VXZ in this space as early as the first half of 2009, VXX is still the #1 VIX ETP in terms of assets at $1.043 billion, while VXZ is in the #8 slot at $57 million.

To reiterate what I have maintained since their launch, VXX and VXZ are products that are suitable for short-term long volatility positions or for longer-term holding periods under certain market conditions. For those who are interested in more information, the links below should provide some excellent jumping off points.

All investors are encouraged to carefully study the prospectus of VXX and VXZ and more generally of all VIX and volatility-based exchange-traded products.  I also strongly encourage potential investors in this space to spend some time learning the intricacies of VIX futures, contango, roll yield and other related subjects.

Related posts:

Disclosure(s): short VXX at time of writing

Monday, January 21, 2013

New Updates for Newsletter and EVALS

This is a quick update to let readers know that I have recently posted detailed updates for the VIX and More Subscriber Newsletter as well as for VIX and More – EVALS, which is essentially a model portfolio based on VIX exchange-traded products that complements the newsletter.

Launched in March 2008, the VIX and More Subscriber Newsletter is published weekly and provides general market commentary, an asset class outlook and an explanation of my current investment thesis, as well as a more detailed analysis of market sentiment, volatility, the VIX futures term structure, and trading opportunities in the volatility space. Over the course of the past year or two, there has been an increased emphasis on various ways to trade the VIX ETPs, including the use of several proprietary indices to evaluate the timeliness of selected trading approaches. One feature that has been popular since the launch of the newsletter is the Stock of the Week. In the Q3 Newsletter Update I discussed the Stock of the Week selection process in some detail; in the recently completed Q4 Newsletter Update, I elaborate on the performance of the Stock of the Week in 2012 (up more than 100%) and also talk about four proprietary indices I use to evaluate the timeliness of selected VIX ETP trading strategies.

VIX and More EVALS was re-launched in November 2011 as a model portfolio that trades the VIX ETPs and a handful of other ETPs with a volatility component. The EVALS Q4 Update details performance data, risk-adjusted performance data, trading data, etc. for a model portfolio that posted a gain of 62% in 2012. Additional information can be gleaned from the EVALS One-Year Summary and Performance Update, as well as previous posts, such as EVALS Relaunches, Now Focusing on VIX Exchange-Traded Products.

In keeping with tradition, my intention is to limit the content related to the newsletter and EVALS in this space and encourage readers who are interested in additional details and subscription information to check out:

Related posts:

Disclosure(s): none

ZIV Starting to Gain Momentum

One year ago, I wrote ZIV Undeservedly Neglected when ZIV was trading about 5,000 shares per day and was not even on the radar of many investors who follow the VIX exchange-traded products space. In the land of inverse VIX-based ETPs, it seemed as if XIV was destined to grab all the headlines and the glory, with ZIV relegated to distant also-ran status. Frankly, I was somewhat concerned that ZIV was an ETP with a great deal of potential that might be shuttered due to neglect long before mainstream investors had an opportunity to discover its charms.

One year later, ZIV is still struggling to find adherents, trading approximately 60,000 shares per day as of late, while its performance has become even more difficult to ignore. Over the past year, ZIV is up 103%; and during that period it had a maximum drawdown of only 19%, as the graphic below illustrates. Of course, one can never cut and paste past performance into the future with any degree of certainty, but the record over the course of the past year points toward the potential of ZIV, neglected or otherwise.


A year ago, I summarized some of my thinking on ZIV as follows:

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

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

Going forward, ZIV is going to have to make it or break it on its own merits, but for those few who have enjoyed the ride for the past year, it is clear that the potential is enormous – at least under certain market environments.

Related posts:

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

Friday, January 18, 2013

The Inverted Percentile VIX

Of the many reasons that investors have a tendency to struggle with an interpretation of the VIX, one of the most obvious is an issue of orientation: for the most part, the VIX moves in the opposite direction of stocks. Frankly, it is difficult to appreciate some of the nuances of an upside-down world unless you spend a lot of time hanging upside down looking out at the world, like a bat.

It is partly for this reason that I created the “inverted VIX” back in August 2007. At that time, the VIX had just spiked into the mid-20s only two months after having traded in the 12s. The chart below is an updated version of the inverted VIX over the course of the past year and demonstrates that for the most part, the SPX and the inverted VIX track fairly closely, though there are times, such as just prior to the fiscal cliff denouement, when the VIX sometimes strikes out on its own path.


Today we are seeing a VIX of about 12.50 – the lowest the index has been since June 2007 – and once again investors are grappling for the proper context. Let me throw a new concept into the mix that may help: the inverted percentile VIX, a distant cousin of the inverted VIX. The way to think about the inverted percentile VIX is in terms of the lifetime of VIX values, in which a VIX of 12.50 is in the 12.2 percentile. The inverse of that is the 87.8 percentile, which corresponds with a VIX of 28.67. Now I am guessing that for most investors a VIX of 12.50 feels much lower than a VIX of 28.67 feels high. Statistically they are almost identical in terms of being outliers, so if a 28.67 VIX doesn’t sound like a scary high number, then a VIX of 12.50 should not sound like a scary low number that is reflecting too much complacency.

Investors may wish to consider recalibrating their emotions and expectations or, failing that, take advantage of the relatively low VIX by buying some VIX calls so as to profit when the rest of the world comes to the realization that a VIX in the 12s is making them too nervous. Keep in mind, however, that current 10-day historical volatility of the SPX is in the 5s, so that number would have to double just to be able to support the current level of the VIX going forward.

Related posts:

Disclosure(s): none

Monday, January 7, 2013

Investor Fears Pivot to U.S. Deficit and Debt Ceiling Following Cliff Deal

Just one week after Democrats and Republicans cobbled together a last-minute fiscal cliff deal, investors turned their focus to the next battleground in the fiscal crisis, tabbing the U.S. deficit and debt ceiling as their #1 concern in the VIX and More weekly fear poll. Fears associated with governments and politicians polled a distant second, while ongoing worries related to weak corporate earnings finished in third place, one day before Alcoa (AA) unofficially kicks of the Q4 earnings reporting season.

The two issues that dominated the fear poll during the last quarter seem to have receded from the consciousness of most investors. While the legacy of the fiscal cliff lives on in the debt ceiling discussions, the immediate threat has passed. Meanwhile, in spite of warnings from the likes of Angela Merkel, concerns related to the European sovereign debt crisis remain at low levels and continue to decline.

On the institutional front, one of the residual effects of the fiscal cliff is a persistent worry that the fiscal cliff is merely a symptom of a dysfunctional bi-partisan government with a newfound affection for brinksmanship. On the other hand, worries about excessive central bank intervention are falling, no doubt helped in that regard by the recent FOMC minutes from the December 11-12th meeting.

With the VIX posting a record one-week decline last week, it is reasonable to conclude that investor worries about the fiscal cliff were of a much higher magnitude than those related to the U.S. debt ceiling and deficit. In fact, there are some divergent opinions about the relationship between the declining VIX and the fiscal cliff deal. For more on this subject, check out the comments from Jared Woodard of Condor Options in The Market Is As Nervous as Ever About Austerity Fetishisms, in which Jared picks up on a theme from a recent note by Alec Phillips of Goldman Sachs (GS).

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Friday, January 4, 2013

VIX ETP Performance in 2012

For anyone who pays attention to the VIX exchange-traded products space, 2012 was the year of the inverse (short) VIX futures ETP. The graphic below recaps the performance of the VIX ETPs that were trading as of the end of 2012 and it is easy to see that if you were long the inverse products (XIV, SVXY, ZIV, etc.) and were able to hold on to these positions during volatility storms such as the Greek elections, yield spikes on the sovereign debt of Italy and Spain, the fiscal cliff, etc. (all of which required nerves of steel and a creative risk management approach), then 2012 was a very good year for you. If not, then let the performance ups and downs be a reminder that most of the VIX ETPs are not well-suited for mainstream investors.

Instead of going into too much detail about the performance and reiterating much of what I have already said in the past, I encourage readers to investigate the links below, which include some predictions about future price moves and risk-reward ratios that have been borne out by the events of 2012.

If your new to this product space, perhaps the first place you should begin your research is with posts tagged with labels such as contango, roll yield and term structure – subjects that I have been writing about since the first VIX ETPs were launched, three years ago this month.

[Note that there are no performance numbers for VIXH or PHDG, as these products were launched during the year and have not yet accumulated full-year performance data.]

Related posts:

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

Wednesday, January 2, 2013

Guest Columnist at The Striking Price for Barron’s: The Case for Options Trading

Once again I am delighted to have an opportunity to serve as a guest columnist for The Striking Price on behalf of Steven Sears at Barron’s. While the title of the column is The Case for Options Trading, the focus of the article tilts in the direction of selling options and lists some of the reasons why new and relatively inexperienced options traders should invest some of their time during the coming year to learn more about selling puts and calls – and not just defined risk positions, but naked (uncovered) options as well.

The Barron’s article lays out some of the rationale behind my thinking, but this is a topic I plan to return to on a regular basis that dovetails with some related subjects I have been discussing in this space and are highlighted in the links below.

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

The Year in VIX and Volatility (2012)

Every year I assemble a chart that is my retrospective look at the year in volatility. While 2012 was the first year since 2006 that the VIX failed to make it out of the 20s, this was not due to an absence of threats to the stock market.

During the first half of the year, the euro zone was the primary concern for most investors, with the events surrounding the two nail-biting elections in Greece haunting the markets from April through June. With Greece off of the front page, focus of the European sovereign debt crisis shifted to unsustainable government debt yields in Spain and Italy, which only began to turn around after Mario Draghi pledged to do “whatever it takes” to save the euro in July.

Meanwhile, markets in the United States were relatively calm due to the repeated intervention of the Fed, which offered up QE 2.5, QE3 and QE4. The global economy also found support in the form of central bank stimulus plans from China, Japan and the euro zone.

The last hurrah for the VIX and volatility in 2012 was the fiscal cliff, which was largely overlooked during the U.S. elections, but dominated the headlines even before the last vote was counted. The fiscal cliff issue remained the #1 source of concern for investors throughout the balance of the year and had the VIX moving counter to its usual direction for most of December.

As 2013 dawns, fears related to the fiscal cliff are plummeting and dragging the VIX down with it, but clearly the issues that have kept the financial markets on edge for the past few years are not yet behind us and unseen risks are always lurking just over the horizon.


Related posts:

Disclosure(s): none

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