Here’s one for all you volatility traders. You have to take a position in some combination of the following contracts (and only the following contracts), and hold it for all of 2012. The position will be closed out on the last day of December.
- CBOE Volatility Index® (VIX®) Futures
- EURO STOXX 50® Volatility (VSTOXX) Futures (V2TX)
- CBOE Emerging Markets ETF Volatility Index (VXEM)
- CBOE Gold ETF Volatility Index (GV)
What’s your take? For this hypothetical, we’re limited to only those four contracts – no underlyings – because I’m not interested in uncommited, view-from-nowhere volatility arb sorts of trades.
My bet is that the best combination for 2012 will be a long position in European volatility (long VSTOXX futures) and short vol in emerging markets (short VXEEM). That’s essentially a thesis that China will not have a hard landing, that the China-Brazil-commodities chain will provide upside to EM equity markets, and that Europe will manage not to find meaningful resolution, like, ever. Based on my review of the annual research reports from banks for the year, I guess this is close to the consensus view. Some people are more positive on European stocks, while others think that China will steal even more customers from Europe.
I’m not putting a speculative VIX trade on in this hypothetical because, despite the strong recent U.S. economic data, I’m not convinced we won’t see the economy stall out in the second half of the year; and while U.S. equity implied vol is definitely expensive relative to recent stock volatility, it is only expensive if the rest of the year looks exactly like the start. I don’t understand gold from a trading perspective, and neither does almost anybody else, and, if anything, you have to be biased toward long volatility exposure in some commodities.
The last two products are newer, and while volume in the VXEEM product is off to a nice start, the gold contract appears to be stillborn. I still don’t understand why the CME and CBOE listed essentially the same gold volatility product in the same year, in some kind of exchange-traded product listing parody of Mutually Assured Destruction. If you aren’t familiar with volatility futures or wonder why they are worth trading in lieu of listed options, check out “VIX Futures and ETPs: Declaring Independence from Strike Prices,” from the July 2011 issue of Expiring Monthly.
I’m genuinely interested in what people’s views and biases are here – your comments are welcome here or on Twitter.
Disclosure: positions in these and related products. This post is just for fun.