Archive | Studies

VIX Option Activity and Market Returns (Update)

Monday, February 10, 2014


The intuition around ratios of option trading volume is that large deviations from normal trading volume may indicate a significant change in investor sentiment, and especially a "capitulation"...

Dispersion and Stock-pickers’ Markets

Tuesday, December 31, 2013

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Here’s an interesting new paper from S&P Dow Jones Indices about dispersion and why it is a more valuable estimate than correlation: “[W]hat does it mean to say that a particular index (or portfolio) is diversified? Or more diversified than another, or more now than it was before? In order to speak meaningfully about the internal diversity of an index and its variation over time, quantitative metrics are required. The most commonly encountered is the correlation statistic, but…

Stock returns when volatility is low and options traders are stressed

Monday, October 7, 2013


In a previous post, we showed that the spread between one month and three month at the money implied volatility in S&P 500 index options was near the highs for the year. That post also mentioned that it was unusual to see implied volatility term structure so high even while the realized volatility of equity returns has been particularly low. To quantify that intuition, here’s a chart, using Russell 2000 data this time for variety: Most investors know…

Do the Commitments of VIX Futures Traders Predict the Future?

Monday, July 22, 2013


Not really. Here are the 2013 weekly non-commercial VIX futures Commitments of Traders (COT) from the CFTC: There are interesting stories in the time series – especially the large run-up in net short exposure in 2012 and 2013, which was unwound pretty quickly in June and has slowly started to climb again. Charts below show percent changes in the spot VIX index one, two, and four weeks after each change in the non-commerical short VX COT. Data are from…

Extreme correlation between equity returns and implied volatility

Tuesday, March 26, 2013

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Everyone knows that implied volatility and stock returns tend to be negatively correlated. The results from a recent study we did showed, though, that when implied volatility and stock returns become too negatively correlated, volatility sellers should consider moving to cash. The x axis in fig. 1 shows the two month realized correlation of VXX and SPX returns. The y axis shows VXX returns 15 days after each correlation observation. One thing that stands out from this plot is that, if we…

130/30 Strategies as Expensive Beta

Monday, December 17, 2012

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Only a few years ago, 130/30 funds were all the rage. They allowed equity managers who had traditionally been bound to a long-only strategy to make use of short exposure to shape their portfolios. The ability to take short and levered long positions was supposed to reduce the overall riskiness of the portfolio and also to provide new ways to beat the benchmarks, e.g. by adding long exposure to the best stocks in a sector and taking short positions in…

Is the threat of airstrikes against Iran driving oil options prices higher?

Sunday, March 25, 2012

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Probably. First, some context. Here’s the one-month volatility risk premium in USO options since 2007. Think of this as an estimate of how richly or cheaply priced options on crude oil are, relative to the actual historical volatility of the asset. Any ratio above 1.00 indicates that option buyers were willing to pay a premium above the value of the volatility subsequently exhibited by crude oil futures. As you can see, the ratio is usually greater than one.…

Are Baidu and Google Earnings Related?

Friday, July 15, 2011


After the close on Thursday, even as traders were marveling at the 13% move after Google announced its earnings triumph, Baidu was also up substantially after hours (2.8%) on no apparent news. This got me wondering whether there was any steady relationship between the two – after all, Baidu is colloquially “the Google of China,” so it isn’t hard to imagine people trading the two stocks similarly. On the day after Google reported earnings, the returns of the stocks…

Buying on the Dips in your Strategy

Wednesday, September 22, 2010


If you’re trading a strategy with a long-term record of solid performance and a steadily rising equity curve, a great time to increase your exposure to that strategy is after the strategy has suffered a losing period. In other words, given a strong and consistent strategy, you should buy that strategy on the dips. The thinking here is the same as it is for any buy-on-the-dips approach to investing in stocks. Because equities have tended to rise…

Hedging Tail Risk with the VIX

Wednesday, July 14, 2010


Felix Salmon is doubtful about whether it is possible to hedge tail risk, and I wholeheartedly agree with the data he cites showing that, of eight major asset classes, only volatility and managed futures offer genuine non-correlation to market returns. In fact, I’ll go a step further: I’m not that enthusiastic about the benefits of managed futures, at least in their current form. As a registered commodity trading advisor, I’ve seen the sorts of strategies that most of…


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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