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Volatility and Bond moves

 
Friday, January 28th, 2011 | Vance Harwood
 

VIX was touching / very close to the lower 2 sigma Bollinger band this morning, so I sold my  XIV position at 150.13.  Bought some IEF (Barclays 7-10  Treasuries) at 93.80  because it was near the low end of its current trading range, will go ex-dividend next week (1-Feb) with a dividend of around $0.24/share, and tends to go up if equities go down.

Later in the day,  with IEF up at 94.18  I put a 0.1 point  trailing stop on the position, because I had gotten more than my target profit on the position, but wanted to leave some room for an additional move up.  The position sold out at 94.20.

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Posted in all, Dividend Capture, VIX | No Comments »

Schwab joins the CBOE Weeklys crowd

 
Friday, December 23rd, 2011 | Vance Harwood
 

With no fanfare whatsoever Schwab has added support for weekly and quarterly options on all of their current trading platforms: Schwab.com, StreetSmart Pro, and StreetSmart.com. I thought we would have to wait for the new StreetSmart Edge.   See this link for CBOE’s currently offered weekly options.

At least on StreetSmart Pro the option greeks on the non-standard options appear to be computed correctly.  Instead of expiring on Saturday like regular monthly options, weeklies expire on Friday afternoon after normal trading halts (unless it is a holiday shortened trading week).   Historically Schwab and Fidelity have used “whole day” timing in computing their option greeks—they don’t update time to expiration in finer resolution than a day.  Until they are close to expiration this difference is insignificant, but when you get close to expiration this is a big deal.   On Fridays Fidelity’s greeks on weeklies are totally bogus (e.g., delta of 1 for ITM options), but  apparently Schwab has addressed this issue.   My reference for  accurate greeks is LiveVol (free, but registration required).

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Posted in all | No Comments »

Options now available on volatility ETNs VIXY & VIXM

 
Wednesday, January 26th, 2011 | Vance Harwood
 

ProShares’ competitors to Barclays’ VXX and VXZ now have options available on them. With VIXY’s and VIXM’s average daily volumes of 50K and 10K respectively it seems premature, but I guess if you are going to compete with the market leader you need all the pieces. It will be interesting to see how wide the bid/ask spreads will be on these options.

NEW OPTIONS CLASSES – CBOE (C)

UNDERLYING SECURITY NAME STOCK SYMBOL
ProShares VIX Mid-Term Futures ETF VIXM
ProShares VIX Short-Term Futures ETF VIXY

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For a full list of all volatility ETNs and ETFs see here.

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Posted in VIX | No Comments »

Taking XVIX back 5 years

 
Wednesday, January 26th, 2011 | Vance Harwood
 

There is an interesting post in Volatility Futures and Options that projects XVIX performance back 5 years. It addresses a couple of things more analytically than I did in my recent post. Specifically how did UBS pick the 0.5 short factor it uses with short term volatility, and how stable has that factor been over time.

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Posted in VIX | 6 Comments »

Schwab’s StreetSmart Edge™

 
Monday, December 5th, 2011 | Vance Harwood
 

Update: Please see here for more recent information.

A few observations:

  • The package is designed for multiple monitors.  Each layout can be on a different screen
  • The colored “link” symbol in the upper right synchronizes tools to the same ticker.  If you want multiple charts on the same layout for different tickers you should select different link symbols for each one.
  • You can save layouts to the “Schwab Server” instead of the local machine.  This feature allows you to share the same layouts amongst multiple computers you might use in course of the day.

The StreetSmart Edge™ video quick start package is good.  The segments are clear and short.   I often hate these things, but this one was well done and worth the time to watch.

Posted in all | No Comments »

XIV looks like a winner—if you have the stomach for it…

 
Friday, July 22nd, 2011 | Vance Harwood
 

VelocityShares’ daily inverse volatility fund XIV has only been around since November 30th, 2010, but it has already delivered in a head turning 44% gain. This performance is not totally surprising given the collapse of VXX in the last two months, but how would it have behaved in less favorable times—let’s say the Flash Crash?

I did a back synthesis of XIV starting January 4th, 2010 to get a feel for its longer term performance. Since its goal is to match the inverse daily performance of VXX this is a relatively straightforward task (at least compared to mind twisters like CVOL or XVIX). It’s not as easy to get your head around as making investments at sites like BullionVault.com, but a backtest like this can give you a good feel for how an investment will behave. I did not factor in the 1.35% annual fee or treasury bill interest in my calculations. My results are shown below:

XIV v.s. VIX and XXV, click to enlarge

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Some observations:

  • The XIV actuals (blue in upper right) and XXV actuals (orange data points), are landing right on top of my synthesized values.  This gives me some confidence in my models
  • If you could have invested in XIV at the beginning of 2010, you would have only been down 20% at the worst of the Flash Crash. This is pretty impressive given the dynamics of that correction. VXX jumped 80% during the Flash Crash, from 20 to 36.
  • XIV would have climbed from 50 to 138, starting January 4th, 2010 and ending last Friday—a 175% increase in less than 13 months. Wow!

The fuel for this rocket is the fierce contango that VXX must deal with in rolling its volatility futures to provide a constant weighted average volatility maturity of one month. It’s not set in stone that volatility futures will continue to have a steep increase in price with longer dated contracts, but it does seem to be a stable situation. If VXX and VXZ stop being the dominate ETNs in the volatility space this might change, but I don’t expect that to happen in 2011.

For a link to XIV’s prospectus see this page, which lists all active volatility ETNs/ETF along with links to their prospectuses.

Posted in VIX | 4 Comments »

How did XVIX perform in 2010?

 
Saturday, February 12th, 2011 | Vance Harwood
 

UBS’s new long-short volatility ETN,  XVIX has only been trading since December 1, 2010. XVIX has climbed a grand total of $0.40 per share (+1.6%) since then. It would be an easy winner if there was a:  ”Most boring volatility investment” award. VXX has decreased from 46.99 to 31.57 (-33%) in the same period.

Is XVIX doomed to mind-numbing mediocrity, or does it have some potential for investors?

The past never perfectly predicts the future, but it can provide some clues. In order to get a feel for how XVIX will perform I did a back synthesis of its price for 2010 using the daily variations of VXX and VXZ as the basis. Since XVIX is based on the same rolling mix of volatility futures (+1x medium term, -0.5x short term)  as these two ETNs I think this is a good approximation for what XVIX would have done.  I have ignored the 0.89% annual investment fee in my calculations.  The results of my back synthesis are shown below:

Back Synthesized XVIX price vs VIX index

This simulation suggests a 50% gain for XVIX for 2010—impressive. The purple line on the right of the graph is the XVIX actuals in addition to the back synthesized price, they align nicely. What really surprised me was the calm way that XVIX would have weathered the flash crash and associated correction in May—it didn’t miss a beat.

Looking at the chart below, it is a little clearer why the XVIX formula seems to work well.  In scary times the VXZ jumps enough to cancel out the big jumps in the VXX fraction. In non-fearful times the short on VXX more than offsets the general decline of volatility and the losses due to rolling the medium term volatility futures.

XVIX investment compared to VIX, VXX, VXZ


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Capitalizing on the inherent decline in VXX due to the rolling of volatility futures contracts while mitigating the effects of the occasional spikes in volatility makes XVIX an attractive investment. I bought some today at $25.41 per share.

Posted in all, VIX | 5 Comments »

April Condor

 
Monday, January 17th, 2011 | Vance Harwood
 

Put a condor in place on S&P 500 April futures.   The call spread was at S1350 (sell-to-0pen) and S1370 (buy), while the put spread was at S1140 (sell-to-open) and S1100(buy).  The net credit on each set of four options before commissions was 6.15 points.   With S&P 500 futures each point is worth $250, on the futures as well as the options on the futures.

With the S&P 500 at 1290 there is a 4.6% upside margin  before the short call goes in-the-money, and 11.6% downside before the short call goes in-the-money.  The worst case loss would be 33.85 points per contract set.  Currently this position pretty close to delta neutral, and the plan is to close out, or roll this position in 30 to 45 days.

Posted in Options | 1 Comment »

The reason VelocityShares’ XIV works…

 
Tuesday, August 9th, 2011 | Vance Harwood
 

The histogram below shows the daily percentage moves of VXX for 2010.    If you plot this distribution for a normal stock or ETF you will get a normal looking distribution, with an average close to zero.   This distribution (the red line marks zero), is asymmetrical (fat tail on the positive side), with an overall average of minus 0.43%.    In contrast, the average of VIX’s percentage moves in 2010 was  plus 0.20%.    Since VXX on average has a negative percentage move, this drives VelocityShares XIV in the positive direction.

VXX percentage moves 2010, click to enlarge

Posted in VIX | No Comments »

First foray into XIV

 
Wednesday, January 12th, 2011 | Vance Harwood
 

I have been investigating VelocityShare’s XIV inverse volatility ETN, and I’m very impressed.  I’ve backtested it through the beginning of 2010 and I’m getting some very attractive numbers—150% gain for the year.   At the worst of the Flash Crash it would have gone down around 20% YTD, which is better than I would have expected.   This looks like the first volatility ETN/ETF that warrants a buy and hold approach—although I think a trailing stop of around 3% is probably a better strategy.

Bought XIV at 122.42 today.  The spread was running about  $0.20.  I hit the ask, rather than try to split the spread.

Posted in VIX | 3 Comments »

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