What’s Your Volatility Thesis for 2012?

Mon, Feb 13, 2012 | Jared Woodard


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.

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.

1 Comments For This Post

  1. Freemon SandleWould Says:

    Just stopped by to tell you that you are an idiot. Only a wanna be climber would say what you said about gold I own none. But wish I could as our Dear Leader Obama is a damned fool.

    It is really easy to see both you and Buffet are trying to talk us out of another recession by upping our spending and investment.

    That will not work. Looking at the absolute employment numbers and petroleum gives up the game. Another recession headed our way fast.

    Oh well! Preserving freedom by getting rid of B.O. is worth it.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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