Tags

Browse the content below to find what you're looking for.

A Volatility Spike Barclays’ XVZ Would Have Missed

 
Tuesday, February 28th, 2012 | Vance Harwood
 

Bill Luby of VIX and More, noted that yesterday, February 27, 2007 is the five year anniversary of  the biggest daily percentage jump in the VIX index’s history.  The index jumped from a 11.15 close the previous day to 18.31 —a 59% jump.

Normally I would expect a volatility strategy fund like XVZ, VQT, or VSPY to perform very well during a volatility spike of this magnitude.  None of these funds existed back then, but my backtest of XVZ shows XVZ would have stayed flat, and I doubt the others would have done well either.

The chart below (click to enlarge) shows XVZ’s backtested performance since 2004 compared to VIX.  In general it has very good performance during volatility spikes.

 

VIX vs XVZ since 2004

The February 2007 spike was different.    The chart below shows a close-up of VIX and a simulated XVZ in that time period.

VIX vs XVZ February 2007

Unlike most volatility spikes there was no forewarning on this one—things were quiet, then a big one day jump.  The chart below shows a more typical run-up that happened in 2006, where XVZ would have gained about 9% overall by the time the spike was over.

VIX vs XVZ 2006

When I was generating the backtest for XVZ I noticed this anomaly.  A closer look revealed that XVZ wouldn’t have caught this spike because its asset allocation strategies on any given day are based on the closing value of the VIX to VXV ratio two days before.    When the spike occurred XVZ would have still been in its full contango fighting mode, short 30% short term rolling futures, and long 70% medium term futures—the moves in the two positions would have cancelled each other out.   By the time XVZ adjusted the VIX was already into its mean reverting mode.

Inherent time delay in the triggers (e.g., SPX historic volatility, implied volatility) used by other volatility strategy funds like VQT and VSPY hobble them with the same inability to capitalize on fast volatility spikes.   The spike in 2007 was triggered by a 9% blow-off in the Chinese stock market, but the scenarios that worry me more are no-warning events like natural disasters (earthquake/tsunami) or terrorist attacks.  Generally there is no forewarning on these events and they could have significant impacts on the market.    None of the first generation volatility strategy funds address this gap, hopefully the second generation will.

 

 

Posted in all | 3 Comments »

A Brief History of Fear—VIX Over the Last 25 Years

 
Friday, March 16th, 2012 | Vance Harwood
 

One of the scariest things about market panics is their unpredictability.  All of us remember the dark days of 2008 and 2009, not so many the October 1987 crash.   For me, both of those crashes carried the same sense of disruption—the feeling that things would never be quite the same again.

I’ve been looking at the history of volatility, because it’s clear to me that volatility spikes are a big danger in the inverse volatility investing that I’m been doing.   Shorting VXX, or being long XIV is great while we are in a bull market, but things can get very ugly in a hurry.   The chart below shows a history of volatility, starting in January 1986.  Neither the VIX, or its predecessor VXO existed at that point,  the original index started in 1993, but the CBOE has projected the old style VXO index back to that year.

Volatility 1986 through 2011, click to enlarge

.

.

.
.

.

.

..

..

…

..

I’ve never looked closely at the original VIX index, which is now called the VXO.   The VIX methodology we now use was put in place in 2003.   The chart below shows the two indexes during a fear spike in the fall of 1998.   The two track each other closely enough that for normal and semi-normal situations they look comparable.

VXO vs VIX August 1998, click to enlarge

.

.

.

.

.

.

.

.

..

Below, I have zoomed in on the October 1987 and the November 2008 fear spikes.

October 1987 volatility spike, click to enlarge

.

.

.

.

.

.

.

.

.

Fear in November 2008, click to enlarge

.

.

.

..

.

.

.

..

Looking at these two monumental spikes, there doesn’t seem to be anything unusual about the run-up.  Nothing in the data suggests that a massive spike in volatility is on the way.

For more information, and access to the the raw data that I used see the CBOE’s microsite on VIX.

.

Posted in all, VIX | 5 Comments »

CVOL—the new volatility kid on the block

 
Saturday, January 15th, 2011 | Vance Harwood
 

Last week was the first week of trading for Citigroup’s new volatility product: CVOL.   Its stated goal is to “produce returns that are correlated to the CBOE Volatility Index (the “VIX Index”). ”   So far no one has figured out a way to offer a direct investment in the VIX Index, so volatility traders must be content with proxies.

CVOL’s established competitor, Barclays’ VXX also tries to correlate with the VIX, but consistently fails, both in magnitude and its steady erosion in value due to contango.   In order to avoid some of VXX’s weaknesses CVOL uses longer dated volatility futures (third and forth month instead of first and second), adds a short position in the S&P500, and uses leverage.   This witches brew is spelled out with equations in Citigroup’s CVOL pricing supplement / prospectus, but I don’t know if I will ever have enough motivation / coffee to drag myself through those.

In any event, the proof is in the pudding, so below are the percentage results for CVOL compared to VXX and VIX, using its first day of trading, November 15th as the basis.   Very few shares of CVOL were traded during the week so regular stock charts are mostly useless.   I captured four snapshots of  the market during the week, plus I took the actual trade values of some of the CVOL trades and used their timestamps to lookup the corresponding VXX and VIX values.   The bid / ask spread of CVOL ranged from around .53 to 1.10 during my snapshots.  I used a value halfway between the bid/asked for the chart below.

 

CVOL vs VXX and VIX, click to enlarge

 

Last week was a good test case, because there was a lot of volatility in volatility.  The VIX popped over +17% on Tuesday and CVOL delivered a very respectable +15% value, while VXX demonstrated its usual lethargic behavior with an 8% jump.   The last two data points were on Friday, and show CVOL out performing the VIX—something I wonder if VXX has ever done.   On Monday we will see if this performance was due to the typical Friday sag in VIX (due to option traders compensating for time decay during the weekend), or over-leverage in the CVOL machinery.

VXX has proved to be an abysmal long term performer (down 89% since inception), so the only believable reason for its multi-million share daily volume is traders trying to speculate on / hedge short term volatility and the associated market declines.

The early returns suggest that CVOL will be a better choice.

Posted in Advanced Topics, all, VIX | No Comments »

Betting on fear to fade

 
Tuesday, May 18th, 2010 | Vance Harwood
 

Bought VIX June  puts at 4.6,  the VIX index was around 31 at the time.   Barring another bear market I think we will see the VIX pull back from the recent spikes.

For related posts see:

Posted in all, Options, VIX | No Comments »

Fear vs Fear — 2009 / 2010 wins

 
Sunday, May 16th, 2010 | Vance Harwood
 

When updating the chart below, where the price and normalized volume of SPY from 2003/2004 intertwines with the SPY of 2009/2010, I noticed one area of consistent difference between the two time spans—volatility.   Using the VIX index as a proxy for actual volatility, the ’09 / ’10 values have averaged about 40% higher than the ’03 / ’04 bull market.   On the slight chance that the existing chart wasn’t busy enough, I added the daily VIX closing values from the two time spans.    It’s not too surprising the VIX is running higher this time around, the 2000 bear market took around 30 months to go from the 2000 highs to the 2003 bottom.  The 2008/2009 crash only took 6 months—it’s no wonder people are still edgy.

As usual my crystal ball continues to be cloudy.   USA economic news continues to be upbeat, while the Euro-zone continues to thrash.  My hat is off to the German bankers, count on them to be straight talkers!   I’m guessing fear will have the upper hand on Monday and Tuesday.

SPY 2003 / 2004 vs 2009 / 2010, click to enlarge

SPY 2003 / 2004 vs 2009 / 2010, click to enlarge

Posted in all | No Comments »

February VIX options expire — fear takes a bite

 
Thursday, February 18th, 2010 | Vance Harwood
 

February VIX options expired today.   The settlement price (ticker VRO/$VRO/^VRO) was 22.50.  The VIX index opened at 22.25.   With this settlement price I ended up losing .35 per call on my VIX spread.    Things could have been much worse–I could have lost up to 2.85 with the spread.    I certainly didn’t expect the VIX to stay up at the levels it has.     People always seem surprised at how fast things drop in a correction, that coupled with the recent savage bear market,  and the uncertainty in the EU, has people spooked.   The 6 month pattern of VIX dropping rapidly after upticks was broken with this sequence.  I’m reminded of the quote, “everything works sometimes but nothing works all the time”.

6 Months VIX index, Click to enlarge

6 Months VIX index, Click to enlarge

Posted in Advanced Topics, all, VIX | No Comments »

VIX option expiration dates

 
Friday, October 28th, 2011 | Vance Harwood
 

Upcoming expiration dates for VIX, RVX options:

Expiration date
Wednesday (AM)		VIX
(open)		VRO
(settlement)		Futures
Month
December 21st, 201122.5221.36
January 18th, 201223.2023.64
February 15th, 201219.7420.44
March 21st, 2012 14.7214.55
April 18th, 201219.0219.06
May 16th, 20121
June, 20th, 20122
July 18th, 20123
August 22nd, 20124
September 19th, 20125
October 17th, 20126
November 21st, 20127
December 19th, 2012

The last day of trading for the options expiring each month is the day before (Tuesday) the dates above.

The underlying security for these options is not the CBOE’s VIX index, rather it is the volatility futures expiring on the same date.  The VIX and volatility futures do approximate each other on their expiration date (see below for the discussion on VRO), but otherwise the volatility futures can be lower or higher than the VIX.

You can get a good estimate for the volatility futures prices by looking at the $10 VIX call for the the corresponding month.  For a given month if you split the bid/ask price of this deep in the money option, and add 10 you are pretty close to what the VIX futures for that month are trading at.   For example, if the $10 call is at 8.50 bid, 8.90 ask, then split the difference to get 8.70, and add 10 to get 18.70.  This is the approximate VIX futures price for that month.   Volatility ETN products (e.g, VXX, VXZ, TVIX, CVOL, XIV) are based on various uses / mixtures of these futures.  See Volatility Tickers for a full list.

The exercise / settlement values on the expiration date are not the opening values of the VIX / RVX index, but rather their special opening quote values.    These quotes have their own symbol and are printed a few minutes after opening.  The VIX settlement value is VRO  (Yahoo ^VRO, Schwab $VRO), and RSL for the Russell Volatility index.

Source:   OCC and CBOE option expiration calendars

For a spreadsheet calculator for all historical expiration days see this CBOE tool.

Posted in Advanced Topics, all, master, Options, VIX | 4 Comments »

Getting the correct greeks for VIX options

 
Monday, March 19th, 2012 | Vance Harwood
 

Most software packages that report option greeks (e.g., delta, gamma, theta, implied volatility) report incorrect values for VIX options. Depending on the date and state of the market they can vary from almost correct to widely wrong–giving truly nonsense numbers.  These packages assume that  the VIX index is the underlying for the VIX options.   This is wrong.   The true underlying is the corresponding VIX future for that month (e.g., January VIX futures for January VIX options).

Read More

Posted in Advanced Topics, all, Options, VIX | No Comments »

FAQ on VIX, the “Fear Index”

 
Saturday, September 24th, 2011 | Vance Harwood
 
  • Why do they call the VIX Index the “Fear Index” or “Fear Gauge”
    • Because the VIX almost always goes up when the market goes down. The scarier the decline the higher the VIX tends to go. In the worst part of the 2008/2009 bear market it went as high as 80. In Dec 2009 it has been averaging around 22. In strong bull markets it historically bounces between 10 and 15.
  • How can I get quotes for the VIX?
    • For Yahoo Finance use ^VIX
    • For Schwab use $VIX
    • For Fidelity use VIX
    • Google Finance—apparently not available
    • For VIX options quotes—check your broker’s home page, Yahoo Finance (where they seem to come and go), or here
  • How can I buy or short the VIX Index?
    • You can’t short VIX directly.  It is a computed index like the Dow Jones Industrial Average, but instead of stocks this index is related to option prices on the S&P 500 index (SPX). As the options get relatively pricier the VIX index goes higher.
    • You can short VIX indirectly, with proxies that correlate fairly well with the VIX index.  See “Going short on VIX” for details.
  • Is there any way to speculate on the VIX?
    • You can buy options and futures on the VIX. I have not done futures trading on the VIX, but I have done VIX options. While not inherently riskier than options on stocks, these options have some unusual wrinkles and characteristics that you should know about. For example the VIX options typically don’t follow the VIX itself all that well on most days—they tend to not drop as rapidly as the VIX index itself, or climb as fast. This can be really frustrating! In addition the “spread”—the difference between the cost to buy and to sell is quite high on these options. This is never in your favor–this makes it harder to make a profit, but be aware you don’t have the pay the listed prices, you can often buy or sell close to the midpoint of these two prices.
    • There are also multiple ETNs (Exchange Traded Note) and ETFs that are intended to track the VIX index. See Volatility Tickers for a complete list. These trade like stocks (however sometimes they are hard to short).   VXX doesn’t do a particularly good job of tracking the VIX.  It doesn’t jump as much as the VIX in scary times, and structurally it is fated to lose value over time.   It is best suited for short term positions.  See “How to go long on VIX.“
    • In addition, XIV is an ETN that is designed to deliver the inverse daily return of  VXX.  This is a good choice when you think the VIX index is going to drop.  See here for more information.
  • Why don’t VIX options track the VIX?
    • For a typical options marketplace to function the option market makers need to be able to buy or sell the thing the options are based on (this is called the “underlying”).  So far no one has figured out how to make the VIX index investible—it is a computed index that can’t be cost effectively replicated in the real world.  Since the VIX index isn’t practical as an underlying VIX options are based on volatility futures that are traded on commodity exchanges.   These volatility futures typically lag the VIX index in both directions, up and down.
    • In normal situations the next volatility future to expire will move about 50% of the VIX index (e.g., if the VIX increases 4% the futures will probably move about 2%).
    • To track the price of the VIX options underlying future for a given month, look at the $10 strike call for that month, split the bid/ask price and add 10.  That will give you a good estimate of the current future’s price.

.

Posted in Advanced Topics, all, Options, Popular Post, VIX | No Comments »

VIX quotes, options chains, and correct greeks for VIX options

 
Monday, March 19th, 2012 | Vance Harwood
 

You can get free delayed VIX option quotes at freerealtime.com or Yahoo Finance using the ^VIX symbol.  Go to here for options calenders giving the correct expiration dates (always last trading on a Tuesday, expiration on a Wednesday morning)

Schwab uses $VIX as the ticker symbol, Fidelity uses VIX, Yahoo uses ^VIX.

VIX Settlement values (the price used to evaluate loss/gain at expiration) use symbol VRO  (^VRO for Yahoo, $VRO for Schwab).

The option Greeks (e.g., delta, gamma, theta) and computed IVs for VIX options are computed incorrectly on most broker’s software packages because they incorrectly use the VIX index instead of the appropriate VIX future month as the underlying.  I go through the steps in computing the correct Greeks yourself in this post.

Posted in Advanced Topics, all, Options, Popular Post, VIX | No Comments »


The Volatility Landscape

Follow Six Figure Investing

Twitter: 6_Figure_invest

Archives