IS THE VIX A SIGNAL OF FURTHER SELLING TO COME?
by Chart School - July 14th, 2010 5:17 pm
IS THE VIX A SIGNAL OF FURTHER SELLING TO COME?
Courtesy of The Pragmatic Capitalist
There is a lot of chatter regarding the recent action in the VIX. The index is by no means a holy grail, but a lot of smart money tends to hang out in the options markets so it’s not an indicator that you want to shun. Anyhow, the VIX terms structure is in a steep contango which is implying a summer slow-down in volatility followed by a massive ramp in October. FT Alphaville wonders if the smart money isn’t preparing for something “scary” in the markets this fall. But MKM Partners is a bit more optimistic about the action in the VIX (via Daily Options Report):
“Although spot VIX has declined sharply over the last couple of weeks to close at 24.56 yesterday, its low since mid-June, longer- dated maturities have barely budged. This upward-sloping volatility term structure is approaching its steepest level in recent years (measured between spot VIX and the six- month future), likely reflecting imbedded skepticism in the aftermath of the May 20 volatility spike.
This condition is typically not sustainable, and we think it must be resolved either with the short end of the curve snapping back toward recent elevated levels or the long end drifting lower. Given our view that spot VIX will remain downward-trending over the intermediate term, we expect the latter scenario to play out. This suggests that the term structure of VIX will flatten while the curve will gradually shift lower toward its position earlier in 2010.
From a volatility trading perspective, this dynamic can be exploited in single stocks via long gamma, short vega strategies (i.e., buying short maturities to sell long maturities delta-neutral). Directional investors who are long stocks with steep term structures and who are bullish over the short term could similarly buy near out-of-the-money calls in one- or two-month tenor while selling further out-of-the money calls around six-month tenor. This creates a leveraged overwrite that provides short-term upside exposure in parallel with the long stock, while committing to selling those shares at a higher level.”
I would tend to agree with MKM. In my opinion there is no “smart money” that knows what is going to occur in October. These markets have had a hard enough time discounting what will happen tomorrow let alone in 3 months. …
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DiggVIX Futures Contango Bubble
by Chart School - July 10th, 2010 3:30 am
VIX Futures Contango Bubble
Courtesy of Bill Luby at VIX and More
Truth be told, there is no such thing as a “contango bubble,” but I like how the two words look juxtaposed and it is Friday…
Bubble or not, the VIX futures are stretched to an extreme that I do not ever recall seeing and to the extent that the grapevine is whispering to Adam Warner of the Daily Options Report that the differential between the first month and third month VIX futures is at its highest level ever. (Note to self, why doesn’t the grapevine ever whisper to me?)
The chart below, courtesy of FutureSource.com, shows the difference between the VIX third month futures and front month futures (VX V0 – VX N0 in current VIX futures parlance) going back about six months. Personally, I tend to get excited when the third month VIX futures rises more than 2.00 higher than the front month, as this frequently suggests that the VXX negative roll yield contango play is starting to set up.
Some 17 months after its launch, I probably still get more questions about VXX than any other subject. As much confusion as there is about VXX, I think it is probably time to come out with an extended look at this volatility product in the next week or two.
For more on related subjects, readers are encouraged to check out:
- VIX Spike and VIX Futures Contango Means…
- VXX Calculations, VIX Futures and Time Decay
- VIX Term Structure and VIX Forecasts
- VIX:VXV Sell/Short Signal
- Is the Fear Bubble Bursting?
- VIX Futures Starter Kit
Disclosure(s): short VXX at time of writing
Comment by Ben: I don’t understand what this means. Is it a signal to short VXX? Buy it? Or VXZ? Or what?
Bill’s response: It is not a signal to short VXX, though that is the position I currently have on right now. What it means is that the consensus is that the VIX has fallen too far, too fast. The VIX futures indicate that the market believes the VIX will spike back up into the 30s over the course of the next few months.…
Testy Tuesday – Bottom Busting or Big Bounce?
by Phil - June 29th, 2010 8:27 am
Wheeee, what a ride!
Finally all our very boring sitting around at 75% cash makes us feel smart as the market makes what we hope is that final blow-off bottom to re-test our lows. I already sent out an Alert to Members this morning so a lot of this is old news to them but nothing has changed since 4:30 so here’s a quick reprise – What we are mainly seeing in the futures this morning is 2 major factors that are driving the markets lower:
1) Japan, where too strong Yen (88.6), -0.1% industrial output, -1.7% exports, rising unemployment (just 5.2%) AND lower houshold spending (-0.7%) numbers sent the Nikkei down 1.25% today to 9,570. If you think about it though, pretty much all of that is a strong Yen issue because it lowers demand for the exports (making them more expensive) and then factories slow down and people get laid off and household spending drops from that PLUS the fact that it’s now cheaper for them to buy imports so they can buy the same stuff at lower prices.
So, overall, nothing people shouldn’t have expected but ugly to read about.
2) China, where the Shanghai fell 4.27% today to 2,427, which is a lot because they are a 10% limit down market on individual stocks so you can bet the selling isn’t done if the AVERAGE was down 4.27%. The Hang Seng was ugly too, falling 2.3% to 20,248. What sent China off a cliff was kind of silly. The Conference Board, which is a NY-based research firm had reported that Chinese economic indicators rose 1.7% in April – something at the time (June 15th) we thought sounded a bit high. Well, funny thing is it turns out the people at the Conference Board must have been high on something because it turns out they made a "calculation error" and the correct number was just 0.3%.
There is a third factor in play and, earlier this morning I thought it was too silly to be considered but, apparently, you can panic retail investors over pretty much anything. On Thursday, there are $547.5Bn worth of bank-loans from last year’s special liquidity program that are due to roll over and there are rumors circulating that the ECB won’t renew the facility at all. The ECB has, in fact, already promised to replace it with rolling 3-month loans at the…
Sector Detector: InfoTech Holds Lock on Top Ranking
by ilene - June 15th, 2010 9:29 pm
Sector Detector: InfoTech Holds Lock on Top Ranking
By Scott Martindale, Senior Managing Director, Sabrient
The stock market is searching for direction, testing support and resistance levels each week. After threatening a waterfall decline last week, it instead found support and has rallied strongly. Today, the S&P 500 and Dow Jones Industrials joined the Nasdaq 100 and Russell 2000 by rising above the important 200-day moving average. However, they all remain below their 50-day moving averages.
I like to define trends in simple terms. So, when a stock or index is above both its 50-day and 200-day moving averages, I consider it to be in a bullish trend. Likewise, when below both its 50 and 200-day, I consider it to be in a bearish trend. When it is between the two, the market is searching for direction. Recapturing the 200-day was important for fighting off what appeared to be the start of a new bear trend. It shows that there is some buyer support for this market.
Market volatility represented by the VIX has settled back to around 25, which is right at its 50-day moving average and still well above its 200-day moving average. Keep in mind that the VIX tends to move opposite the market, so finding support is typically bearish for the market. We should know soon how this is going to play out.
The SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. Like the technical picture, current quant rankings reflect an uncertain outlook.
Latest rankings: Information Technology (IYW) continues its lock on the top ranking with a score of 71, but this Financials (XLF) has taken back the second spot after falling into a tie last week with Healthcare (XLV). Overall, sector scores are quite similar to last week despite the big market rally from the edge of the abyss.
Notably, Consumer Discretionary (XLY) and Materials (XLB) have both weakened somewhat this week. Also worth mentioning is that Energy (XLE) and Materials (XLB) were the only sectors to get hit with more analysts reducing earnings estimates rather than increasing.
IYW fares the best in the percentage of analysts increasing earnings estimates, and it ranks high in return on…
VIX Alive!
by Chart School - June 3rd, 2010 2:21 pm
VIX Alive!
Courtesy of Adam Warner, at Daily Options Report
If I could summarize my opinion of how to use the VIX (and volatility in general) in one sentence, it would be as follows. Pay attention when it tells you something unexpected.
The VIX itself yesterday did not act all that odd. It was on the weak side given that the market itself was not that cosmically strong. But between Tuesday’s VIX strength, and the somewhat self-fulfilling prophecy of the skew curve, it’s not shocking.
No, the real message lies in VIX futures, and in turn VXX. Both maintained stubborn strength yesterday as standard measures of volatility declined sharply. The VIX is now near parity with July futures, which in a vacuum is not odd. But think about what that means; the market expects to see VIX levels in the low 30′s out to mid July. That is somewhat noteworthy as we have to remember that a VIX over 30 is pretty elevated. And July is not exactly known for high volatility.
It goes further. September VIX futures are near parity to cash VIX as well. And in fact October is modestly higher….and November modestly higher than October.
We don’t know the path the options market will take between now and then, but we do know the market right here right now anticipates it will see volatility right about here. That will seem cheap if indeed we reprise 2008 this Fall, but far more likely that’s too much Fear imho.
Forgotten Weekly Wrap-Up
by Phil - May 29th, 2010 9:31 am
Well, what a huge waste of time this week was!
Remind me next holiday to just take the whole surrounding two weeks off. We had similar nonsense around Good Friday and do you remember that HUGE drop we had on Dec 31st that was completely erased on Jan 4th? It was very similar to the big sell-off we had on Jan 15th that was reversed on the Tuesday after Martin Luther King day (although that was the last good day we had for 2 weeks as the Dow droppped 750 points). Now I don’t want to connect that sell-off with Scott Brown’s win in Massachusetts and we didn’t go short just because the Dems lost their ability to make changes - we had gone short a week earlier as I called the markets "shell-shocked" – too battered by bad news to take appropriate action.
My new mantra is "I can’t change the system – I can only tell you what they are going to do and how to make money on it." This week that was really put to the test but no more so than yesterday, when we got all the highs and the lows and all the drama in a single 6.5-hour session. As you can see from David Fry’s Chart, we took a huge dip on the Spain downgrade at about 12:40, followed by a stick save at 2 and then a massive dump back near the lows into the close. As I had noted in the morning post, we were already short but I pointed out to Members in Chat at 12:26: "CNBC trotting out the Steve Wynn story again? That was two weeks ago… Looks like we’re heading for a panic frenzy on CNBC again!" This is why we watch CNBC, even though it’s like waterboarding ourselves every day, we need to know what they are up to!
I put up a nice TZA hedge for Members which pays 500% on a 20% drop in the Russell as we had noted copper’s inability to hold our $3.15 target – the Spanish downgrade was just icing on the cake but also totally expected by us as I had just that morning put up a chart of the cascading cycle of failures and mentioned Spain was next. As we had been waiting for this shoe to drop for weeks, when we finally got word at 12:44, I posted for Members: "FITCH…
Volatility and Wide-Range Days with Neutral Closes
by Chart School - May 18th, 2010 4:19 pm
Volatility and Wide-Range Days with Neutral Closes
Courtesy of Bill Luby at Vix and More
A reader notes:
The VIX tends to move inversely with the market on a day-to-day basis. Market up = VIX down and market down = VIX up. That’s all fine and dandy MOST of the time (I’m stating the obvious here) because of expectations about the asymmetry of volatility during bull versus bear moves. But how do we square moves like Monday (05/17) when, even though the close-to-close change in the market was very small, the intraday move was very large (with implications re: continued high volatility), yet the VIX still fell? Does the VIX (from a statistical correlation perspective) only care about close-to-close changes? Isn’t that a bit shallow?
This is an excellent comment and set of questions.
In terms of background, consider that measures of volatility based on actual changes in the price of the underlying break out into two camps:
- those that focus on close-to-close price changes and ignore/understate intraday price movements (e.g., historical volatility)
- those that include intraday price variations in their calculations (e.g., average true range)
Here is where an example might help to clarify things. Take the recent ‘flash crash’ of May 6th. Even though the close-to-close change in the S&P 500 index (SPX) was a very large 3.24%, the intraday range was a whopping 8.73%. So which was the better measure of volatility on that day? My guess is that anyone who was watching the markets as they crashed would vote for the 8.73% move, as things certainly felt more like the panic of October 2008 than the relative calm of October 2007.
Given that implied volatility values such as the VIX are calculated directly from options prices, in theory the VIX does not strictly account for intraday prices. Also, technically the VIX is the market’s forward estimate of close-to-close volatility in the SPX. So from a pure statistical perspective, the VIX does indeed have a narrow close-to-close time horizon and is blind to intraday fluctuations in prices.
In practice, however, a wide range day with a relatively benign close-to-close number will typically reinforce the idea that the market is ripe for large volatility moves, even if these moves may cancel each other out on intraday basis. In my opinion, mapping these changes in price to changes in volatility is…
Trash-Talk or the Real Deal – Pactiv Call Options Higher on Apollo Rumor
by Option Review - May 17th, 2010 4:32 pm
Today’s tickers: PTV, F, ODP & VIX
PTV – Pactiv – Hard to know whether there is any substance behind the Wall Street Journal’s story that the maker of Hefty refuse sacks is in deal talks with Apollo Global Management or whether it’s just trash-talk. But investors have got the deal-bit between their teeth and have already pushed shares higher by 18% to $28.27 but not before they were earlier propelled to $29.41. The WSJ says a deal maybe struck between $34-$38, which helps explain the appeal of call options at the $30 strike price at expirations from May through August. The uncertainty of the news sent implied volatility surging from 32% to 58%, while volume today has completely eclipsed the number of existing option contracts held on the stock. There is also interest in the June $25 strike puts but it’s hard to state that investors are cashing in here in the event the bulls are right. Premiums at that destination fast-eroded over the weekend to 65 cents losing more than half their value.
F – Ford Motor Company – Naturally the broader U.S. market took a blow to the gut on account of heightened fears for European recovery. Ford’s April sales took a 17% nosedive on the continent at the very moment that its European incentive plan came to an end and competitors were able to creep in and find a way to better serve customers. But the domestic U.S. recovery seems to be more important to some investors as the auto industry recovers from a dip to annualized sales volume of 10.4 million to 11 million. While demand was sparked by incentives, the experience of GM in its welcome return to profitability today shows optimistic trends for the broader industry. Most important of all is the reduced reliance on incentives results in higher prices at dealerships. The industry has also gone through severe cost-cutting programs, which may be staring to play out as it escapes the bankruptcy days. Although Ford’s share price is weaker today at $11.78 option investors seem to have a passion for both May and June expiration call options at the $13.00 strike price where early volume of 10,000 and 5,000 contracts was evident. The May premium of seven cents is an inexpensive way of playing the rebound while a 34 cent cost at the June expiration would require a 13.2% share price gain…
Visa Traders Turn Call-Sellers After Regulatory Change
by Option Review - May 14th, 2010 4:28 pm
Today’s tickers: V, VIX, SY, TIVO & MDR
V – Visa Inc. – The decision to allow the Federal Reserve to regulate and therefore pressure fees charged by debit-card companies hampered shares at Visa today and in late morning trading they are 8% lower at $79.00. The slide slices the share price right through two five-dollar-wide strike prices and with options expiration next weekend, call sellers were quick to capture premiums available at the May 80 strike where 10,000 contracts have traded within a price range of $2.32 to $1.18. At its present share price those call options are worth nothing but the hope value they carry in the event of a recovery next week. Investors also boosted put premiums from a close yesterday at 73 cents to as high as $3.50 per contract at the May 80 line. Implied options volatility rose a further 8% to 38.7% today as uncertainty for the financial sector grew.
VIX – CBOE Vix Index – As investors’ trading screens once again turn a familiar red as Eurozone fears grow, the flashing red light of the CBOE’s Vix index heads inevitably higher. On Friday the index leapt 17% to stand at 31.33. It’s still well beneath the panic-driven peak of last week when it ran up to 42.15, yet today’s reading is the highest point in between then and now. One investor appeared to extend a bet that volatility is set to remain omnipresent using a 50,000 lot calendar call spread that appears to roll forward protection from May expiration to the June contract. The order combined the same amount of May call options at the 35 strike with June calls at the 37.5 strike. The net cost of the trade was $1.20 per contract.
SY – Sybase Inc. – Option trading indicates little upside room for Sybase after Germany’s SAP said it would pay $65 per share to acquire the enterprise software business. Having shot up from $40 before the deal to more than $65 yesterday option sellers appear to be writing chunks of $65 strike calls in the June and September contracts probably because they expect to see further declines in volatility and little improvement in an already generous deal that boosted the company’s capitalization by 63% in a stroke. The June call options carrying a $65 strike price have traded 13,000 times mainly at a 25-cent premium, while the September contract…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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