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Investing directly in the VIX Index—CVOL is close, TVIX outperforms

 
Thursday, September 29th, 2011 | Vance Harwood
 

For a long time investors have been frustrated in their desire to directly invest in the VIX index.  Now two ETNs, one by design, and the other perhaps by accident are tracking (or out-performing) the VIX index on both a daily percentage move basis and for multi-day holding times.

UBS’ CVOL was designed to correlate well with the daily moves of VIX.   It uses 2X leverage on the 3/4 month rolling volatility futures, and then adds a variable short S&P 500 position to give the ETN some extra kick on down days to better match the VIX. CVOL didn’t use the 1/2 month rolling volatility futures because contango imposes a heavy penalty on them when the markets are quiet—the 3/4 month futures don’t suffer as much. CVOL hasn’t really caught on so far in the market place, its daily volume tends to run below 20,000 shares and its bid/ask spreads are usually in the $0.50 range. The graph below shows CVOL compared to the VIX index on a daily percentage move basis since July 1st, 2011.

Daily percentage moves of CVOL and the VIX index, click to enlarge

Historically the daily percentage moves of short term (1/2 month) volatility ETNs like VXX tend to be about 50% of the VIX index moves. Since VelocityShares’ TVIX is essentially a 2X leveraged version of VXX, you might expect it to track the VIX index—and it does a pretty good job except for the effects of contango/backwardation.

TVIX compared to VIX on a daily percentage move basis.

Daily percentage moves of TVIX and the VIX index, click to enlarge

While the daily percentage correlation is important, unless you’re day trading volatility (shudder) the more important attribute would be the results of holding these ETNs for a few days. In that case how well would they track to the VIX index? The chart below shows how $1000 invested in each of these starting July 1st,2011 would fare.

July 1, 2011 investment in VIX, TVIX, CVOL, VXX--click to enlarge

CVOL did the best in tracking the VIX index itself. VXX lagged, but eventually caught up due to the sustained period of backwardation for the 1/2 month rolling futures. TVIX on the other hand skyrocketed during this panicky time. A doubled benefit from backwardation was part of the gain, but the trend lines on the chart below suggests there are other factors.  I suspect the rest is from the compounding effects of 2X leverage.

TVIX, CVOL, and VXX, showing trendlines from July 1, 2011--click to enlarge

TVIX looks like the vehicle of choice if you want to bet on VIX’s moves during times of high volatility—it matches VIX’s daily moves well and greatly benefits from backwardation. On the other hand CVOL is probably the better choice when the markets are less fearful.

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A spread before the Fed

 
Monday, September 26th, 2011 | Vance Harwood
 

I opened a S122/S123 spread today with SPY calls this morning for a net credit of 0.44.   Right now I think there is more downside risk than up, and if I’m wrong and the market rallies my long XIV position will more than make up for my 0.56 worst case loss.   Initially I put in my order as AON (all or none) at a penny below midprice.  It didn’t fill, so as an experiment I removed the AON and resubmitted at the same price—it then filled immediately (this was on Schwab’s SmartStreet Edge package).   Could have been a coincidence, but I wondering if AON adds another layer of processing that hinders execution.

I recently updated to Schwab’s StreetSmart Edge version 1.10.25, and noticed that they added a new feature that shows your option positions on the chart.  My spread shows up as the red and green horizontal lines on the chart marked with “P”s.

SPY 20Sept2001, click to enlarge

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Barclays’ inverse volatility ETN: IVOP

 
Wednesday, February 8th, 2012 | Vance Harwood
 

The termination of IVO left a hole in Barclays’ inverse volatility ETN lineup.   It still has XXV, but its leverage is only around 0.25 right now, so they needed a higher leverage solution that can compete with the likes of UBS’ AAVX, or VelocityShares‘ XIV—which always give 1X daily leverage.

IVOP had an inception date of September 16th, 2011 with an initial value of $20.   Barclays’ inverse volatility funds are essentially short positions on the same index that VXX tracks.  The short position is effectively created on the inception date, and it is not adjusted after that.   This approach differs considerably from their competitors’ offerings which deliver daily percentage moves matching  the inverse of the  index.

IVOP will not suffer from the compounding / path dependency problems of the competitors, but at the cost of exhibiting variable leverage—high leverage in volatile times, and low leverage in the quiet times when inverse volatility performs the best.   High leverage proved to be the undoing of IVO, the predecessor of IVOP.  Its leverage was approaching 3X, when it hit its $10 termination value.   IVOP’s leverage will be near 1X when VXX is around $41 and will terminate if VXX climbs above approximately 62.3.   The chart below shows projected leverage values v.s. VXX values.  The black vertical line shows VXX’s 19-September close.

XXV, IVOP, XIV leverage vs VXX, click to enlarge

For IVOP’s prospectus look for IVOP in Volatility Tickers

 

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SPY dividend September 2011

 
Sunday, September 25th, 2011 | Vance Harwood
 

SPY went ex-dividend Friday September 16th, 2011. Its payout will be $0.6249 per share on October 31st. The table below summarizes third quarter dividend information for SPY, IVV, and VOO—the three biggest S&P 500 index ETFs.

SYMBOL Next Ex-dividend Next Pay date Last Dividend Dividend
SPY 16-Sept-2011 31-Oct-2011 $0.6276 $0.6249
IVV 26-Sept-2011 30-Sept-2011 $0.605 $0.60 (est)
VOO 26-Sept-2011 (est) 30-Sept-2011 (est) $0.285 $0.285 (est)

For more information about ex-dividend and distribution dates for SPDR, iShares, Schwab, and Vanguard ETFs see this post

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Gold—sideways for the week?

 
Wednesday, September 14th, 2011 | Vance Harwood
 

I opened a 179/180 spread in GLD for a net credit of 0.20 for calls expiring this week.  I’m betting there is enough downward pressure on gold to keep GLD below 179 for the week.

GLD, click to enlarge

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Chart from Schwab StreetSmart Edge

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Barclays’ IVO bites the dust

 
Sunday, September 25th, 2011 | Vance Harwood
 

IVO,  one of Barlays’ inverse volatility ETNs terminated today when it briefly dipped below its $10 termination value.  The automatic redemption value will be $11.8024 next Monday, the 19th.   IVO was designed to behave as a true short of the short term volatility index SPXVSP ( fundamentally the same index that VXX tracks).  This approach avoids the potential path dependency / compounding errors of percentage tracking, daily rebalancing inverse funds like VelocityShares’ XIV or UBS’   AAVX,  but at the cost of having variable leverage.   As you can see below, IVO’s leverage was around 3X when it terminated.

Inverse Volatility daily leverage vs VXX price, click to enlarge

IVO’s leverage dropped below 1X when volatility is low—which in my opinion delivers the worst of both worlds:  high leverage when volatility is high and low leverage when volatility is low and contango is punishing those long short term volatility.

Barclays other inverse volatility ETN, XXV only has a leverage factor of 0.3 currently so I predict they will move quickly to replace IVO.   They had VZZB available to replace VZZ almost immediately after its termination.   Possible tickers would be XXVA or IVOA—IVOB appears to be taken.  (update:  IVOP  is the symbol for the IVO replacement).

For more on volatility ETN termination events see this post.

Posted in all | 4 Comments »

UBS introduces 12 new volatility ETNs

 
Friday, September 9th, 2011 | Vance Harwood
 

UBS has single-handedly increased the number of volatility focused ETNs/ETFs from 16 to 28 (press release). My initial analysis is that there is nothing revolutionary with these new products.  Four of the twelve are effectively clones of Barclays‘  VXX and VXZ products, and VelocityShares‘ XIV and ZIV inverse volatility products.  The other eight (4 long, 4 short)  fill in gaps in the forward volatility expectation spectrum:  2 month, 3 month, 4 month, and 6 months.

UBS’s short ETNs are similar to VelocityShares’ XIV and ZIV products in that they are designed to track the inverse of the daily percentage moves of their underlying indexes.   These aren’t true shorts of the underlying indexes like Barclays’ XXV and IVO.  Short volatility ETNs have acceleration / termination clauses to prevent them from going negative during big volatility spikes.  UBS’s ETNs terminate if they fall below $5, or more than a 60% drop in one day.  For all of the non-UBS products mentioned in this post, see Volatility Tickers for more information.

I think it will be tough for UBS to build volume with these products.  Initially their bid/ask spreads will likely be wide, and the uncertainties involved with trading volatility seem to swap out any advantages of being to fine tune the time frame of your volatility investments down to the month level.   People will construct elaborate mixes of these ETNs, but they will be setting these mixes based on backtesting—and if anything is certain, it is certain that the future will be different from the past.

UBS long S&P 500 VIX Futures ETN prospectus

UBS daily short S&P 500 VIX Futures prospectus

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Posted in all | 2 Comments »

Under the hood of XVZ

 
Wednesday, April 25th, 2012 | Vance Harwood
 

Barclays’ new XVZ volatility ETN is intended to allow investors to profit from volatility jumps without the contango losses that drag down approaches like Barclays’ VXX short term and VXZ medium term long only products.   To accomplish this XVZ switches between 11 different mixes of short term and medium term positions in volatility futures.  In volatile times there can be a different setting every day.

The switching itself is driven by the VIX/VXV ratio (Barcalys calls this ratio “Implied Volatility Term Structure” or IVTS) —the higher the ratio, the higher the fear that is being experienced in the market.   With settings 1 through 5 shown in the table below XVZ is holding short positions in short term volatility futures—which are profitable when volatility futures are in contango.  The rest of the settings are long both short and medium term futures in various mixes.

IVTS = VIX/VXV Set Actual Short Term Alloc. Actual Medium Term Alloc. Backtest Days Description
IVTS < 0.9 1 -0.3 0.7 307 Contango mode, very low fear
0.9 <= IVTS < 1.0 2 -0.2 0.8 402 Contango mode, low fear
3 -0.175 0.825 2
4 -0.125 0.875 24
5 -0.075 0.925 29
1.0 < IVTS <= 1.05 6 0 1 80 Transition
7 0.05 0.95 4
8 0.125 0.875 20
1.05 <= IVTS <= 1.15 9 0.25 0.75 43
10 0.375 0.625 10
IVTS > 1.15 11 0.5 0.5 26 Backwardation,very high fear
947 Total days

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In XVZ’s prospectus only 5 of these settings are explicitly called out, but the fine print specifies that allocations won’t change day to day by more than 12.5%. In practice this creates intermediate points to smooth out the changes.  Since some of these setting are closer than 12.5% from each other, it is possible to skip over settings in a day-to-day shift.   The other thing to remember in tracking XVZ’s movements is that today’s performance is driven by the allocations that were put in place the previous business day—and  those allocations were driven by the VIX/VXV ratio at the close of the market the business day before that.

In the table notice that of the 947 trading days of the backtest 709 of them (75%)  would have been in the two lowest, contango mode settings.

I’ve updated my XVZ backtest chart below, showing VIX and VIX/VXV  multiplied by 10.  XVZ  is making big decisions based on -10% / + 15% moves in the VIX/VXV ratio.

XVZ vs VIX and VIX/VXV, click to enlarge

The graph below shows my simulated XVZ (red) vs the actual XVZ (green) for August and September.  Things are tracking nicely.

XVZ sim vs actual, click to enlarge

 

 

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Getting index quotes on Bloomberg—not always obvious

 
Monday, September 5th, 2011 | Vance Harwood
 

Quotes / charts for all of the underlying indexes for volatility ETNs can be found on Bloomberg.  For example VXX uses SPVXSTR and XIV uses SPVXSP.   These indexes show the indicated value of the index that the ETNs track—this is the value used for creating or redeeming large blocks of ETN shares directly with the ETN provider.

Until recently I was having mixed results getting the index information from Bloomberg on the first try.  I would type the index, including the required ” :IND” at the end and depending on some apparently random process I would get the results I wanted, or “There are no matches for your search.”  A direct hyperlink would always work.  It doesn’t matter whether I was signed into Bloomberg or not.   I did some experimentation, and now I understand the problem.


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The first time you enter the Bloomberg  site if you type a correct index symbol into the search box and press enter you will get a “no matches response.”  If you click the magnifying glass nothing happens, I guess it’s just a decoration.

The key is to pay attention to the drop-down that appears below the search box while you are typing—if you don’t make any mistakes.  This is non-trivial since the volatility tickers are comprised of random collections of the letters: X, V, I, Y, and Z.    Bloomberg  displays the dropdown if you manage to type all the ticker characters plus at least “:IN” at the end.  But don’t stop there, you need to type the “D” too.   I’m guessing Bloomberg is not using much Google technology here.

Now, if you click on the “Get Quote” on the dropdown you will be sent to the page you want.

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It seems like once you have completed a successful search, the enter key works as expected.

Volatility Tickers provides a complete list of all the current volatilty ETNs / ETFs and links to their associated indexes—so you don’t have to type them in…

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