Flight-to-Safety ETP Performance During Invasion of Ukraine

Russia invaded Ukraine a little over a month ago, creating turmoil and panic in stocks and across a wide variety of asset classes and instruments. 

In the graphic below, I capture the performance of ETPs covering a variety of traditional flight-to-safety instruments that are used to de-risk or hedge an equity-centric portfolio.  These include: 
SHY: 1-3 Year Treasuries (solid red line)
GLD: Gold (dark purple line)
UUP: U.S. Dollar (light green line)
FXY: Japanese Yen (violet line)
FXF: Swiss Franc (light blue line)
VIXY: Short-Term VIX Futures (black line)

Note that normally I would use VXX, but the price distortions due to the suspension of new creation units makes VIXY a more accurate measure.

The graphic shows that none of the ETPs above turned in particularly strong performance.  Long volatility has been the best performer for the first two weeks, but is now down more than the S&P 500 Index, with a loss of over 12%.  The top performer for the entire period is gold, which has had a fairly steady if unremarkable return during this period.  The second-best performer is the dollar, which has seen a steady upside, but has consistently trailed gold.  Three ETPs have also generated losses, following a slight uptick the first few days.  The worst performer has been the Japanese yen and the other underperformers have been the Swiss Franc and 1-3 Year Treasuries.

All in all, these traditional or generic hedges have been a disappointment.  In my next post, I will look at some hedges that are better suited to the Russia-Ukraine situation and have delivered much better results.

[source(s):  StockCharts.com]

Further Reading:
Safe Haven Options Shrinking?
Chart of the Week: Flight-to-Safety ETPs
Revisiting the Flight-to-Safety Trade
Chart of the Week: The Flight-to-Safety Trade
Why Not Point Hedges?
Forces Acting on the VIX
A Conceptual Framework for Volatility Events

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): Net short VXX and long GLD and SHY at time of writing

ETPs Turn to Selling Options to Generate Income

Not long after I penned The Options and Volatility ETPs Landscape, Credit Suisse (CS) added another buy-write / covered call ETP to the mix: the Credit Suisse Silver Shares Covered Call ETN (SLVO).

With SLVO, Credit Suisse is essentially extending the methodology they pioneered with the Credit Suisse Gold Shares Covered Call ETN (GLDI). In the case of both GLDI and SLVO, the ETPs are selling covered calls against the underlying commodity ETF for gold (GLD) and silver (SLV) in an effort to generate some income, and in so doing, choosing to forego some upside potential. In both instances, the ETP starts selling covered calls with 39 days until expiration and completes the sales with 35 days to expiration. One month later, the ETP buys these covered calls back over a period ranging from five to nine days prior to expiration. The net proceeds of these covered call transactions are then paid out as a monthly dividend. This dividend payment is not guaranteed and can fluctuate substantially from month to month. In the first four months following its launch, the monthly dividend for GLDI has been 0.1146, 0.0724, 0.1319 and 0.0572.

As silver is generally much more volatile than gold, SLVO elects to sell calls that are 6% out-of-the-money, while GLDI sells calls that are only 3% OTM. Other than this difference in strike selection or moneyness, the strategies employed by GLDI and SLVO are essentially the same.

Of course, covered call strategies work best when the price of the underlying is flat or when the underlying is appreciating slowly. During the recent sharp drop in GLD and SLV, the covered calls did provide a small amount of downside protection, but with GLD falling 13% over the course of just two trading days last month, the downside protection offered by a covered call was barely more than a rounding error. Covered calls and buy-write strategies generally outperform a long position in the underlying in all instances except when the underlying experiences a strong bull move.  (See graphic below for details.)

Thinking more broadly, the introduction of GLDI and SLVO should reinforce the idea that with ETPs now spanning a wide variety of asset classes and alternative investments, covered call strategies can be implemented in many non-traditional ways. The most popular of the traditional methods is PowerShares S&P 500 BuyWrite (PBP), which sells covered calls against the popular equity index. There is no reason, however, why there cannot be a similar product that sells covered calls against more volatile groups or sectors, such as emerging markets (EEM), small caps (IWM) or semiconductors (SMH), just to name a few. One can even bring alternative assets under the covered call tent. I’m not talking just about the likes of crude oil, copper or corn, but why not have covered calls on real estate, currencies or even volatility ETPs?

Better yet, why stop at covered calls? A strategy that I have discussed here on a number of occasions is selling cash-secured puts. The recent launch of U.S. Equity High Volatility Put Write Index ETF (HVPW) brought the put-write strategy into the ETP marketplace.  It is unfortunate that put-write strategies have not found a wider audience at this point or they too would be ripe for extending beyond the comfortable confines of the S&P 500 index.

Assuming this market eventually stops going up almost every day, investors are going to have to look for other ways to grow their portfolio and the scramble for yield will no doubt intensify. With ETPs now selling options to generate income, investors may want to look at some of the shrink-wrapped products mentioned above or consider how they might wish to implement similar strategies on their own.

[source(s): StockCharts.com]

Related posts:

• The Options and Volatility ETPs Landscape
• Opportunities Arising from Unusually Low Volatility in Gold
• Recent Developments in Gold and Gold Volatility
• Silver Volatility Rises Over 50
• Is Volatility a Better Play for Silver than Direction?
• Covered Calls Finish Strong in 2011
• The Value of Selling Covered Calls
• Surfing for Weekly Buy-Write Trades
• Sideways Markets, Covered Calls and the RUT
• BEP and the Joy of Covered Call Funds
• One Approach for Volatile Sideways Markets
• The Often Overlooked Put Writing Strategy
• Graphical Comparison of Performance of PutWrite and BuyWrite Indices
• More on PUT Returns

Disclosure(s): long GLDI and HVPW at time of writing

Safe Haven Options Shrinking?

Back in February, in Chart of the Week: Flight-to-Safety ETPs, I examined the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade: volatility (VXX), gold (GLD), crude oil (USO), the dollar (UUP) and U.S. Treasuries (TLT). At that time, the Arab Spring was considered to be the main risk to portfolios and I noted that with the exception of crude oil, none of these supposedly safe havens had been profitable for the first two months of the year.

Ten months later the risk landscape is a much different one and TLT (+33.7), GLD (+10.2%) and VXX (+8.4%) have all lodged fairly impressive gains. While the dollar is flat, the picture in crude oil depends on where you look, with USO down 6.0% and BNO (a much better measure of global crude oil prices) up 15.7%.

So while it seems as if the safe havens have had a good year, a large part of that picture has changed during the first two weeks of December. Most notably, implied volatility, gold and crude oil have declined sharply in concert with stock prices, with all three acting as ‘negative hedges’ and adding insult to injury for those who were looking to cushion losses instead of exacerbate them.

Of the big five flight-to-safety vehicles, this leaves just U.S. Treasuries and the dollar as having been successful during the first half of December. With rates on the U.S. Treasuries at all-time lows and seemingly everyone waiting to time the Bill Gross short trade better than the bond master himself, this leaves only a currency that is less debased than most of its competition.

So where is the safe haven? Not too many years ago, many thought real estate was the best safe haven.

Right now one interesting short-term play is EUO, the ProShares UltraShort euro ETF, where the ETFs objective is to move -2x the daily direction of the euro.

Related posts:

• Chart of the Week: Flight-to-Safety ETPs
• Revisiting the Flight-to-Safety Trade
• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: VXX Celebrates 2^nd Birthday
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events

[source: StockCharts.com]

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

Chart of the Week: Flight to Safety ETPs

It has already been an interesting year for students of market sentiment, volatility and geopolitical influences on financial markets. We have seen revolutions of various sizes and shapes in the likes of Tunisia, Egypt and Libya, with smaller uprisings in Bahrain, Algeria and elsewhere in North Africa and Middle East. For the most part, volatility in the equity markets has been rather muted prior to the Libyan revolution and its influence on crude oil prices.

In this week’s chart of the week, I examine the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade. They include volatility (VXX), gold (GLD), oil (USO), the dollar (UUP) and U.S. Treasuries (TLT).

Note that with the exception of crude oil, the political unrest in North Africa and the Middle East has not been disruptive enough to make these trades profitable ones in 2011, though there has been an uptick across the board since violence heated up in Egypt on January 25^th and in Libya starting on February 15^th. The VXX chart does an excellent job of capturing the nature of the VXX gambit. Even with the geopolitical turmoil and spike in crude oil prices, this ETN is still down 16.2% on the year. The volatility spikes have provided VXX longs with very short-lived opportunities to capitalize on heightened market anxiety, with the chart reflecting the continued downward trend and high volatility in this ETN. [As an aside, a similar chart swapping VXZ for VXX would show very little difference in terms of performance.]

So the next time you think about a long volatility position in the context of a geopolitical crisis, give some strong consideration to some alternative flight-to-safety plays.

Related posts:

• Revisiting the Flight-to-Safety Trade
• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: VXX Celebrates 2^nd Birthday
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events
  

[source: ETFreplay.com]

Disclosure(s): long VXZ, short VXX, USO and TLT at time of writing

Opportunities Arising from Unusually Low Implied Volatility in Gold

Gold sure seems like it has been acting more than a little crazy lately, with the commodity recently hitting new highs and threatening the 1300 level and ETFs for physical gold (e.g., GLD) and gold miners (e.g., GDX, GDXJ) attracting a great deal of attention.

If you listen to the media, a number of extreme positions are being bandied about, ranging from gold going to 10,000 to being described yesterday as the “ultimate bubble” by billionaire hedge fund guru George Soros.

With such strong convictions and emotions riding on the gold trade, this is the type of environment in which one would expect to find extreme volatility. Instead, the exact opposite has been unfolding. As the chart below demonstrates, during the last month the 20-day historical volatility in gold (dotted green line) has dropped to its lowest level in several years. At the same time, the CBOE’s gold volatility index (GVZ), which measures 30-day implied volatility expectations for GLD, has been making all-time lows. GVZ, which has been calculated since June 2008, established a new all-time low on Monday when it closed at 16.69.

With two strong divergent opinions on gold and low implied volatility levels, this could be an excellent time to buy options in order to establish speculative long or short positions in the metal.

In addition to gold’s speculative potential, investors looking for a portfolio hedge or even just a little portfolio diversification might also find gold options to be an attractively priced addition to one’s portfolio at current prices.

Related posts:

• Recent Developments in Gold and Gold Volatility
• Recent Gold Volatility
• Gold and Gold Volatility
• Chart of the Week: Gold
• Three Fear Indicators (or…The Three Baritones)
• The Evolution of the Volatility Family Tree

[source: CBOE, Yahoo]

Disclosure(s): long GDXJ at time of writing

Revisiting the Flight-to-Safety Trade

Once again the S&P 500 index approached the precipice at 1040 and for now at least has backed away and found a little breathing room.

With anxiety running high, investors have embraced the flight-to-safety trade once again. The current preference is for U.S. Treasuries, the dollar (UUP), and to a lesser extent, gold (GLD).

While the most conservative plays are necessarily on the short end of the U.S. Treasury yield curve (represented by ETFs such as SHV and BIL), note that in the chart below I have included the long bond ETF (TLT) to provide a higher volatility bond for comparison purposes. The trend is fairly well established at this stage. Of the flight-to-safety vehicles, U.S. Treasuries are attracting the most interest (perhaps due to deflationary concerns), followed by gold, with the dollar the least enticing alternative, today’s 0.8% rally notwithstanding.

Not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a speculative bear market play or a hedge than a flight-to-safety alternative. During the period from the April 23^rd high through yesterday (June 28^th) VXX is up 53.4%, with a volatility level of 94.5.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: 10-Year Treasury Note Yield
• Yield Curve Looks Just Like May 2003
• The Battle for Bond ETF Supremacy

[source: ETFreplay.com]

Disclosure(s): short VXX at time of writing

Chart of the Week: The Flight-to-Safety Trade

This week’s chart of the week looks at some of the various flight-to-safety trades that investors have been taking advantage of since the recent closing high of 1217 in the S&P 500 index from April 23^rd.

In the chart below, note that first gold (GLD) and then the dollar (UUP) peaked as hedges against stock declines. More recently, U.S. Treasuries have been the favored flight-to-safety vehicle, with the long bond ETF (TLT) outperforming the other two alternatives and shorter-term Treasury ETFs such as IEF, not shown, attracting quite a few buyers.

Also not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a hedge than a flight-to-safety alternative. During the last month VXX is up 81.3%, with a volatility level of 113.6.

[source: ETFreplay.com]

Disclosure(s): short VXX at time of writing

Recent Developments in Gold and Gold Volatility

With the price of gold topping $1000 per ounce today for the first time since February, there has been a great deal of discussion about gold prices and the volatility of gold prices.

While there is no disputing that gold prices are high (today they also matched their 52 week high), the comments I have seen about elevated volatility in gold are not supported by the numbers. In fact, the CBOE’s gold volatility index (GVZ), which is sometimes known as the “Gold VIX,” closed today at 26.97, which is in just the 20^th percentile of the GVZ’s range since the index was launched in June 2008. This means that the implied volatility in the gold ETF (GLD) is not pricing a large move in the commodity in the coming months.

Looking back at historical volatility, the numbers show volatility at historically low levels. A week ago today, for instance, GLD set a new record low for 20-day historical volatility. While historical volatility has risen slightly in the last week, it is still only in the 6^th percentile for HV data going back to June 2008.

A related, but little discussed phenomenon is the correlation between gold and gold volatility. I track this in several different ways, including using 10-day and 20-day rolling correlations between GLD and GVZ. In each of the last three days, the 10-day and 20-day rolling correlations have set new records, indicating that GLD and GVZ have been moving upward almost in lockstep lately, particularly for the past five trading sessions.

The correlation data do have some interesting historical precedents associated with them. For instance, the last time the 10-day rolling correlations set a new high was at the beginning of June, just as gold was topping out just below 990.

In the chart below, I have captured the movements of GLD and GVZ since the launch of GVZ. In addition, I have also highlighted some of the instances when GLD and GVZ have had a persistent negative correlation in the past.

Sometime in the near future, I will pick up the theme of extreme positive correlations between GLD and GVZ.

For additional posts on gold and gold volatility, readers are encouraged to check out:

• Recent Gold Volatility
• Gold and Gold Volatility
• Chart of the Week: Gold
• Three Fear Indicators (or…The Three Baritones)
• The Evolution of the Volatility Family Tree

Chart of the Week: Gold

In a week in which most securities drifted lower on uninspired volume, gold was a notable exception, jumping 4.1% as tensions between India and Pakistan increasingly point toward the possibility of a military confrontation while violence in the Gaza Strip between Israel and Hamas is escalating.

Against the backdrop of potential conflict in either Gaza or the India-Pakistan region, gold surged above the critical 840 mark and ended the week at 871. As the uppermost of the two dashed black lines in the chart of the week shows, resistance from previous November-December 2007 highs was pierced this week. Gold also broke out of a down trending channel (solid black lines) this week and is now setting up for a possible large bullish move. If gold continues to rise, look for gold miners (GDX) to be even more volatile and likely outperform the commodity or the popular gold bullion ETF, GLD.

[source: StockCharts]

Recent Gold Volatility

I have been receiving quite a few questions about gold and gold volatility lately, so with gold receiving a lot of attention in the press, I thought this would be a good time to check in on the commodity and on the CBOE’s gold volatility index (GVZ), which was launched back in August.

Gold is something every investor should be watching these days as it reflects the ebb and flow of opinions about the risk of deflation in the short run and inflation over the longer run.

In the chart below, I have captured the price action in the commodity as tracked by GLD, the popular gold bullion ETF. I have also included the GVZ (aka “Gold VIX”) to gauge some of the recent volatility in gold trading. Gold volatility peaked back on October 10^th and has been in a gradual downtrend for the past six weeks. The chart reflects that spikes in gold volatility have generally coincided with spikes in the price of the commodity.

The broader issue of correlations between gold prices and volatility is much more complicated and subject to cyclical swings. In the chart I have highlighted two periods in which gold and gold volatility have shown a persistent negative correlation, first in August and later in mid-October. These two instances were both bearish for gold prices, yet when the correlation switched back to a positive one, gold prices began to move up in both instances.

It is still too early to draw any definitive conclusions between gold prices and gold volatility, but I will return to this subject periodically as my thinking evolves on the subject.

[source: VIX and More]

Gold and Gold Volatility

With the unfolding of the latest chapters in the financial crisis, gold has received considerable attention as a safe haven investment. The rush into gold was greatly exacerbated when investors began to lose confidence in money market funds following the ‘breaking of the buck’ at Reserve Primary Fund last Tuesday.

One week later, there is still a great deal of fear and anxiety in the financial markets and gold is trading at its highest level in almost two months.

In the chart below, I have plotted the movements of GLD, the most popular gold ETF, along with GVZ, the CBOE’s gold volatility index (or Gold VIX) which was launched back on August 1^st and is based on GLD.

As is the case with OVX (CBOE oil volatility index), there has generally been a positive correlation between the price of gold and gold volatility index. Note that in early August, the correlation between GLD and GVZ switched from positive to negative, as gold volatility began to rise even as gold prices declined. On about September 11^th, however, the correlation between GLD and GVZ swung back to a strong positive one, where it has held for the past two weeks. It may just be a coincidence that this switch in correlation occurred just before a week of extreme financial panic, but I wanted to at least plant that seed and note that I will be following these and other related subjects as I evaluate some of the new volatility indices in this space going forward.

[source: VIX and More]

optionsXpress Trading Patterns and the VIX

One of the trading tools that satisfies my inner investment voyeur is the Trading Patterns feature at optionsXpress. If the “Trading Patterns” name doesn’t ring a bell, you might also know this feature as “People Trading ___ Also Traded…” in the spirit of Amazon’s recommendation technology and predecessor technology that dates back to internet pioneer Firefly Network Inc.

In the past, I have used the Trading Patterns data to see which companies were being most actively traded by those who are seeking high risk speculative momentum plays. I somewhat arbitrarily made BIDU the poster child for these momentum chasers and have twice looked at what those who were playing with BIDU were also trading.

With all the discussion around potential substitutes for the VIX at least as a hedging tool, I thought it might be interesting to get a broader picture of those who trade VIX options. Thanks to Trading Patterns, I have captured just such a snapshot below. Not surprisingly, VIX traders are aggressive risk takers. In aggregate, they appear to be hoarding gold (GLD) and going short with the double inverse ETFs for real estate (SRS) and the NASDAQ-100 index (QID). It’s just a guess about the direction of some holdings, but the other positions appear to fall squarely in the short finance and technology camp: SPY, WB, AAPL, YHOO, and NVDA. The one finding that I see as somewhat surprising is the presence of the ProShares Ultrashort Oil & Gas ETF (DUG). Given the list of trading vehicles, I am concluding that the VIX players see oil and gas as overbought instead of a safe haven like gold. In any event, it is clear that the pessimism of VIX traders continues to be grounded in an expansion of the real estate and financial woes, the expectation that this will drag technology down with it, and the opinion that gold is the most sensible long position at the moment.