Tuesday, January 5, 2016

The Year in VIX and Volatility (2015)

Every year one of my most-read posts is my annotated overview of the year in VIX and volatility.  Now that I have been doing this for the past eight years, the aggregated view of volatility from 2008 to the present makes for a fascinating concise history not just of volatility, but more broadly of the financial markets and of economic activity in general.

The graphic below captures most of the highlights from 2015 and from a volatility perspective, it was a year for the record books.  During August we saw the largest one-week VIX spike (+113%) that resulted from unprecedented back-to-back days of VIX spikes of more than 45%!  The cumulative jump in the VIX pushed the VIX to a high of 53.29 – the only time outside of the 2008-09 financial crisis since the launch of the VIX in 1993 that the VIX has topped 50.



[source(s): VIX and More]

While most investors pointed to China as the proximate cause of the record VIX spike(s), a VIX and More fear poll one week after the big VIX spike also highlighted “market structural integrity (HFT, flash crash, exchange issues, etc.)” as almost on par with China concerns, with “market technical factors (breach of support, end of trend, etc.)” not that far behind.

The balance of the year saw a wide variety of events that moved the markets, including the Fed’s first rate hike in nine years; crude oil plummeting to $34/bbl.; shock waves in the high-yield bond market due to low oil prices; chilling terrorist attacks in Paris and in California; Puerto Rico announcing it will default on some of its debt; turmoil in the currency markets when the Swiss National Bank ended the peg of the Swiss franc to the euro; a dramatic boom-bust cycle in Chinese A-shares – and a flurry of ineffective interventions on the part of the Chinese government to restore stability; a proxy war between Saudi Arabia and Iran in Yemen; and the European Central Bank committing to $1.2 trillion of quantitative easing.

As noted previously, even with all of the volatility, Every Single VIX ETP (Long and Short) Lost Money in 2015.

Finally, since 2011, I have been maintaining a proprietary Macro Risk Index that measures volatility and risk across a broad range of asset classes, including U.S. equities, foreign equities, commodities, currencies and bonds.  In 2015, the Macro Risk Index was consistently higher than it has been during any year since the 2011 inception.

What does high volatility in 2015 mean for 2016?  During the past two weeks, Barron’s published two opposing (but not necessarily inconsistent) perspectives on volatility in 2016.  For the case for rising volatility and what to do about it, try Jared Woodard’s Prepare for Rising Volatility in 2016.  I provide the contrarian point of view in The Case Against High Stock-Market Volatility in 2016.


Related posts:




Disclosure(s): net short VIX at time of writing
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Sunday, January 3, 2016

Every Single VIX ETP (Long and Short) Lost Money in 2015

Just one month ago, in The Current VIX ETP Landscape, I plotted all twenty-four VIX exchange-traded products with respect to leverage and maturity, using leverage on the Y-axis and maturity on the X-axis.  I also included a half dozen VIX strategy ETPs that have no easily discernable point on the leverage-maturity grid.  Depending on how finely you wish to split hairs, these twenty-four ETPs cover approximately seventeen unique ways to trade volatility long and short, across various maturities and according to a wide variety of strategic approaches. 

The big story is that in 2015, not one of those VIX ETPs was profitable.  In fact, the mean VIX ETP lost over 21% for the year.  This means that in those instances where there are long and inverse pairs – notably VXX and XIV as well as VXZ and ZIV – both the long and short version of the same volatility trading idea lost money.

This all happened in a year in which the VIX fell a mere 5.2% from the beginning to the end of the year.  While contango was a factor during the course of the year, contango affecting the front month and second month VIX futures averaged a relatively mild 4.3% per month during the year, while contango between the fourth month and seventh month was slightly above average at 1.6% per month.

The biggest culprit affecting the declines were the huge moves in volatility, with three one-day VIX spikes of greater than 30% occurring in the space of two months.  The large volatility spikes had a considerable impact on end-of-day rebalancing, leading to volatility compounding price decay.

One last technical note, with respect to the AccuShares VXUP and VXDN products, I have yet to see AccuShares or anyone else attempt to calculate the performance of these products for 2015.  Given the chaos created by regular, special and corrective distributions, in addition to reverse splits and stock dividends, calculating performance for these two ETPs is not a project I have the inclination to tackle right now.  That being said, until I see the calculations, I cannot be 100% sure that VXUP had a losing year in 2015.  Consequently, in the event that VXUP did post a gain, this would be a good time for AccuShares to post some performance data and claim at least one public relations victory in this space.

To the broader audience, if you happen to be sitting on an idea for a VIX or volatility-based ETP that would have been a winner in 2015, this is an interesting time to consider moving forward with that idea.

Looking ahead, I will have a lot more to say about VIX ETP strategies, VIX ETP performance and related subject going forward.



[source(s): VIX and More]


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Disclosure(s): net short VXX and VIX; net long XIV and ZIV at time of writing
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Saturday, January 2, 2016

The Case Against High Stock-Market Volatility in 2016 (Guest Columnist at Barron’s)

About a month ago, when Steve Sears and Barron’s asked if I would be interested in writing the first The Striking Price of 2016 and share my perspective on what to expect in terms of volatility for 2016, I jumped at the chance.  I quickly made a list of more than two dozen reasons why I felt volatility is likely to rise in 2016 relative to 2015 levels and began to outline the case for why investors should be cautious about the financial markets in 2016.

Since then, every pundit has unveiled their 2016 crystal ball and almost without exception, the consensus is for a significant rise in volatility in the coming year.  While I certainly understand the rationale behind these calls for an increase in volatility in 2016, I can add little value to the dialogue by rubber-stamping the consensus opinion.  In fact, I am probably better off just pointing you to last week’s The Striking Price column, where former colleague Jared Woodard channels some of the more compelling of my two dozen plus higher volatility ideas in Prepare for Rising Volatility in 2016.

So, given that I hate overcrowded consensus trades, strongly believe that volatility is extremely hard to predict and am intimately familiar with data that shows market participants have a habit of overestimating future volatility in stocks, I decided that today’s Barron’s column should be The Case Against High Stock-Market Volatility in 2016.

Today’s column draws on a good deal of research and analysis I have present here in the past and also touches upon themes from some previous Barron’s columns.

Of course, one should take all of this volatility prediction stuff with a grain of salt, as back in May 2010 in Barron’s I was critical of the art and science of predicting volatility in The Perils of Predicting Volatility.

Related posts:


A full list of my (17) Barron’s contributions:



Disclosure(s): none
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