Last Week in Emerging Market Volatility – 3/30/2014

Last week the Brazilian market experienced a credit downgraded by Standard & Poor’s.  The result for the equity market was a rally of over 7% in the iShares MSCI Brazil Capped ETF (EWZ – 44.87).  EWZ has been around since the year 2000 so I decided to check if the 7.68% gain for EWZ was some sort of record or one of the top ten weekly moves for the fund.  EWZ has been around for 714 weeks and this past week’s performance was the 43rd best weekly performance on record.  I guess that explains why the CBOE Brazil ETF Volatility Index (VXEWZ – 28.16) only dropped 4.51% despite the rally in the Brazilian markets.

The rest of the emerging markets had solid performance as well with the iShares MSCI Emerging Markets ETF (EEM – 40.74) rising 4%.  The reaction from the option market was a drop in implied volatility as well.  Also, I know this space is supposed to be all about volatility, but I did come across a somewhat bullish EEM trade from Friday that is worth mentioning.  There was a buyer of EEM shares that sold 9,000 of the EEM Apr 41 Calls for 0.67.  I say somewhat bullish since the shares will be called away if they are over 41 in three weeks, however buying the stock and selling the calls indicates that the trader believes the fund at minimum has a floor here.

VXEEM VXEWZ

Last Week in Short-Term Volatility – 3/30/2014

Despite a relatively tame week over week change, the CBOE Short-Term Volatility Index did trade in pretty wide high – low range last week.  The week over week drop of 0.29 doesn’t quite tell the story of last week.  The high for the week was 17.44 which occurred on Monday morning, while the lowest VXST level for the week was the following day when VXST traded down to 13.24.   This five day illustrates just how much VXST was moving around last week.

VXST 5 Day

 

Looking at the VXST term structure, the ‘bump’ for the April 16th contract caught my eye last week.  It is still there as the April 16th contract is slightly as a premium relative to the other three futures currently listed on VXST.  I did some digging and am still wondering if it is just the beginning of first quarter earnings season around that time that has SPX implied volatility elevated around that date.

VXST

Panel Marks VIX Futures – 10 Years and 95 Million Volume

March 27, 2014 – A panel discussion yesterday at CBOE marked the tenth anniversary of the launch of futures on the CBOE Volatility Index® (VIX®).

Four experts surveyed the development and promise of volatility products:

  1. Mike Edleson, Ph.D., CFA,  Chief Risk Officer,  Office of Investments, University of Chicago,
  2. Joanne Hill, Ph.D., Head of Investment Strategy, ProShare Advisors,
  3. Jamie Tyrell, VIX Options Market-maker, Group One Trading, and
  4. Krag “Buzz” Gregory, Ph.D., Managing Director, Goldman Sachs.

An audience of about 120 financial professionals was in attendance, and I received quite a bit of good feedback.

Buzz Gregory delivered a presentation on VIX Futures: The First Ten Years, and noted that –

  • VIX spot is not directly tradable.
  • Access to the VIX market comes from trading listed VIX products. The performance of VIX ETFs, ETNs, and VIX options is dependent on the listed VIX futures market, so understanding the dynamics of VIX futures is crucial for successful trading.
  • VIX futures began trading in March 2004 and have now been tested in both low and high volatility regimes.
  • The relationship between spot VIX and VIX futures levels is highly correlated to the term structure of S&P 500 implied volatility.
  • If the term structure is steeply upward sloping the VIX future will typically be trading above VIX spot.
  • The steeper the term structure, the higher the basis ( Basis = future – spot ).
  • High-basis environments have tended to be profitable for shorts, bad for longs.

Joanne Hill noted that –

  • Adding cash-equivalent exposure is the typical way U.S. equity managers reduce beta and risk;
  • Smaller amounts of VIX Short-Term and Mid-Term Futures can produce similar amounts of reduction in risk as measured by standard deviation;
  • Rolled positions in VIX Mid-Term Futures also resulted in higher returns than using cash or VIX Short-Term Futures for the period studied.

Mike Edleson delivered remarks on long volatility strategies and diversification.

Jamie Tyrell discussed strategies, liquidity and expirations for VIX futures and options.

Pic-2014-03-26-Vol Panel pics

VOLUME GROWTH

Over the past decade the total trading volume for VIX futures has surpassed 95 million contracts, and the VIX futures average daily volume rose from 4,543 in 2009 to 213,024 in the first two months of 2014.

VIX fut and opt volume

For information on more than 35 volatility-related indexes, please visit www.cboe.com/volatility and www.cboe.com/VIX.

Last Week in VIX – 3/23/2014

I’ve been spending more time focusing on block trades that come through the VIX option pit at CBOE to get ideas of how large traders are positioning themselves.  A really unusual one hit the market on Thursday.  I’m trying to piece this together from a handful of trades so I may be off just a little, but there was a large buyer of VIX Sep 18 Straddles that sold 3 VIX Sep 25 Calls for each straddle purchased.  The net trade appears to be long the VIX Sep 18 Call at 2.90, long the VIX Sep 18 Put at 3.00, and short 3 VIX Sep 25 Calls at 1.35.  The net cost for this would be 1.85 per spread.  Below is a payoff diagram is this trade is held to September expiration.  My feeling is there may be some trading around this position, but I can’t get in the mind of the trader so we’ll look at the trade this way.

VIX PO

 

Below 16.65 and above 19.35 the trade makes money and there is no risk if we have a very low VIX at September expiration.  Due to the short position in the VIX Sep 25 Call there is risk to the upside.  Once VIX trades above 27.90 the trade becomes risky and with no protection on the upside, the theoretical loss is unlimited.

 

VIX finished the week right at 15.00 as fears of an expansion of the conflict in Ukraine subsided.  Janet Yellen scared the market a little mid-week, but that too was short lived.  The pattern of VIX moving up and then returning to lower levels seems to be a recurring one, but like one the instructors at the Options Institute likes to say, a pattern repeats until it doesn’t.  Eventually one of these flare ups in volatility and drops in the equity market may last longer than a few days.

VIX

Last Week in Short-Term Volatility – 3/23/2014

Going into Monday VXST was coming off a week where it rose 62%.  Since fear came out of the market this past week and the S&P 500 rallied up over 1% VXST gave a good portion of the previous week’s gains back and dropped almost 30%.  The near dated (front week?) futures contract that expires next Wednesday was down 14% on the week as well.  I do want to point something out that I found interesting from Friday’s closing VXST prices.  Note on the term structure chart below that the blue line is longer than the red line and I circled the last data point in green.  The blue line is Friday’s close and that April 16th contract is brand new having listed on Thursday.  I felt compelled to include it in the diagram since it went out at a premium to the other contracts.  I’m digging around and not sure if there is an anticipated event that may be market moving or not before that date and after the April 8th expiration.  If someone has ideas please feel free to share at rhoads@cboe.com or tweet your thoughts and tag me at @russellrhoads.

VXST

Last Week in Gold and Oil Volatility – 3/23/2014

As the crisis in Ukraine subsided and the Fed indicating interest rates will eventually go up put pressure on the price of gold for most of the week.  Despite rising about half a percent on Friday the SPDR Gold Shares ETF (GLD – 128.45) lost just about 3.5% on the week.  The fund is still up about 10% for 2014.  Note that despite a big drop in the GLD fund, gold volatility was lower as well.  The CBOE Gold ETF Volatility Index (GVZ – 16.43) was down in sync with the price of gold.  It is not all that uncommon for GVZ to move in the same direction as GLD, but when there is a big move like last week it makes me pause for a moment.  My thinking is that volatility players are not too concerned about last week’s price action signaling the end of the steady up trend for the price of gold that has been in place in 2014.

The United States Oil ETF (USO – 35.84) was up slightly this past week after being under pressure on Monday post the election in Crimea.  As that situation seems to have calmed, at least for the moment, volatility dropped as well.  The CBOE Crude Oil ETF Volatility Index (OVX – 19.46) was down slightly with what could be considered a small drop in geopolitical risk component in the price of oil.

GVZ OVX

Last Week in VIX Options and ETPs – 3/23/2014

The VXST – VIX – VXV – VXMT term structure chart below shows the dramatic drop in the risk perception of global markets.  VXST (9-Day) was down 28%, VIX (30-Day) lost almost 16%, VXV (3-Month) was just under 10% lower and finally VXMT (6-Month) lost just over 7%.  The event that had elevated fear and resulted in VXST moving to the low 20’s passed without any violence and Crimea voting to rejoin Russia.  It may just be that the markets realized this geopolitical event may not end up having any fundamental impact on the US economy.

VXST - VIX - VXV - VXMT

 

Since VXST was introduced I feel I have neglected the VIX or VIX or VVIX.  VVIX results when the VIX methodology is applied to VIX index options.  For a perspective the range for VVIX in 2013 was between about 70 and 100.   VVIX went out at 97.11 a week ago and dropped down to 78.64 during the week.   Despite a nice week for the stock market VVIX is closer to the middle of its recent range than the low end.  This can be taken as demand for VIX options (think tail risk protection) is still exhibiting some nervousness about the equity market in the next few weeks.

VIX Options ETNs

Last Week in Russell 2000 and Nasdaq-100 Volatility – 3/23/2014

US stocks rebounded last week, but both the NASDAQ-100 (NDX) and Russell 2000 (RUT) slightly lagged the S&P 500 (SPX).  The NDX rose 0.69% and the RUT was up by 1.04% while the S&P 500 rose 1.38%.  Interestingly the respective volatility indexes for each of these markets followed the lead of their primary market.   The CBOE Volatility Index (VIX) was down 15.82%, the CBOE Russell 2000 Volatility Index (RVX) was 11.22% lower and finally the CBOE NASDAQ-100 Index dropped by 8.15%.  This may be interpreted as a bigger drop in global market risk versus domestic market risk.  I often compare RVX to VIX as a measure of global concerns versus concerns about the domestic economy.   So far this year, with a couple of exceptions that has been how VIX versus RVX has appeared.  For the past couple of weeks global risk perceptions were slightly elevated, but now that some of the recent situations that cause the markets to be a bit nervous have subsided, VIX is back to a bigger discount relative to RVX and VXN.

VXN RVX

Last Week in Emerging Market Volatility – 3/23/2014

The Brazilian market showed signs of hope last week with the iShares MSCI Brazil Capped ETF (EWZ – 41.67) rising more than 6%.  The result for EWZ implied volatility was a drop, but the CBOE Brazil ETF Volatility Index (VXEWZ – 29.49) was down 12% but still close to 30 which still indicates a bit of concern.  Do remember markets climb a wall of worry and VXEWZ near 30 indicates worry.  The rest of the emerging markets popped as well with the iShares MSCI Emerging Markets ETF (EEM – 38.98) gaining about 1.5%.  VXEEM dropped accordingly, losing over 14% and the curve adjusted moving from textbook backwardation to contango.

VXEEM VXEWZ

As I write this I’m sitting at the CBOE booth at TD Ameritrade’s Market Drive event in New York.  The good people from iShares are next to me and made me aware of a pretty fun promotion that have going on.  Most people are focusing on their NCAA brackets right now and my understanding is that as of last night 16 people still had a shot at taking $1 billion of Warren Buffett’s money.  I didn’t take a shot at that, but am considering participating in iShares Fund Frenzy contest.  For a donation of $1 (which goes to charity) you can set up a portfolio of 5 iShares single country exchange funds by May 5th.  The best performer wins $20,000 for the charity of their choice.  More info can be found at www.isharesff.com/td.

Touching Clovers Is Like Gold, Not VIX

Thus far on the blog, we have written a few pieces about busts in the stock market.

wrote, “Whenever this bull market ends, it is likely to be with a bang, not a whimper.” He also wrote about Deflation, Debt and Disaster where he pointed out we may be on the edge of deflation, which leads to stagnant economies and depression. I also pointed out the cycle of stock-to-commodity outperformance may be switching back in favor of commodities.

With the possibility of doom and gloom over the stock market, a natural question may be where to turn to protect your assets. Many consider gold a safe-haven, but is it really? My colleague, Reid Steadman, wrote about VIX – The Enforcer, where in a hockey analogy he pointed out that when other markets fail, VIX may be the last line of defense.  It is a decent argument that VIX may act as a strong safe-haven.

However, many might be hesitant to believe that VIX, a reflection of volatility, is a safe-haven since it’s not tangible. Despite the fact that not even the luckiest person can catch the leprechaun with the pot of gold at the end of the rainbow, at least everyone can dream that picture.  But what does a pot of VIX look like? Besides charts in a pot?

Although Reid does a good job of explaining what is VIX, as humans we possess irrational behaviors (besides believing we can catch a leprechaun with a pot of gold).  One of our behaviors is biased expectations or overconfidence that leads to misapprehensions about oneself and to the illusion of control.

In a

, investors are more confident in the value of the cards they TOUCHED. The example is as follows:

  • A game is played with two decks of cards, red and blue.  Players pay $1 and receive one card from one of the decks. The card is then returned to the deck, the dealer shuffles and draws one card. If the player’s card is drawn, the player wins $100.
  • When the game is played with the blue deck, the dealer only shows the card to the player.
  • When the game is played with the red deck, the player gets to touch the card and return it to the dealer.
  • Players were asked to sell their cards prior to revealing the card chosen by the dealer.

The results show players valued the cards they touched more than they valued the cards they did not touch:

  • Blue deck (no touching of cards): 19% were unwilling to sell their cards. Average asking price was $2
  • Red deck (players were able to touch cards): 37% were unwilling to sell their cards. Average asking price was $9

Why does this matter?  It is since investors may value the tangible property of gold as a store of value, or currency, that it has been considered a safe-haven asset as throughout history. But the question is at what price? Is gold as a safe-haven really more valuable than VIX at protecting your portfolio in hard stock market times?

That all depends on how we measure time frames and what we consider protection, but from the look of it, we put much too high of a value on the tangibility of gold.

Let’s take a look at the overall cumulative return chart of S&P GSCI Gold, VIX, S&P GSCI and S&P 500.  Gold looks pretty attractive relative to VIX but we need to dig deeper to see which does a better job as a safe-haven.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

Using monthly data in the time period from Jan 1990, the only negative years for the S&P 500 were 2000, 2001, 2002 and 2008.  The results of protection are mixed. In 2000 and 2008, VIX returned higher than the S&P GSCI Gold, but the opposite was true in 2001 and 2002.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

However, the results become more clear when evaluating other metrics. VIX has the lowest correlation to the S&P 500 of -0.63, compared to -0.01 of S&P GSCI Gold with the S&P 500 and 0.18 of the S&P GSCI with the S&P 500.  This implies VIX has stronger diversification properties that could potentially lead to greater capital preservation when mixed with stocks.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

Further, on average of 287 months measured, 103 months were negative for the S&P 500 and 27 of those lost more than 5% in the month. While gold protected, VIX seems to have done a better job. An average monthly loss for the S&P 500 was 3.6% with a 15% gain from VIX and only 56 basis points from gold.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

VIX also has the best record of positive months when the S&P 500 lost. In 79% of down months for the S&P 500, VIX was positive.  The S&P GSCI Gold and S&P GSCI didn’t do a bad job but came up short again versus VIX.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

Finally, maybe when it counts most, we measure two crisis periods during this time: the tech bubble burst and the global financial crisis.  Once again both gold and VIX protect but VIX wins.

Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting).  Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Source: S&P Dow Jones Indices. Data from Jan 1990 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.

As investors, and humans, we really might price the value of the golden touch too highly.

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