From early March through last Friday, there were really only a few ways to make any profits in the S&P 500, and looking at which strategies have been working gives us a good sense for the character of this market. First, let’s take a look at price action over this period. SPX went basically nowhere: Fig. 1. S&P 500 Index, March 6 – April 18. Source: CBOE Now, trading strategies can be classified according to the source of their risks/returns, meaning…
Monday, February 25, 2013
Monday’s 1.9% decline in equities sparked the largest jump in the VIX since… There’s certainly some value in knowing the end of that sentence, but unless you’re avoiding all financial media, you’ve probably already read a few variations of that story. Here are some additional ways of measuring changes in implied volatility. We use some of these estimates to inform market timing strategies. First, here is the VIX shown as a percentage of trailing S&P 500 1-month historical volatility. Sometimes…
Friday, February 1, 2013
A successful portfolio hedging strategy does two things: it protects against market declines, and it imposes minimal costs in rising markets. In a year like 2012, the ability to minimize hedging costs actually matters more than downside protection, and the VIX Portfolio Hedging (VXH) Strategy bested its benchmarks and peers by being more cost-effective. Let’s start with a look at how the S&P 500 and the iPath VXX ETN fared in 2012. The histograms at fig. 1 show daily…
Thursday, December 20, 2012
Here’s a chart I sent out to clients last night as part of our weekly update. It tracks the ratio of three-month SPX implied volatility as measured by VXV to the trailing 3m historical volatility. SPX 3-month volatility risk premium. Source: Yahoo!, Condor Options What the chart shows is that three-month options are priced at more than 1.4 times the value of the actual rate of change in stocks over the last quarter. Options are usually a bit…
Thursday, November 8, 2012
The emerging post-election consensus is that the fiscal cliff is more likely to be addressed without roiling markets. President Obama, the theory goes, is stronger politically than he was in 2011, and Speaker Boehner also has more control over the Tea Party wing of the Republican party. The new power dynamic should make it easier for moderates to find a palatable mix of revenue increases and spending cuts. This morning, John Carney mentioned an alternative view: The…
Monday, November 5, 2012
The election this week has sparked countless articles about the likely effects of an Obama or a Romney win on various sectors of the economy, but in the short term, traders should focus not on the effects of a win by one party, but on the effects of an unclear outcome for either party. The FX team at Citi recently called a disputed electoral outcome the “biggest political risk” facing markets right now: We view most of the…
Wednesday, October 24, 2012
As I mentioned yesterday morning to our clients, our momentum-based VIX signal has us avoiding new short volatility and long stock positions for the moment. If we see some additional large swings in the CBOE Volatility Index (VIX) over the next few days, a volatility-of-volatility estimate I follow will also signal a ratcheting down of exposure. We can also look at the order flow in major index option products on Tuesday to gain some clarity about market sentiment. fig.…
Monday, September 17, 2012
Not that long ago, we noted that S&P 500 implied correlation was marching to new all-time highs, suggesting that investors were better served to focus on major economic risks rather than looking just at the details of individual stocks. About one year later, we can write instead that S&P 500 implied correlation is pushing to new lows. CBOE S&P 500 Implied Correlation Index (January 2013). Source: CBOE, Condor Options The biggest risk scenarios that have worried investors over…
Wednesday, August 29, 2012
First Trust Portfolios L.P. recently announced the launch of the First Trust CBOE S&P 500 VIX Tail Hedge Fund, a fund designed to replicate the performance of the CBOE VIX Tail Hedge Index. The strategy is very simple. It holds stocks replicating the S&P 500 and, at the monthly VIX expiration, purchases a quantity of front-month VIX calls corresponding to the level of the VIX Index. With VIX<15 or >50, no calls are bought. With VIX>15 and <30, 1% of…
Tuesday, August 21, 2012
The sharp decline in market volatility has directed a lot of attention to low readings in the CBOE Volatility Index (VIX). Given all of the plausible scenarios for market turmoil not that far in the future, traders have been wondering: isn’t VIX at least a tad underpriced? Nicholas Colas from ConvergEx responds: In practice, the VIX measures expected changes in stock prices over the next 30 days. That’s it. It is heavily informed by recent actual volatility, as…
Jared Woodard is a registered commodity trading advisor who specializes in trading volatility as an asset class. With over a decade of experience trading options, futures ... Read More
© 2013 Condor Options. Powered by Wordpress.
Tuesday, April 23, 2013
0 Comments