There’s an interesting disconnect right now between the qualitative narrative about Greece, the euro, and China, and one quantitative estimate of how aggressively you should be hedged. The narrative is about as gloomy as it gets: everyone is talking about the new German empire (Soros), the “inevitable” Grexit, etc., and mediocre U.S. economic data. But the VXH strategy, while no longer at its lowest setting, is still not signalling the need for large hedges.
I developed the VIX Portfolio…
The jargon of options trading sometimes turns people off, and maybe “volatility skew” is one of the biggest hurdles. So I’m going to explain the concept in a straightforward way, and then explain why volatility skew is something you should care very much about.
Volatility skew usually refers to the difference between the implied volatilities of options at different strike prices in the same expiration cycle. For the majority of stocks and indexes, options with high strike prices have low…
I’ve already posted some performance details on the VXH strategy, but I wanted to wait for the official report from the accountant to discuss August returns. The numbers are in, and VXH returned 167% in August. The strategy is up another 10% or so in September, and has returned more than 50% since inception. I sent the following note to clients earlier this week, and you can read it here for more details:
VIX Portfolio Hedging (VXH) Program Performance Review…
Volatility is the only asset class that makes sense for hedging an equity portfolio, since it protects against the actual thing that investors are worried about. Fixed income, commodities, gold, etc. all have their neat quirks, but their value as portfolio hedges is orthogonal, at best. Investors love smooth, positive returns most of all and love sharp, jagged declines the least. Long volatility strategies like VXH produce outsized gains during those sharp, jagged periods of high volatility, making them the…
Some miscellaneous thoughts as equities notch another decline of 2.5%.
1. If your portfolio is too bullish or unhedged, by all means there’s no reason to stay “naked long,” but at the same time this is the worst sort of environment in which to be buying puts outright, because the high IV and steeper skew means put buyers will have seriously overpaid if we get even a modest bounce over the next week or two.
2. If you want…
The VIX Portfolio Hedging (VXH) Strategy is being offered to the public for the first time, starting today. The strategy is available via professionally managed accounts, or available by subscription here. First-time visitors may want to start with the previous posts on this strategy:
Introducing the VIX Portfolio Hedging (VXH) Strategy
Why Conventional Hedging Methods Fail
VIX Portfolio Hedging in a Crisis-Free World
The Discreet Charm of the VXX ETN
If your portfolio isn’t already protected against…
Our paid newsletter strategies are predicated on the expectation of mean-reversion (with risk-management rules for containing losses in trending markets)—in implied volatility as well as in price of the underlying. But when we find ourselves in a strong bullish trend, it's often desirable to both increase delta and decrease vega. One great way to do this is with butterflies...
This is the fourth post in the series I’m writing to introduce the VIX Portfolio Hedging (VXH) Strategy. To review: the purpose of the VXH Strategy is to provide cost-effective protection against tail risks and market crashes. The strategy takes positions in short-term VIX-based products, and varies its allocation to those positions in response to changes in the market environment. In this post, I discuss the use of the iPath S&P 500 VIX Short-Term Futures ETN…
This is the second post in the series I’m writing to introduce the VIX Portfolio Hedging (VXH) Strategy. I am discussing the problems with conventional portfolio hedging methods first – before getting into the details of the VXH strategy – because if widely-known conventional methods are suitable, then there’s little reason why anyone should consider a novel method. The two conventional hedging methods I’ll review are diversification (Modern Portfolio Theory), and portfolio insurance using long put options and option…
Since the 2008 financial crisis, I’ve been contacted regularly by clients and readers who are looking for effective and cost-efficient methods for hedging their portfolios. The more time I’ve spent researching the topic, the more I’ve become convinced that most widely-known methods are ineffective as hedges, inefficient from a cost standpoint, or both. After nearly a year of research, I have developed an alternative method that can provide meaningful protection against sudden and/or large market declines while not imposing excessive…
Tuesday, June 5, 2012
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