Tag Archive | "correlation"

Volatility Tracker: No Surprises in Gold

Sunday, November 22, 2009


Volatility Tracker for the week of November 23, 2009 News-making price changes in gold [11] have not been accompanied by any particularly noteworthy behavior in the options market. While it would be wrong to suggest that options in any way “anticipated” the gold rally, it is also fair to say that price action in the underlying has been roughly in line with the expectations given by option prices.  Notice that the CBOE’s VIX-style gold volatility index (GVZ) has drifted between…

Volatility Tracker: Implied Correlation as a Reflation Proxy

Monday, August 31, 2009


Volatility Tracker for the week of August 31, 2009 The CBOE Implied Correlation Index spiked to its highest level last week since the beginning of the rally that began this spring. [10] In a healthy, normally functioning market, companies that succeed will see their stock prices rise, while the stocks of failing companies will fall. In a healthy, normally functioning market, the stocks of winners and losers alike won’t rise or fall together in lock step; but the increase in…

Volatility Tracker: Implied Correlation

Monday, July 27, 2009


Volatility Tracker for the week of July 27, 2009 Equities continued to rally last week in defiance of any “overbought” technical readings. [4] Nevertheless, until the contrary signals noted last week abate – specifically, the term structure of volatility futures [7] and the VIX Premium Ratio [8] – I don’t anticipate much upside potential. Note that the Nasdaq 100 Implied Volatility Index (VXN) rose on the week [2] – though this is just as likely due to out of the…

The VIX is Fungible

Friday, July 17, 2009

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I propose the following rule of thumb for VIX interpretation: If you think some VIX movement entails a proposition p and movement in the other volatility indexes VXN, RVX, and VXD doesn’t entail p, you shouldn’t believe p. Why accept this rule? Because equity indexes are highly correlated, especially over the very short term, and volatility indexes are calculated using the same methodology, such that in the case of a divergence of one volatility index from the others,…

The Volatility Risk Premium in Index Options

Friday, April 17, 2009


Two academic papers recently discussed over at the CXO Blog provide some good analysis of the volatility risk premium in equity index options.  The volatility risk premium is just the difference between the realized volatility of the underlying and the volatility implied by options prices.  What numerous academic studies have found is that index options are consistently priced at a higher volatility than is realized over the relevant time period. “The Volatility Premium” (Eraker 2008) locates one source of…

Top Five Trading Myths

Thursday, January 29, 2009

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These are the top five trading myths that we would kill right now if we could.  Since human brains are wired to remember often-repeated associations as true even if they’re false, we’ll state the true propositions. Technical analysis does not apply to 2x, 3x, and related inverse ETFs that track the daily changes in some underlying. You can’t trade the spot VIX; not with VIX futures, not with VIX ETNs, and not with VIX options. Credit spreads are…

The VIX Has No Causal Power

Wednesday, October 29, 2008

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We should buy stocks because the VIX is going to decline, according to a strategist at J.P. Morgan.  As reported in the Striking Price Daily: Admittedly, trading stocks, or puts and calls, to benefit from VIX’s fluctuations seems like adventurism, but many investors routinely chase less well-researched ideas. Lee, the J.P. Morgan strategist, opines that VIX can be expected to decline following improvements in the credit markets, more macroeconomic clarity, an easing of hedge-fund redemption related selling,…

Is a Volatility ETF a Good Idea?

Wednesday, September 10, 2008

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Bradley Kay at Morningstar would like to see an ETF that tracks the VIX: Equities not only provide a return, but they also have a volatility that estimates how risky they look in the near future. [...] While it has historically hovered around 20, the VIX falls during quiet market periods and spikes when a flurry of trading activity buffets the stock market. An investment in this index would provide a valuable hedge against periods of heightened uncertainty, and since…

More on The Correlation Game

Monday, August 18, 2008


We unveiled one of our favorite 4PM pastimes back in April: called The Correlation Game, the steps are simple: Step One: Point your browser at Yahoo Finance, Marketwatch, or whatever mainstream financial media portal suits your fancy. Step Two: Scan the top headline, which is typically of the form, “Markets move x on news that y.”  If the headline includes a dubious assumption or inference about causation, take a drink. Step Three: the next player moves to the…

Weekend Reading: The Next Leg of the Bear

Sunday, August 10, 2008

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Random Roger, following up on the 300-point rally meme, agrees that during bear markets, there does tend to be more volatility.  Remember, volatility doesn’t necessarily equal whatever is happening (or not happening) in the VIX.  And more importantly, volatility doesn’t equal large-size selloffs – monster one-day rallies are constitutive of volatility, too! Adam has had enough of people deriving some major magical causal link between the price of crude and equity rallies.  We couldn’t agree more – oil-related stories are…


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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