Tag Archive | "spx"

S&P 500 implied correlation drops to post-crisis low

Monday, September 17, 2012

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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…

VIXH: How to Pay Through the Nose for the S&P 500

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…

S&P 500 3-month implied volatility is extremely low

Tuesday, August 21, 2012

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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…

Something Strange is Happening to Treasury Bond Options

Monday, August 6, 2012


It looks like investors are willing to pay more for options exposure to Treasury bonds than they ever have before. It is a well-known fact that, across many different markets and consistently over time, options tend to be priced today at volatility levels greater than the actual statistical volatility that occurs in the underlying asset. This phenomenon is known as the volatility risk premium (VRP). Think of an investor who wants to hedge her stock portfolio and buys some puts on…

SPX Options Yawn as Correlations Increase

Tuesday, June 12, 2012


Here are some observations about volatility and market conditions. 1. Option implied volatility is not especially high. With all the noise in the markets, you might think that options prices have baked in a lot of downside risk. They haven’t. One month SPX historical volatility is about 18%, and one month at the money implied volatility is closer to 20%. If we add in out of the money skew, VIX-style, we get an estimate of 23.5%. That ratio of implied to historical –…

Are Volatility ETPs Like VXX and TVIX Going To Kill the Market?

Tuesday, March 20, 2012

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The theory that volatility ETPs are somehow going to have adverse consequences on the market has been a popular theme for a month or two now at least. I’ve tried to show why this this idea doesn’t make sense twice; when it comes to zombie ideas, sometimes you have to just keep trying. If you want to claim that the increased volume in volatility ETPs is causing the VIX tail to wag the SPX dog, you owe the world the…

The Cost of Hedging Equity Exposure Is Higher Than It Looks

Saturday, March 17, 2012


BofA interest rate strategists Ralph Axel and Ruslan Bikbov suggest that now would be a good time to buy tail risk hedges. (hat tip Joe Weisenthal) 6-month options on 10-year swap futures are as inexpensive now, they claim, as they’ve been in decades, excluding one period in 2006. 6M IV on 10Y Swap Futures, bp. Source: BofA Merrill Lynch Global Research So far, so good. If rates are your key concern, this looks like a decent time to…

This Week in VIX Scaremongering

Thursday, March 8, 2012


The halt in TVIX share issuance and the fact that, on some days, VIX-based ETF/ETN rebalancing accounts for 90% of VIX futures volume has caused some pretty wild speculation. I’ve been too busy this week to write a proper rebuttal, but here are some points that will help you steer clear of all the needless hand-wringing: The rolling of contracts in VXX and similar products is in no way “entirely game-able,” for the same reason that the term…

Is the Market Getting Too Quiet?

Tuesday, January 31, 2012


The market has not been this docile in more than eight months. The short-term volatility of the S&P 500 dipped below 10% in mid-January, and the market has kept getting quieter as stocks churn flat-to-higher. The temptation when stocks get this quiet and options become this cheap is to assume that volatility will soon revert higher. But before speculating on rockier markets up ahead, it is worth looking back at how similar markets have fared historically. Fig. 1. SPX…

The European Volatility Risk Premium Persists

Tuesday, January 10, 2012

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The media narrative at the moment is that U.S. investors are happy to ignore all things European for as long as modestly positive domestic economic news keeps trickling out. The headlines today about stocks being up “on” news from Alcoa were silly enough,* but this does seem to be a real theme – slight reductions in the odds of a 2012 recession mean it’s time to pile into stocks, apparently. The smarter parts of the market qua options and volatility traders have…


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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