Sunday, November 30, 2014

How to Ride an Aging Bull (Guest Columnist at Barron’s)

Yesterday marked the fifteenth time I have served as a guest columnist for The Striking Price at Barron’s and How to Ride an Aging Bull is one of the few articles I have written for Barron’s that has not focused almost exclusively on the VIX and volatility.

In the Barron’s article I note that pundits have been calling this “the most hated bull market ever” for about three years and partly as a result of the mistrust of large bull moves, many retail investors have exited the market when they feared prices were getting ahead of themselves. As stocks have continued to rally, these same investors have had difficulty getting back in at even higher prices. Now, with 2015 just around the corner, quite a few of these investors believe stocks can continue to move higher and are wondering how they might be able to take advantage of a continued rally even though they believe the six-year bull is too long in the tooth.

An approach I discuss in the Barron’s article is one of seeking out value in underperforming sectors. In the article I cited the energy sector as the headline underperformer, but noted that while the energy sector ETP (XLE) is down 8.5% year-to-date, the metals and mining sector ETP (XME) is down 18.7% for the year. [Unfortunately, due to an editing snafu, the updated numbers I provided using data following the OPEC meeting were not incorporated into the publication.]

The XME March 33/38 risk reversal trade (short the March 33 put; long the March 38 call) cited in the Barron’s article uses strikes and prices that are quite stale now that OPEC has decided not to cut production. An updated version of the trade that would still generate a small credit would use the March 32 and 37 strikes, with a profit and loss chart that looks like the one below. Note that if XME is between 32 and 37 at expiration, the trade will generate a small profit. Should XME settle below 32 at expiration, the risk reversal (blue line) would lose about 2.24 less than holding the underlying (dotted gray line); if XME settles above 37 at expiration, the risk reversal gains would be about 2.76 less than if one had held the underlying.

XME March 2015 Risk Reversal 112914

[source(s): VIXandMore]

While metals and mining have had a difficult year, the recent rate cut by the People’s Bank of China and the anticipated near-term stimulus measures from the European Central Bank should provide a lift to metals and mining stocks. Other factors, including continued strong U.S. economic growth, could also bolster XME, which focuses mainly on steel, coal and aluminum for the U.S. market.

As noted in the Barron’s article, one could also make a similar trade with one of XME’s most liquid components, Alcoa (AA), where a short February 16/19 risk reversal has a similar profit and loss potential, yet taps into one of the metals and mining sectors, aluminum, that has been a very strong performer in 2014. As Alcoa’s options market is more liquid than that of XME, the single-stock version of this risk reversal should be considered as an alternative way of achieving similar exposure.

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

Thursday, October 16, 2014

Fear Poll: Fed/QE, Ebola and Technicals Top Worry List

Stocks may be in the process of putting in a bottom, but with the VIX hitting 31.06 yesterday at the same time VIX futures were setting new volume records, investor fear and anxiety is as high as it has been since the 2011 European sovereign debt crisis.

As the VIX and More Fear Poll results reflect, the current situation is particularly difficult for investors to grapple with because there is so much disagreement about what the biggest worry is and how some of these fears may be connected.

In the chart below, I have summarized the almost 400 votes from some 35 countries, with the U.S. accounting for 65% of all respondents.

It is worth noting that the responses appear to be somewhat headline driven, as yesterday Ebola topped the list of worries, only to be supplanted by concerns about the impact of the Fed ending quantitative easing and in so doing removing the safety net that has helped keep liquidity high, volatility low and investors more confident. I also find it particularly interesting that “market technical factors (breach of support, end of trend, weak internals, etc.)” are so important to a broad range of investors, which raises the question of whether technicals are more of a cause or effect in the recent downturn.

Looking at global economic weakness, slightly more investors expressed concern about the U.S. economy than that of the euro zone, with concerns about the Chinese economy a distant third.

In these types of polls, I am always interested to see how U.S. respondents differ from those outside of the U.S. In the current market environment, U.S. respondents tend to place more emphasis on the weak U.S. economy and the Ebola virus, while paying less attention to currency issues and China. Some of the detailed results certainly have a whiff of provincialism, yet it remains to be seen whether the global or Americentric perspective does a better job of honing in on what to focus on – a subject I will delve into at a later date.

For those who might be interested in the results of prior VIX and More Fear Poll data, the links below should be a helpful reference.

Last but not least, many thanks to everyone who participated in this poll, which I intend to periodically reprise as market conditions warrant.

VAM Fear Poll 101614

[source(s): VIX and More]

Related posts:

Disclosure(s): none

Monday, October 13, 2014

Largest SPX Pullback of 2014 Hits 6.4%

Every time there is a pullback, it seems as if I receive multiple requests for an updated version of the table below. With the S&P 500 index reeling and still trying to find a bottom, this looks like a good time to put the current pullback in the context of the 27 most significant peak-to-trough declines from new highs since the SPX bottomed in March 2009.

Note that the current 6.4% decline from the September 19th high of 2019 is roughly average in terms of duration, but makes it the second largest pullback in percentage terms since 2012, just eclipsing the January-February 2014 pullback, when emerging markets (EEM) and Crimea were weighing heavily on the minds of investors.

Keep in mind that as ugly has things have been in the SPX, the Russell 2000 small cap index (RUT) is down 13.8% since topping out in early July, while the NASDAQ composite index is down 8.5% since its mid-September top. Of course, some sectors have been hit even harder, with oil and gas exploration and production (XOP) down 33.3% from its 2014 high. Semiconductors (SMH) have declined 14.4% from their 2014 high, yet that high was established less than a month ago.

There is never an easy answer to the question of whether this has been enough pain to warrant a bottom, but after the events of the past week, all sorts of extreme scenarios now seem much more plausible.


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

Related posts:

Disclosure(s): none

Saturday, October 4, 2014

Song for My Father*

My father passed away this summer and in the intervening period I set aside my media hat. Before I formally return to the media space, I want to use this space to talk a little bit about my father.

My father was an eccentric man and sometimes a complete enigma even to those who were closest to him. For instance, while we share the same name, he insists that I was named not after him but his uncle Bill, who was a baseball player in his earlier years and later became coach, attorney and a judge. My father followed his uncle into the legal field, with his own twist, carving out his own niche as a modern-day country lawyer and advisor.

Outside of family and work matters, sailing, quantum physics and jazz were the three things my father was most passionate about. While part of the appeal of sailing was no doubt the escapist aspect of charting one’s one course – my father’s own moveable island – I have often thought that more than 90% of our father-son relationship and peer-to-peer relationship was formed while sailing together from Long Island Sound to Down East Maine. One particular trip that I often think about was a voyage from New London, Connecticut to Cape Cod Bay which was slowed dramatically by adverse currents and a lack of wind. Arriving very late one night at Cuttyhunk Island, we determined that the delays had almost entirely depleted our food supplies. After rummaging through the storage locker, my father declared that what remained were nine Saltine crackers and two bottles of wine. For dinner, he placed one bottle of wine on the table in front of me and pushed five of the nine crackers my way. I had begun that day as a 14-year-old boy, but when I woke up the next morning, I had no doubt that I was now a man. Several years later, we talked extensively about buying a Beneteau and sailing it back from Saint-Gilles-Croix-de-Vie, France, but this adventure never came to fruition.

Ironically, while my mother was a teacher, journalist and quite adept at communicating, my father preferred to use language as a puzzle, where he would leave a minimal number of clues and see if the recipient of those clues could find his or her way to the finish line. Dubbed “The Great Communicator” by some of those who spent extended periods in his verbal labyrinth, when he wanted to my father could be an expert writer or orator, but when he preferred to get overly creative with language, he typically lost most of his audience in a hurry.

As much as my father provided advice and counsel for countless family and friends, very little advice was aimed in my direction. One piece of advice I did hear over and over again was, “Keep your options open.” I have always attached a high degree of value to having options in life, but I often smile at the thought that a large part of what I do professionally is sell options to those who place a higher value on them than I do.  On a somewhat related note, when I was a child, my father was keen on having me play chess with him. I received no leniency, coaching, hints or advice of any kind while losing literally thousands of matches. Eventually, I was able to learn enough to win consistently and in the process also learned how to figure things out for myself, the value of tenacity and many other life lessons. Only after his passing did I find an old yearbook and discover that he was the chess champion at his high school. Needless to say, without his hand, I would never have developed some of the skills that I enjoy today.

Dad, wherever you are, I hope that the journey is smooth sailing and the wind is at your back.


[my father with my wife, Deborah, at the Cape Cod National Seashore, 2011]

Related posts:

Disclosure(s): none

*The title of this post also refers to one of my favorite jazzmen, Horace Silver, who wrote Song for My Father

Thursday, May 22, 2014

Low Volatility: How To Profit From a Quiet VIX (Guest Columnist at Barron’s)

Today I was once again a guest columnist at Barron’s, penning Low Volatility: How to Profit From a Quiet VIX for the venerable Barron’s options column, The Striking Price.  While this is my thirteenth turn as guest columnist, much to my surprise this is the firsts time that “VIX” has appeared in the title.  Since everyone seems to be talking about how low the VIX is, whether the VIX is broken, etc. I thought it would be an appropriate time to share some of my thoughts on the subject.

In the Barron’s article I make the point that while mean-reversion trades when the VIX spikes higher has been a viable strategy over the years, the mean reversion approach has not fared nearly as well when the VIX dives substantially below its long-term mean, which happens to be just a shade over 20.

As the chart below (monthly bars of the VIX) shows, most significant VIX spikes tend to be short-lived, but the VIX can remain well below the 20 level for multiple years in a row. Just look at 1994 – 1996 and 2004 – 2007 and think about the long-term viability of buying VIX calls or putting on a similar long volatility position during a period like this one, armed with the knowledge that eventually the VIX will have to revert to its historical mean.

VIX Macro Cycles 1990-2014


In fact, there have already been two instances (1990 – 1994 and 2002 -2007) in which the VIX declined steadily for a period of at least four years. With the most recent peak volatility in August 2011, it is not unreasonable to think about the possibility of volatility continuing to decline or at least tread water through at least August 2015.

While the Barron’s article does not give my options trade idea a label, it is a ratio risk reversal that contemplates selling VIX June 14 puts and (perhaps) investing the proceeds in twice as many VIX June 17 calls.

I encourage everyone to read the original article at Barron’s, but for those who might not click through, I will include my closing paragraph below:

“No matter what your market outlook, however, do not make the mistake of thinking that the VIX is no longer relevant, and be careful when it comes to equating a low VIX with complacency. The VIX has closed below 13 some 964 times – and almost all of these instances have been in the middle of a bull market.”

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

Tuesday, April 15, 2014

The Correction As Seen in the ETP Landscape

Since stocks bottomed in March 2009, I have periodically been publishing an SPX pullback table and occasionally a plot of all those pullbacks and their duration. The recent selloff in stocks, however, has been anything but an SPX pullback. I toyed with the idea of presenting comparable data for the NASDAQ Composite or NASDAQ-100 Index (NDX), but here again, the selling has been disproportionate in some areas of the NASDAQ universe, even though it has been hit harder than the SPX.

This time around I have opted instead for a chart that shows the peak-to-trough drawdown across the equity ETP universe, focusing on sector groups that I believe are among the most important to watch.

ETP Landscape 2014 DDs 041514

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

The data above cover only 2014 and indicate the maximum drawdown since the 2014 peak. While many of these maximum drawdowns are from earlier today, there are quite a few instances in which the maximum drawdown was established earlier in the year.

Note that while the NASDAQ gets most of the attention, it is the small caps (IWM) that have suffered the most among the major market index ETPs.

Not surprisingly, biotechnology (IBB), social media (SOCL) and Russia (RSX) have seen the largest declines, but among cyclicals, defensive stocks and European country ETPs, there is very little to choose from.

Finally, just for fun I have added four alternative ETPs with an equity flavor (SPLV, PBP, CWB and PFF) to show how low volatility, covered call, convertible bond and preferred stock ETPs have fared.

Related posts:

Disclosure(s): none

Sunday, March 30, 2014

CBOE RMC 2014: A Retrospective

Earlier this month, I had the pleasure of attending the CBOE Risk Management Conference (RMC) in Bonita Springs, Florida. Now that the conference is over and the CBOE has posted most of the presentations, I thought I would take a little time and offer a retrospective look at some of the content that caught my attention.

Before I do that, I am compelled to tip my cap to Russell Rhoads, whose indefatigable and prolific efforts were responsible for capturing many of the details of the conference. Russell’s posts and those of Matt Moran made it possible for anyone to have a virtual front-row seat throughout the proceedings. Their efforts in conjunction with the RMC are archived at the CBOE Options Hub with the CBOERMC tag.

From my vantage point, I thought it particularly interesting that the two keynote speakers, Martin Zonis and Carl Tannenbaum, had such divergent views about the potential risks and rewards in the U.S. financial markets in the coming years. Zonis placed most of his attention on political risk and foreign policy matters and declared that the markets were “underestimating volatility in future years.” While Tannenbaum expressed concern about banks in Europe as well as credit and real estate in China, he had a much more sanguine view of the future of the U.S. economy and financial markets.

Among the other presentations, I was particularly interested to hear Maneesh Deshpande provide an overview of the players and strategies used in volatility products during the course of the evolution of the VIX product platform. Deshpande described the VIX futures as a mature market, with liquidity and supply having shifted from commercial to con-commercial traders. He also indicated that demand for VIX puts has stagnated, while new entrants are increasing the demand for VIX calls. All of this has influenced how the VIX spikes and mean reverts, as well as how the VIX futures term structure has evolved.

Another particularly interesting session involved Ed Tom and John-Mark Piampiano, who tackled the subject of the volatility of volatility, invoking the likes of VVIX as well as the third and fourth derivatives of SPX implied volatility. At every conference at least one session gives you things to mull over long after the speakers are done and for me, this was the session that hit the high notes. Ed Tom’s presentation has not yet been posted, but he started his talk by decomposing VIX risk premium into realized volatility plus skew plus kurtosis and went on from there.

Sheldon Natenberg and Trevor Mottl were tasked with the subject of evaluating the volatility surface: skew and term structure. Not surprisingly, they were up to the task, with Mottl focusing on the role of money and credit in shaping the volatility surface. He indicated that the increasing size of the Fed’s balance sheet has depressed volatility across the board over the course of the past few years and expects that as the Fed’s balance sheet normalizes, the change in non-financial debt will become the most important influence on equity market volatility going forward. Mottl attributed the steepness of the VIX futures term structure to the uncertainty related to the Fed’s ability to be successful with its quantitative easing program. He also traced fluctuations in the skew of volatility to expectations related to the Fed’s tapering plans.

Among the other presentations I sat in on were:

  • a panel on volatility as an asset class (the consensus that volatility is more of a tool and in order to be thought of as an asset class needs to harvestable, allocatable and easier to benchmark; a separate thread was critical of the costs associated with traditional approaches to tail hedges)
  • a discussion of trading volatility across asset classes (included an interesting set of metrics and trade ideas)
  • a wide-ranging session on the design and trading of VIX and other volatility derivatives, which had a detailed explanation of the VIX settlement process as well as a discussion of VXST, which is expected to gain much more momentum when options on the index become available on April 10

Finally, I had an opportunity to sit down with Angela Miles of CBOE TV to offer my thoughts on the second day of RMC:


For those who may be interested, the 3rd Annual CBOE RMC will be held September 3-5, just south of Dublin, Ireland.  Since all of my ancestors trace their roots back to Ireland, I can’t imagine a better place to hear about the latest thinking in volatility and ponder the miracle of Guinness draught at the same time.

Related posts:

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

Saturday, March 29, 2014

The Turnaround in Emerging Markets and VXEEM

While I have a long way to go before I become the next Manny Mota, yesterday I was delighted to be able to pinch hit for Steve Sears of Barron’s for the twelfth time, when I penned Emerging Market Stocks: Have They Hit Bottom? as a guest columnist for The Striking Price.

In the Barron’s article I talk about how rapidly increasing uncertainty and risk in emerging markets during January was largely responsible for the 31.7% VIX spike on January 24, but was nowhere near the levels of June 2013, at least as measured by the CBOE Emerging Markets Volatility Index (VXEEM).

I also used the VXEEM:VIX ratio and some other data to support the idea that emerging markets have likely bottomed and are poised for a bounce. I concluded the Barron’s column with a couple of options trade ideas to take advantage of a reversal in emerging markets.

When I wrote the article, on Tuesday, my position on emerging markets was very much a case of going out on limb. By Friday’s publication date, which includes Tuesday’s option pricing data, emerging markets had already experienced a significant bounce and my emerging markets thesis no doubt sounded much less provocative than it would have three days earlier.

EEM SPY EFA 032814


In any event, I strongly believe that emerging markets (EEM) and VXEEM bear close watching going forward, as the Fed moves toward a new policy direction, emerging markets grapple with rising interest rates in the U.S. and the global economic growth story has many critical ripple effects across the full emerging markets landscape.

Related posts:

A full list of my Barron’s contributions:

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

Tuesday, March 18, 2014

CBOE Risk Management Conference Update

Today was the first full day of the CBOE Risk Management Conference and between the presentations, sidebar conversations and opportunities to meet and greet, I have to say that things hit full stride very quickly.

Today CBOE CEO Ed Tilly announced that the CBOE will roll out nearly 24 hours of trading, five days per week in VIX futures beginning on Sunday, June 22. This announcement follows another important announcement last week that options on VXST (the CBOE Short-Term Volatility Index) will commence on April 10. Clearly, things continue to move forward on the volatility product front and at the end of the year, I suspect we will lock back on these two developments as critical milestones in the volatility space.

Today I had the opportunity to listen to Marvin Zonis give a keynote address on “New Insights into Geopolitical Risk: Examining Geopolitical Risk Hot Spots and the Implications for Trading Strategies and Risk Management.” For anyone wondering about what it might take to drive the VIX higher over the course of the next few years, Zonis had a laundry list of grave concerns (Ukraine, Japan/China, Korean Peninsula, Pakistan, Iran/Israel/nuclear weapons, Egypt/Syria/Turkey, China, political stagnation, etc.) and summarized the situation by saying, “We are in the age of major, major political risk.”

Another featured speaker was Maneesh Deshpande, who talked extensively about the evolution of the demand for volatility products as well as the evolution of the supply for volatility products. Maneesh had a number of interesting observations about new players and new strategies in the volatility space. He also expressed concern about the crowded VIX short trade and the potential for the next crisis that does not mean-revert quickly to lead to a sharp second VIX spike as shorts scramble to cover their positions.

Also of interest was a two-part presentation with Dominic Salvino discussing VXST and other volatility index products (he expects interest in VXST futures will pick up dramatically after the options are launched in less than a month) as well as a detailed description of the VIX settlement process (VIX SOQ) by Bill Speth of the CBOE

Other sessions I attended today included:

  • a panel on volatility as an asset class that produced considerable debate on the proper answer to that question as well as a good deal of criticism of tail risk strategies
  • two speakers on trading volatility across asset classes that shared details on the methodology they use to generate trade ideas as well as quite a few cross-asset class pairs trades

Last but not least, I had the opportunity to meet quite a few people who have been regular readers of VIX and More over the years, many of whom nudged me to ramp up my posting frequency – which I certainly intend to do in 2014, starting this week.

Related posts:

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

Friday, March 14, 2014

VIX March Futures and Options Expiration on Tuesday, Not Wednesday

Just a quick reminder for those who may not be aware of it that the VIX futures and options expiration for March falls on next Tuesday, March 18th, not the typical Wednesday. This means that the VIX special opening quotation (SOQ) used to determine the March settlement price will be at the open on Tuesday and also the last trading day for the VIX March futures and options will be on Monday. With the speed at which things are developing in Ukraine and elsewhere, these 24 hours could turn out to be significant.

For those who are interested in a link to the VIX options expiration calendar, the CBOE maintains a 2014 options expiration calendar here, with the VIX expiration highlighted in a solid dark orange box. Note that I have a link to the CBOE options expiration calendar on the blog at the bottom of my VIX, Sentiment & Options section.

To review how the VIX expiration dates are determined, the VIX futures and options expire 30 days before the SPX monthly options expiration in the following month. These SPX options expirations are almost always on a Friday, therefore the VIX expiration is almost always on the Wednesday four weeks and two days prior to the SPX expiration. The complication factor for the VIX March 2014 expiration cycle is that on Friday, April 18, the CBOE is closed due to the Good Friday holiday, which pushes up the April SPX expiration to Thursday, April 17, with the result that the VIX March expiration is pushed up one day as well.

Last but not least, the VIX SOQ probably deserves a separate post in order to explain some of its unique characteristics, but it is worth noting that the VIX SOQ is not the price at which the VIX opens, but rather another separate calculation that takes place at the open.

Related posts:

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

Tuesday, March 11, 2014

CBOE Risk Management Conference, the VIX and Volatility Summit, Begins in One Week

The CBOE calls it the CBOE Risk Management Conference and I like to think of it as “The VIX Summit,” but by any name I am convinced that the 30th annual CBOE RMC (yes, it is even nine years older than the VIX) is the top conference of the year for anyone with an interest in the VIX, volatility and more broadly in the subject of risk management.

Kicking off one week from today, on March 17th in Bonita Springs, Florida, the CBOE RMC is the best place I can think of to interact with the top thinkers and practitioners in the volatility space. The speakers and the agenda are both top notch and as always, an abundance of fascinating ideas and information will flow freely outside of the formal presentations. Some of the sessions that sound particularly interesting to my ear include:

  • The Shifting Landscape of Volatility Products: Who is Doing What and Why, and What Should You Do About It?
  • Panel on Volatility as an Asset Class: What Options- and Volatility-Related Strategies are Institutional Investors Employing and Why?
  • Trading Volatility Across Asset Classes
  • Volatility of Volatility
  • The Volatility Surface:  Skew and Term-Structure
  • Listed Derivative Product Design and Trading

I encourage anyone with an interest in volatility to attend as this is an excellent place to find ideas to ruminate on and to master the art of volatility cross-pollination. After all, it is still a relatively small (but growing) group of aficionados that live and breathe volatility. Where else, for instance, can you find a bunch of like-minded souls who are already plotting how to implement VXST options strategies when these products have not even been launched?

Speaking of like-minded souls, if you have a moment, I encourage you to flag me down and say hello.

For those who are unable to attend, I will do my best to pass along some of the highlights from the conference.

Finally, for those who might be interested in a similar event on European soil, planning for the 3rd Annual CBOE RME-Europe is ongoing and at this juncture the odds favor a location that will appeal to those who are fans of links golf courses.

Related posts:

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

Tuesday, February 4, 2014

A Very Middling Pullback, So Far

Nary a selloff goes by these days without at least a handful of readers asking for an update of the SPX pullback table I have used to chronicle the pullbacks in the S&P 500 index since stocks bottomed in March 2009.

The table below captures the 24 most significant peak-to-trough declines from new highs during the course of what is now an almost five-year bull move:

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

Note that the current peak-to-trough decline of 6.0% puts the pullback in the middle (#11 of 24) of those pullbacks in terms of magnitude, though it is slightly lower than the 6.9% average (mean) pullback during the period, due to large selloffs in 2010 and 2011 that skew the average well above the median.

While the recent decline seems sharp, it actually progressed in two stages: a sideways to slightly down move for the latter half of January; and a sharper decline at the end of January and the beginning of February. If one were to plot the magnitude of the current pullback against the duration of the peak-to-trough move, it would like exactly on the trend line which can be found on the plot in All About the Pullback from 1687. In other words, the current pullback, should it stop at SPX 1739, is very middling in almost all respects.

That being said, a mean pullback of 6.9% would take the SPX down to 1723 and a pullback matching the 21.6% decline from 2011 would take the SPX all the way back to 1451 – a level not seen since early January 2013.

Right now the SPX is at 1757 and has about a 1% buffer over yesterday’s low. While emerging markets are bouncing back nicely today, anything can happen following the release of Friday’s nonfarm payroll data.

Related posts:

Disclosure(s): none

Friday, January 31, 2014

VXX and VXZ Now Five Years Old!

In the midst of all the emerging markets turmoil, I wanted to take a moment to acknowledge the fifth birthday of the two pioneering VIX ETPs : VXX and VXZ. Launched five weeks before stocks hit their 2008-09 financial crisis bottom, both VXX and VXZ have struggled against a tide of falling volatility over the course of the past five years and have also been battered by persistent contango in the VIX futures, which has created additional head winds in the form of negative roll yield.

The table below captures the grim history of these two products, looking at product lifecycle years from January 30th to January 30th:

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

Note that even though each of the five years have been losing years for both products, there have been periods in which these products have been extremely strong performers. One of these periods was from July to October 2011 when VXX nearly tripled (maximum gain of 198%) and VXZ rallied some 66%. I mention this because both have performed well in January, with VXX up 13.0% as I type this and VXZ with gains of 2.2% for the year.

While I am not going out on a limb and predicting a renaissance for these two VIX ETPs, they are two of the most important and liquid VIX ETPs on the market and can be attractive hedges or speculative trades when the markets go through a period of selling and/or there are concerns about a potential crisis.

I have been writing about these even before they were launched and will continue to offer my thoughts on them going forward.

Related posts:

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

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

Sunday, January 26, 2014

Performance of VIX ETPs in 2013

A number of readers have asked me to recap the performance of the VIX ETPs in 2013 according to the leverage/maturity grid I have been publishing for several years.

The graphic below should look familiar to long-term readers and measures the performance of all VIX and volatility ETPs for 2013, including dividends. (Two exceptions are TRSK and SPXH, which have data going back to June 24, 2013 and as such, the closing price on that date is treated as the opening price for 2013.)  This time around I am going to refrain from most editorial comments, yet point out that the data bears a very strong resemblance to what I presented in VIX ETP Performance in 2012.  It is also worth noting that just because there were similar numbers in 2012 and 2013, one should not expect these patterns to repeat on a regular basis. In Performance of VIX ETPs During the Recent Debt Ceiling Crisis, for instance, I present a very different set of data that students of volatility should also pay close attention to.

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

For a more detailed discussion of the performance drivers of various VIX ETPs and for additional performance data and commentary, the links below should provide an excellent jumping off point.

Related posts:

Disclosure(s): none

The Year in VIX and Volatility (2013)

This is the sixth year in a row I have offered a retrospective look at the year in VIX and Volatility, which is my attempt to cram the highlights of the year in volatility onto one graphic with a manageable amount of annotations.

In terms of equity volatility and specifically the VIX, 2013 was the story of a persistent bull market in stocks and very little in the way of implied or realized volatility, at least by historical standards. In fact, the VIX’s high water mark of 21.91 was the second lowest annual high point since 1995, eclipsed only by the Greenspan liquidity flood in 2005. Similarly, the average VIX in 2013 was just 14.23, considerably lower than the long-term average, which is a shade over 20. The year only saw two days in which the SPX was up 2% or more and another two days in which the SPX was down at least 2%, the fewest number of such days since 2006.

Even though the numbers may not be impressive, there were still some significant events during the course of the year that were able to provoke substantial anxiety and fear, at least for the short-term. The year began with the Fiscal Cliff drama coming to an end and saw fear in the euro zone heat up after the Italian elections ended with a parliamentary deadlock and Cypriot banks triggered a joint EU/IMF bailout of Cyprus. The Boston Marathon bombings provided a jolt of terrorist fear in April and fears about Japan the future of Abenomics created huge volatility in the yen, with ripple effects felt across currency markets and in many related financial markets during May and June.

In the U.S., the Fed tapering scenarios dominated the investment landscape during the second half of the year and the debt ceiling crisis, government shutdown and entrenched bipartisan bickering cast many doubts about the potential for some huge self-inflicted wounds.

In the end, the SPX set 44 new all-time closing highs in 2013 and the VIX ended the year almost 24% below where it finished in 2012, though the Fiscal Cliff was responsible for most of that gap.

[source(s): VIX and More]

So far 2014 looks more interesting from a volatility perspective, but the year is young and the volatility story is always one of surprises in the form of swans with dark gray plumage.

Related posts:

Disclosure(s): none

Top Posts of 2013

Every year I tabulate the most-read posts in this space as a way to monitor the issues that are resonating with readers and also to see how these issues evolve over time. These most-read posts also serve as easily accessible repositories of high-quality material for the benefit of new readers and long-term readers alike.

The top themes from 2013 echo some top themes that resonated with readers from previous years, including continued interest in VIX spikes and SPX pullbacks, as well as the VIX ETPs, low volatility ETPs, the Fed, interest rates and various global flash points, such as emerging markets.

The posts below represent those that have been read by the highest number of unique readers during 2013. Farther down there are links to similar lists going back to 2008, 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. I find it interesting that ten posts from 2013 made it into the hall of fame – a record for any single year. Part of the reason for this is that while my total number of posts for 2013 was low, I favored quality and more in-depth analysis than pithy commentary, most of which I have migrated to my Twitter handle feed, @VIXandMore

The most-read posts on VIX and More in 2013 were:

Related posts:

Disclosure(s): none

Thursday, January 2, 2014

Was the VIX Too Low in 2013? No…

There was a time when investors would generally fret about the VIX being “too high” and the resulting possibility that there was some sort of unseen threat to the financial markets that was not showing up on their radar. In the last few years, the situation has reversed and now I find investors expressing more concern about a low VIX more often than a high VIX. Yes, there are some (many, actually) who start to get anxious and fearful when the markets are not reflecting as much anxiety and fear as they think they should. For those who still think about the battle scars from 2008, this phenomenon seems to be a recurring issue.  (See my posts on disaster imprinting for more information on this.)

So…was the VIX too low in 2013? In order to answer this question, I am updating a chart I last presented in October 2012 in Ratio of VIX to Realized Volatility Higher than Any Year Since 1996.

As the chart shows, both the (mean) VIX and 10-day historical volatility (HV) of the S&P 500 index were are relatively low levels during 2013. More importantly, the VIX maintained an average premium of 34% to the 10-day HV of the SPX during the year, which is right in line with historical norms going back to 1990 of a premium of about 35%.

[source(s): CBOE, Yahoo]

While I have used data provided by the CBOE going back to 1990 in calculating historical norms, I think it is worth noting that from 1990-1996, the VIX typically had a much higher premium relative to historical volatility in the SPX than it has in more recent years, so whereas the long-term VIX premium to HV stands at about 35%, the post-1996 average premium is closer to 26%. As a result, if you really need to drive home the point that the VIX was “too low” in 2013, you can always trot out the post-1996 data, but otherwise consider the VIX to be just about exactly where it should have been – at least in relation to historical volatility – during the past year.

Last but not least, the chart also illustrates that while the VIX and SPX HV do have a tendency to trend over the course of several years, the ratio of the two has a much more random movement and is therefore much more difficult to predict for 2014.

Related posts:

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

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