VIX and More: February 2013

Thursday, February 28, 2013

The Options and Volatility ETPs Landscape

For several years I have publishing a graphical overview of the VIX ETPs landscape, with all the ETPs plotted on the basis of leverage and target maturity, such as the recent VIX ETP Returns for 2012.

Lately, however, an expanding crop of options and volatility ETPs has been taking root in a space that is closer to the VIX products than any of the other ETPs. I talked about the low volatility ETPs at some length in yesterday’s Beyond SPLV: The Expanding Universe of Low Volatility ETPs.

The graphic below is a plot of these securities, with the their geography, market cap and asset class in the rows and strategy/approach in the columns. I have talked about PBP in this space and was particularly interested to see that the buy-write / covered call approach is now being applied to gold in the form of the recent launch of GLDI.

Part of what prompted today’s approach is the launch of U.S. Equity High Volatility Put Write Index ETF (HVPW), which is the first put-write ETP on the market. I have talked about put-write strategies and the CBOE S&P 500 PutWrite Index (PUT) at some length here in the past and have included some links below for additional reading.

In the convertible bond space, CWB has been the most popular ETP in this space for the last few years. Earlier this week, PowerShares closed its competing Convertible Securities Portfolio ETF (CVRT), essentially ceding this space to CWB for now.

The other portion of the graphic below is my attempt at translating much of yesterday’s text into a format that makes for a more handy reference.

I will keep tabs on all of these ETPs going forward and in particularly look to see how HVPW and GLDI do in terms of both risk-adjusted performance and investor acceptance. I certainly hope it does not take investors as long to discover these products as it did for them to warm up to the likes of ZIV.

Disclosure(s): long PBP at time of writing

Wednesday, February 27, 2013

Beyond SPLV: The Expanding Universe of Low Volatility ETPs

The spike in volatility that hit a climax on Monday has apparently passed with the swiftness of a summer thunderstorm. Of course, as I explained more than six years ago in What My Dog Can Tell Us About Volatility, things are never really quite the same after the storm passes, which is why we often encounter a phenomenon I call echo volatility.

Most investors – and I know I am the exception here – do not like volatility and actively seek out strategies that minimize the volatility of their portfolios. This low volatility approach has a great deal of merit and a fair amount of academic studies to support the rationale behind low volatility investing. For those who might not be interested in wading through the academic literature, the chart below shows how SPLV has significantly outperformed SPY since its launch, with substantially less volatility along the way.

Since the exchange-traded revolution began, investors have been blessed with a variety of low volatility sector ETPs, such as utilities (XLU) and consumer staples (XLP) as well as a strong selection of value-oriented ETPs (e.g., IWD and VTV) and dividend-focused ETPs (e.g., VIG, DVY and SDY), but it was not until May 2011 that there was an exchange-traded product that specifically target low volatility holdings. Enter the PowerShares S&P 500 Low Volatility Portfolio ETN (SPLV), which immediately began attracting a following and now has $3.4 billion of assets. SPLV had the benefit of being first to market, but its success has prompted the launch of many similar products, of which the most successful has probably been the iShares MSCI USA Minimum Volatility ETF (USMV). Since then, PowerShares and iShares have expanded their product line of low volatility ETPs to cover international stocks (EFAV,ACWV, IDLV) and emerging markets (EEMV, EELV).

The newest battleground in the low volatility race is a U.S. market cap focus, with the launch by PowerShares of the PowerShares S&P Mid Cap Low Volatility Portfolio (XMLV) ETN and the PowerShares S&P Small Cap Low Volatility Portfolio (XSLV) ETN earlier this month. I mention these two new entrants because the distinction between these two and SPLV is much more than the market cap. Indeed, the differences in sector weighting are at least as substantial as the differences in market cap. Starting with SPLV as a benchmark, here the current sector weightings are 31% utilities, 24% consumer staples and 15% financials. In contrast, XMLV is weighted with 51% financials, 24% utilities and no other sector representing more than 8% of the portfolio. Not too dissimilar is XSLV, which is weighted 50% in financials and 16% in utilities. The bottom line is that these two new products are not just smaller cap versions of SPLV, but portfolios with a strong financial component, very little exposure to consumer staples and more exposure to sectors such as information technology and industrials, so the redundancy between SPLV and either XMLV or XSLV is smaller than one might expect.

Aggressive and conservative investors alike should make an effort to have a portion of their portfolio dedicated to lower volatility instruments. While more traditional sector, value and dividend approaches still make some sense, the expanding menu of targeted low volatility products certainly deserve a long look as well – preferably before the next big volatility storm.

[source(s): ETFreplay.com]

Disclosure(s): none

Tuesday, February 26, 2013

Record VIX Options Volume and Large Purchases of VIX Calls

With about a half hour left in today’s trading session, purchases of VIX options are unusually high – much higher than yesterday. As I type this, over 855,000 VIX calls have been traded, with today likely to see the highest VIX call volume since the August 2011 market panic. Data from LivevolPro indicate that 28% of VIX call transactions are being bought on the ask, versus 16% sold at the bid, reflecting a lack of price sensitivity on the part of the buyers of VIX calls, who are the driving force behind these transactions. All told, a record 1.3 million VIX options contracts have been traded, breaking the old record of 1.22 million from September 11, 2012.

Note also that while the VIX’s implied volatility has been on the rise as of late, at its current level it is in the middle of its 2012 range.

The equities market may feel more orderly and composed today, but in the options market, there are signs of increasing anxiety and concern.

[source(s): LivevolPro.com]

Disclosure(s): neutral position in VIX via options; Livevol is an advertiser on VIX and More

Updated SPX Pullback Summary Table for SPX 1485

One of the graphics that I receive many request for and is my SPX pullback summary table. This table starts with the bottom in the SPX in March 2009 and tracks all meaningful peak-to-trough pullbacks from various new highs in the SPX.

Last week’s new high of SPX 1530.94 and this week’s selling have given me an excuse to update that table with current data – and I have taken the liberty of assuming that the SPX low of 1485.01 from earlier today holds up for now. Using this data, of the 19 pullbacks in the table below, the mean duration is 19 days and the mean pullback is 7.3%. For comparison sake, the medians are considerably lower at 7 days and a 5.6% drawdown.

Extrapolating from these averages, a mean pullback would bring the SPX back to 1420, while a median pullback would suggest a downside target of 1446. Of course these are just averages; a repeat of the 21.6% pullback from 2011 would put the SPX back exactly at 1200.

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

A Look at the Pullbacks of the 2009-2012 Bull Market (includes a scatter plot of all pullbacks)

Disclosure(s): none

Monday, February 25, 2013

Best VIX Conference of the Year? Try the CBOE RMC

Since everyone wants to talk about the VIX right now and I often get asked what the best conference is for the VIX and volatility aficionado, I should note that my favorite VIX conference, the 29^th Annual CBOE Risk Management Conference (RMC), begins this Sunday and runs through Tuesday. The conference is being held in Carlsbad, California (about 30 miles north of the San Diego airport) at the Park Hyatt Aviara Resort.

The CBOE offers the following description of the RMC:

“The RMC is an educational forum where end users of equity derivatives discuss new policies, strategies and tactics to manage risk exposure and enhance yields. The conference provides an ideal setting for institutional users and prospective users of exchange-traded derivatives to network with their peers, exchange ideas and learn the latest information about new products and risk management strategies.

Whether you're interested in learning the latest risk management techniques or simply mastering the fundamentals, the Risk Management Conference™ is a valuable opportunity to learn from some of the top traders and strategists.

With topics ranging from basic derivatives applications to advanced trading concepts, the RMC is a must for financial professionals who need to stay current with industry trends and learn how to effectively use the latest risk management tools and strategies. Now more than ever, the CBOE Risk Management Conference is a conference you must attend.

RMC sessions are led by top industry practitioners and researchers - no sales pitches - and it is the only conference of its kind featuring a comprehensive options and futures educational series.”

For more information, you can check out the CBOE RMC agenda and register from any page on the site.

While I was unable to attend last year’s conference, I was impressed by the 2011 event and have the RMC as my only ‘must go’ conference for each of the coming years. On second thought, the CBOE did sponsor the CBOE RMC – Europe in County Wicklow, Ireland last September and if the European version of this conference comes around again this year, I might have to rethink my priorities.

I will be the Carlsbad conference at the end of this week. If you would like to say hello, just look me up or drop me note.

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

All-Time VIX Spike #11 (and a treasure trove of VIX spike data)

Today was one of those days that caught a lot of people off guard. Halfway through today’s trading session stocks we largely unchanged, then some pockets selling began when results of the elections in Italy started trickling in, suggesting the possibility of a deadlock in the Italian parliament and perhaps the need for another round of elections.

The governmental chaos is largely the result of rise of two intriguing political figures. One of these is the phoenix known as Silvio Berlusconi and his People of Freedom (PDL) party, which is anti-austerity and has proposed a policy of massive tax cuts and talked about the possibility of leaving the euro. The bigger electoral surprise is Beppe Grillo and the Five Star Movement (M5S), where Grillo’s populist agenda and anti-corruption message have resonated with voters. Both Berlusconi and Grillo have had a much stronger influence on the elections than most had anticipated and with Italy’s relationship with the euro zone now in question, the euro fell to under 1.31 against the dollar for the first time in six weeks.

U.S. stocks, which had seemed impervious to the sequestration threat, began selling off sharply as a result of the confusion about the future of the Italian government, with selling gathering steam during the second half of today’s session and accelerating sharply during the last hour, when the S&P 500 index fell more than 1% and the VIX spiked 14.4%.

For the full day, the SPX was down 1.83% and the VIX was up 34.02%. The 34% spike in the VIX makes it the eleventh largest one-day spike in the 24 years of VIX historical data going back to 1990.

The first question on everyone’s mind is what the implications of the VIX spike are for stock prices and volatility going forward. The truth is that the historical record following a large one-day VIX spike is somewhat spotty. The table below captures some data from the top 20 one-day VIX spikes. Note that on average (here is where I like to remind everyone that it is possible to drown crossing a stream that is one inch deep ‘on average’) stocks generally outperformed following a big VIX spike for up to one week (SPX ROI +1 to +5 days) and also performed well looking out more than two months. From one week to two months, however, stocks have underperformed following a large VIX spike.

Note that the table below is based on a small data set and if one extracts subsets of this data for the VIX at certain absolute levels or during selected periods or even relative to the magnitude of the change in the SPX, it is possible to draw some very different conclusions. Part of the reason for this may be due to the sample size and part of the answer may be that a clear-cut interpretation of this data is not easy to extract. For these reasons, I have included a fair amount of relevant data and encourage readers to draw their own conclusions.

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

For those who are interested in more conclusive research and analysis on VIX spikes, volatility and other subjects related to today’s events, the links below are an excellent place to start.

Disclosure(s): short VIX at time of writing