Tag Archive | "spy"

What the S&P 500 term structure said

Monday, June 10, 2013


In equity markets, a selloff doesn’t really count until it gets the term structure up. For instance, here’s the ratio of SPY 3 month implied volatility to one year implied volatility since 2012: The only two occasions when we got close to backwardation here were in May 2012 and the end of December 2012 (fiscal cliff). In 2013, the mean level has been about 0.83, which just means that 3 month SPY options were typically about 83% as expensive,…

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…

VIX Portfolio Hedging (VXH) Strategy 2012 Performance Review

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…

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…

VVIX and Index Option Order Flow

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.…

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…

Uninvestable Water

Tuesday, August 7, 2012


Water is one of those investment themes that comes up from time to time. It seems like there are a few different stories: Delivery. People understand this story intuitively: everybody needs water, some places don’t have enough of it, and since you can move it around in bottles and pipes, water is an excludable good. Excludable goods can be profitably sold. Technology and Filtration. Water delivered where you want it does no good if it’s dirty, or if it…

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…

A Quantitative Look at Volatility Skew

Thursday, March 15, 2012


Implied volatility (IV) skew is one of the most important and interesting aspects of listed options. IV skew typically refers to the differences in the implied volatilities of options in the same expiration cycle with different strike prices. There have been many attempts in the academic literature to model the behavior of changes in skew, but the interpretation of skew information by traders is still done largely on a qualitative and ad hoc basis. In “Quantifiable Implied Volatility Skew,”

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…


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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