Tag Archive | "Volatility"

The VIX short squeeze that wasn’t

Sunday, March 3, 2013


Since early 2012, hedge funds and other traders have been short S&P 500 volatility via VIX futures in sizes not seen before. A story from IFR was syndicated across Reuters last week with a rather provocative lede: Hedge funds have levered up their short plays on VIX futures to such extreme levels that the market is poised for a significant short squeeze. For context, here is the positioning in VIX futures by non-commercial traders since the product was listed…

Why Black-Scholes is Better Than We Think

Thursday, December 6, 2012


Every options trader knows about or at least of the Black-Scholes-Merton (BSM) pricing model. Because it is the oldest formalized pricing model and only the first of many, some traders regard it as outdated and inferior. Perhaps it is a victim of the familiarity that breeds contempt. But a recent paper gives some reasons why traders should give BSM a second look. Delta hedging is an essential component of any volatility trading strategy. When straddle buyers also buy…

Rising correlation and stock volatility

Monday, November 19, 2012


In 2011 and early 2012, one of the big themes was the elevated correlation among individual stocks. In the “risk on, risk off” environment, investor appetites for stocks were indifferent to the fundamentals of particular companies: trades were all about the macroeconomic risks. You can get a sense for the major swings in stock correlation by looking at the three month correlation among the Dow Jones Industrial Average components since 2008 – see the bottom panel in fig. 1. One…

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…

VIX Agnotology

Thursday, August 2, 2012


In 1993, CBOE launched VIX. It’s fair to say that, at the time, most of the people who knew about VIX probably had a good idea of what the volatility index was and how it worked (since so few people knew about it). Nearly 20 years later, and despite millions of dollars spent on education and instruction, I think it’s likely that the ratio of informed VIX-watchers is much, much lower. VIX shows up on regular nightly newscasts – everyone…

VIX Portfolio Hedging (VXH) Signal Only Modestly Higher

Tuesday, June 5, 2012


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

Is the threat of airstrikes against Iran driving oil options prices higher?

Sunday, March 25, 2012

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Probably. First, some context. Here’s the one-month volatility risk premium in USO options since 2007. Think of this as an estimate of how richly or cheaply priced options on crude oil are, relative to the actual historical volatility of the asset. Any ratio above 1.00 indicates that option buyers were willing to pay a premium above the value of the volatility subsequently exhibited by crude oil futures. As you can see, the ratio is usually greater than one.…

Is TVIX Distorting the VIX Futures Market?

Wednesday, February 29, 2012


VelocityShares Daily 2X VIX Short-term ETN (TVIX), an increasingly popular volatility product, is an exchange traded note (ETN) provided by Credit Suisse that seeks to provide two times the daily return of the S&P Short Term VIX Futures Index (SPVXSTR), the same index tracked by the popular iPath S&P 500 VIX Short-Term Futures ETN (VXX). SPVXSTR maintains positions in first and second month VIX futures in a ratio weighted to provide constant exposure at a one-month horizon. TVIX…

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…

Q2 2011 Condor Options Performance Review

Tuesday, June 21, 2011

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The Condor Options newsletter portfolio returned nearly 16% in the second quarter of this year, compared with -0.60% for the S&P 500. The newsletter is also more than six percentage points ahead of the index year to date. Finally, the newsletter portfolio reached a new all-time high in June, something that few indexes or assets can claim. I noted in my last quarterly update that I expected more periods of sideways price action in the rest of 2011, and so…


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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