Monday, August 24, 2015

Third Biggest and Second Longest SPX Peak to Trough Pullback Since March 2009

Nary a pullback goes by without at least a handful of requests to update my pullback table to help put the current pullback in perspective. Whether the current market action is best described as a pullback, correction or even bear market, I am happy to oblige.

For those who may new to this graphic, note that the table below includes only S&P 500 Index pullbacks from all-time highs and only those that go back to the March 2009 bottom. (Due to the all-time high requirement, I count back to the May 20th intraday high of 2134.72, even though almost all of the damage has been done in the past three days.) In terms of defining the minimum pullback for the table, here 2.75% seems to be a natural cutoff, but I am more apt to include smaller numbers if it took a relatively large number of days to arrive at the bottom. Of course the current move does more than just squeak in: it is now the third largest in terms of magnitude at 12.5% and second longest from peak to trough, at 66 days.

Worth noting is that the #1 pullback (21.6% in 2011) saw a peak VIX of 48.00 during the decline, while the #2 pullback (17.1% in 2010) coincided with a maximum VIX of 48.20. The current pullback falls into the #3 slot, while the #4 pullback (10.9% in 2012) saw a maximum VIX of only 26.71. For the record, today’s VIX intraday high of 53.29 is the highest VIX on record outside of the 2008-2009 financial crisis, with data going back to 1990.

SPX pullback table as of 082415

[source(s): CBOE, Yahoo, VIX and More]

While there is no obvious proximate cause of the current pullback and VIX spike, it is clear that concerns about slowing growth in China is the main source of investor anxiety.  Investors are clearly uneasy about various sub-plots related to the real level of China’s GDP, the impact of slowing Chinese growth on commodities and related markets, speculative excess and bubbles in China’s domestic stock market (ASHR) and real estate market (TAO) or broader concerns about the ability of the Chinese government to manage the economic transition from infrastructure-driven growth to growth based on domestic consumption.

Sharp selling and higher volatility has been present for many months in commodities and currencies. Only recently has the selling and higher volatility spilled over into Chinese equities and emerging markets as a whole. In fact, emerging markets have suffered greatly as of late, with the popular EEM ETF plummeting during the last two weeks and now down 32% from its April high. At the same time, the VXEEM emerging markets volatility index soared to record of 111.39 on an intraday basis today, crushing the previous all-time high of 86.44.

As with all big pullbacks, at this point we only know that we are closer to a bottom and have no assurance that the current bottom will hold. Most likely it will be tested again in the next day or two and traders will take their cues based on how well SPX 1867 holds up as support.
Related posts:

Disclosure(s): long EEM at time of writing

Last Two Days Are #5 and #6 One-Day VIX Spikes in History

Many readers have commented that one of their favorite of my regular graphics is the table of VIX spikes of 30% or more that I update periodically in this space, along with the subsequent performance in the S&P 500 Index following these spikes.

This time around I have elected to add an additional column that identifies the catalysts involved (necessarily a subjective process) in each instance. When thinking about these catalysts, it might be helpful to compare the nature of the threat and the size of the VIX spike to changes in volatility during various high-profile historical events, an analysis I captured in Volatility During Crises. Another useful exercise is to think about the fundamental factors influencing each VIX spike in the context of A Conceptual Framework for Volatility Events, which I find particularly useful in helping to gauge just how large of a VIX spike a certain type of event might trigger.

Of course the table below has its own set of data nuggets, both fundamental and technical. One interesting statistic I find worth highlighting is the relatively high frequency of large VIX spikes that have occurred during the past five years. VIX data goes back 26 years and yet more than half of the VIX spikes in this table data are from the past five years. I think it is no coincidence that the VIX ETPs (initially VXX and VXZ) were launched in 2009 and the inverse VIX ETPs (XIV and ZIV) and leveraged VIX ETPs (starting with TVIX) were launched in the following year, when big VIX spikes suddenly became more common – much more so than during the 2008 financial crisis, the dotcom crash, etc. For additional information on the subject of more VIX spikes in spite of a generally lower volatility environment, check out 2014 Had Third Highest Number of 20% VIX Spikes.

History of 30 pct VIX Spikes w Catalysts 082415

[source(s): CBOE, VIX and More]

As noted previously, based on the data for all VIX spikes in excess of 30%, the SPX has a tendency to outperform its long-term average over the course of the 1, 3 and 5-day periods following the VIX spike. Also worth noting that that 10 and 20 days following the VIX spike, the SPX has a tendency not only to underperform, but to decline. Further, while the huge decline following 9/29/08 VIX spike tends to dwarf the other data points, even when you remove the 9/29/08 VIX spike it turns out that the SPX still loses money in the 10 and 20-day period following a VIX spike. When the analysis is extended out 50 trading days, the SPX is back to being profitable, but performing below its long-term average. On the other hand, when the analysis includes 100 days following the VIX spike, the SPX is back to outperforming its long-term average.

In summary, this data suggests that following a 30% one-day VIX spike, there appears to generally be a tradable oversold condition in stocks that lasts approximately one week, followed by a period of another month or so in which the markets typically has difficulty coming to terms with the threat to stocks. This tendency makes today’s market action even more remarkable in that today was by far the worst performance of the SPX in a day following a 30% VIX spike.

Taking a longer-term perspective, looking out at least one quarter, all fears are usually in the rear view mirror and stocks are likely to have tacked on significant gains.

As noted many times here in the past, the data in this table supports the idea of both short-term and longer-term mean reversion, but calls into question the role of mean reversion in the 10-20 days following a VIX spike, where fundamental factors have a tendency to overwhelm a technically oversold condition in stocks.

Related posts:

Disclosure(s): short VIX at time of writing; the CBOE is an advertiser on VIX and More

Saturday, July 11, 2015

Seizing Opportunity From Stock Market Volatility (Guest Columnist at Barron’s)

Steve Sears and I have a running joke that whenever I am tapped as a guest columnist for The Striking Price at Barron’s, we should both start buying VIX calls as inevitably something is going to come along and cause a volatility spike just in time to give me something topical to discuss.

This time around I thought China might be the culprit or Greece or Puerto Rico or the Fed or maybe even the NYSE. In fact, it was a cocktail of everything that has turned a relatively quiet Q2 into a much more menacing volatility environment in Q3. In Seizing Opportunity From Stock Market Volatility, which appears today in Barron’s, I turn my attention to small caps (RUT, IWM) and use IWM vs. SPY as a way to think about relative volatility in the context of exposure to China, the euro zone and a strong dollar. Focusing on the Russell 2000 Volatility Index (RVX) and VIX, investors have been attributing roughly the same level of uncertainty and relative risk for small caps as large caps, which I see as questionable when one considers the very different exposure each asset class has to global issues and the dollar.

Given that RVX futures (VU) are thinly traded, it probably does not make sense to be short VU and long VX, the VIX futures. Another way to translate the thinking above into a strict volatility trade would be to short an at-the-money straddle for RUT or IWM, while going long an at-the-money straddle for SPX or SPY. That type of trade is probably a stretch for most Barron’s readers, but I suspect is probably right in the wheelhouse of many readers in this space. For the Barron’s article, I came up with something simpler to execute, an IWM Aug 121/123 bull put spread, which has both volatility and directional components to it and is disengaged from volatility in SPX/SPY.

In the Barron’s article, I talk a little bit about selling volatility in a post-crisis market environment or following a significant volatility event, observing:

“Selling options on the downslope of a volatility spike is often only marginally less profitable than selling options at the top of a volatility spike.”

If any of this sounds a little bit like a corollary to some of my work on “disaster imprinting” then some readers clearly have very good memories.

Related posts:

A full list of my (16) Barron’s contributions:

Disclosure(s): none

Monday, June 29, 2015

Today’s 34% VIX Spike and What to Expect Going Forward

One of the top posts of 2013 was All-Time VIX Spike #11 (and a treasure trove of VIX spike data), in which I sliced and diced the twenty largest one-day VIX spikes in the history of the VIX. Nineteen of those spikes were in excess of 30% and with all-time #5 arriving later in 2013 and all-time #15 and #16 following in 2014, I was compelled to comment that despite the seemingly low VIX and concerns about complacency, 2014 Had Third Highest Number of 20% VIX Spikes.

Fast forward to the present and for all the talk of a low VIX, some forget that the second day of 2015 had a 28.1% VIX spike and then today, we saw a 34.5% VIX spike, the eleventh largest in the history of the VIX and enough to trigger an update to the table of largest one-day VIX spikes below.

History of 30pct VIX Spikes 062915

[source(s): CBOE, VIX and More]

Note that based on the data for the 23 VIX spikes in excess of 30%, the SPX has a tendency to outperform its long-term average over the course of the 1, 3 and 5-day periods following the VIX spike. Also worth noting that that 10 and 20 days following the VIX spike, the SPX has a tendency not only to underperform, but decline. Further, while the huge decline following 9/29/2008 VIX spike tends to dwarf the other data points, even when you remove the 9/29/2008 VIX spike it turns out that the SPX still loses money in the 10 and 20-day period following a VIX spike. When the analysis is extended out 50 trading days, the SPX is back to being profitable, but performing below its long-term average. On the other hand, when the analysis includes 100 days following the VIX spike, the SPX is back to outperforming its long-term average.

With the caveat that this is a limited data set, it is still worth flagging the pattern in which following a 30% one-day VIX spike, there appears to generally be a tradable oversold condition in stocks that lasts approximately one week, followed by a period of another month or so in which the markets typically has difficulty coming to terms with the threat to stocks. One quarter later, however, all fears are generally in the rear view mirror and stocks are likely to have tacked on significant gains.

This type of pattern supports the idea of both short-term and longer-term mean reversion, but calls into question the role of mean reversion in the 10-20 days following a VIX spike, perhaps has fundamental factors begin to win out over a technically oversold condition in stocks.

Now that we have a template, let’s see how well it works for the current market environment.

Since the events of the day have given all of us a fair amount to think about, I have included a larger than usual number of related and tangential links below for those who wish to do a little extra reading.

Related posts:

Disclosure(s): short VIX at time of writing; the CBOE is an advertiser on VIX and More

Longest SPX Peak to Trough Pullback Since 2012

I have been quiet in this space as of late, but there is nothing like a 34% one-day spike in the VIX to inspire me to dust of the cobwebs and get this place humming again. I will start by updating an old favorite table that invariably is the subject of many requests whenever stocks begin to show signs of a meaningful pullback, as is the case today.

Note that the table below includes only pullbacks from all-time highs and only those that go back to the March 2009 bottom. Here 2.75% seems to be a natural cutoff, but I am more apt to include smaller numbers if it took a relatively large number of days to arrive at the bottom. Seen in this light, today’s 2.09% decline in the S&P 500 Index brings the aggregate peak-to-trough decline to 3.7%, but perhaps the most interesting number is that it took a full 27 trading days to realize that 3.7% drop. In fact, no peak-to-trough decline has taken longer to materialize since a pair of 43-day moves from late 2012 that resulted in 8.9% and 10.9% declines. Of course, there is no reason to believe that today is a bottom, but then again, there have been only four longer-lasting pullbacks since the current bull market started over five years ago.

SPX pullback chart as of 062915

[source(s): CBOE, Yahoo, VIX and More]

Depending upon whether one attributes the current pullback to China, Greece, Puerto Rico or more nebulous factors as valuation, time without a correction, etc. one might draw different conclusions about the path forward. Personally, I see China as the biggest culprit, followed (at least today) by Puerto Rico and then Greece. What concerns me most is that the issues in China and Puerto Rico are no less thorny or difficult to resolve than they are in Greece.

For what it is worth, while I think it is important to understand the age of a bull market as a partial proxy for vulnerability, I do not subscribe to the theory that a healthy market needs a 10% correction every x months or y years. Further, did the 9.8% peak-to-trough decline in the SPX really need another 0.2% to reset some sort of magical market-timing sundial? (Don’t forget that both the NASDAQ-100 [NDX] and Russell 2000 [RUT] did hit that threshold during the same period.)

In technical analysis, the time for a move to unfold is sometimes almost as important as the magnitude of the move. In another week or so, we should know whether the current price action is just a slow-motion, short and shallow dip or perhaps the first signs of a deeper and more painful countertrend – and the best part is that we don’t even need a referendum to decide the matter.

Related posts:

Disclosure(s): none

Tuesday, January 27, 2015

Average Annual Normalized VIX Futures Term Structure, 2004-2014

One graphic I post periodically that never fails to generate a great deal of interest among traders, strategists and other volatility aficionados is my normalized VIX futures term structure graph. From 2008 – 2013, the annual normalized term structure was notable in that almost every year was an outlier in one way or another. For instance, 2012 and 2013 were the two years with the steepest contango in history, while 2008, 2009 and 2011 represent three of the four years (2007 being the fourth) with the flattest term structure.

And 2014? It could not have been more average. If one combines all the years from 2004 to 2014 and creates an “average year” (i.e., the wide gray line on the chart) then 2014 (double blue line) comes closest to that average.

Normalized VIX Futures Term Structure, 2004-2014

[source(s): CBOE, VIX and More]

Note that the terms structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact that the CBOE did not implement a full complement of consecutive monthly futures until October 2006.

As for 2015, which is not plotted on the graph above, so far it looks quite flat, almost like a cross between 2007 and 2009. It will be interesting to see if this pattern holds for the balance of the year.

Related posts:

Disclosure(s): the CBOE is an advertiser on VIX and More

Sunday, January 25, 2015

The Year in VIX and Volatility (2014)

This is the seventh year in a row I have offered a retrospective look at the year in VIX and Volatility, which is my attempt to cram some of the highlights of the year in volatility onto one eye chart graphic with a (somewhat) manageable number of annotations.

In aggregate, 2014 was a very quiet year for the VIX, with a mean close of just 14.19 for the year, which is the lowest the VIX has been since 2006 and third lowest since 1995. On the other hand, as I recently documented, VIX spikes were common last year, with 2014 registering the third highest number of 20% VIX spikes since the beginning of VIX data, in 1990. In short, the VIX was susceptible to large spikes, but these were typically followed by strong mean-reverting declines. For example, the peak VIX of 31.06 on October 15 was the highest VIX reading since 2011, yet just six weeks later the VIX was back in the 11s.

When asked in October what they perceived as the biggest threat to stocks, respondents to the VIX and More fear poll pointed to the end of quantitative easing and the removal of the Fed safety net as their top concern, with Ebola narrowly edging out the much more nebulous “market technical factors” for the second slot. As best as I am able to determine, it was the panic associated with fears of an Ebola epidemic that took an already elevated VIX and pushed it up into the 30s.

At various times during the year, Ukraine/Russia, crude oil, ISIS/ISIL, Israel/Gaza, the Fed and the European Central Bank all managed to increase anxiety and perceptions of risk among investors. Also, the narrow miss in the vote for Scottish independence created turmoil in the United Kingdom and across the euro zone, but managed to avoid morphing into another nationalist crisis. Early in the year, there was a currency crisis in emerging markets that was triggered by (unfounded, in retrospect) concerns about higher interest rates in the U.S. Throughout the year there were concerns about valuations and excesses momentum trading in the likes of biotechnology, social media, internet and solar stocks. To some extent, these concerns peaked in April (see The Correction as Seen in the ETP Landscape for additional details), only to return periodically throughout the balance of the year.

The Year in VIX and Volatility 2014

[source(s):, VIX and More]

Last year at this time, the prevailing worries were focused on whether or not Fed Chair Janet Yellen was leaning toward a more hawkish stance, the inevitable march to higher interest rates in the U.S., the weakening of emerging markets currencies and the potential fallout from the Fed’s tapering of bond purchases. In retrospect, investors were largely worrying about the wrong things.

The first few weeks of 2015 have seen Greece, Saudi Arabia and Ukraine back in the spotlight, with the Swiss National Bank and European Central Bank dominating news on the central banking front. If the past is any guide, the big issue for 2015 has yet to rear its ugly head, whether it turns out to be a gray, charcoal or black swan.

Related posts:

Disclosure(s): none

Top Posts of 2014

Since I launched VIX and More some eight plus years ago, I have devoted one post to highlighting the top 25 most-read posts of each year. I do this in part for archival purposes: to see what is important to readers and how their interest in various issues changes over time. I also hope that these aggregations of most-read posts will serve as relatively easily accessible repositories of high-quality material for the benefit of new readers and long-term readers alike.

During 2014, the blog saw an extended hiatus for the first time in its history, largely due to events arising from the passing of my father. For this reason, I am limiting the number of top posts for the year to thirteen, largely because Song for My Father* ended the year in the #13 slot.

Looking ahead, volatility is back and so am I. I miss writing and I miss the interaction with readers. In the coming year I will significantly ramp up my activity on the blog and also in the comments section. I will also continue to write a weekly newsletter specializing in volatility (which just so happens to have a 14-day free trial), pen periodic guest columns for Barron’s and perhaps contribute to some other publications as well.  All this will be in addition to my primary role, which is that of an investment manager.

In 2014, some of the top stories were Ebola, Ukraine vs. Russia, crude oil, ISIS/ISIL, the Fed and the European Central Bank.  The posts below represent those that have been read by the highest number of unique readers during 2014. Farther down there are links to similar lists going back to 2008, along with several other “best of” type posts that I have flagged for archival purposes.

For the record, each year I also attach the hall of fame label to a handful of posts that I believe have particularly compelling and/or original content, regardless of readership. I was a tough grader last year, as I only added one new post to the HoF in 2014, but I already have an addition for 2015 and my goal is to continue to crank out Hall-of-Fame-worthy posts on a regular basis in 2015 – and even manage to do it without assistance provided by performance-enhancing drugs…

With an increase in posting on the blog, I also foresee a substantial uptick in my activity on Twitter, where @VIXandMore gives me a platform to contribute more in terms of time-sensitive news, short-term insights and other related subjects.

The thirteen most-read posts on VIX and More in 2014 were:

Related posts:

Disclosure(s): none

Tuesday, January 6, 2015

2014 Had Third Highest Number of 20% VIX Spikes

By most measures, one would think that 2014 was a relatively quiet year for the VIX and equity volatility in general. In fact, the average VIX of 14.19 was the lowest for the full year since 2006 and the third lowest going back to 1995. Of course, averages can be misleading and just as you can drown in a river with an average depth of one inch, anyone who was short the VIX when it spiked all the way up to 31.06 in October knows that minimum and maximum readings are important.

With this in mind, the chart below shows the number of 20% one-day VIX spikes per year, going back to 1990. Note that when looked through the lens of those 20% spikes, 2014 was the third most volatile year for the VIX since 1990, with the same number of 20% VIX spikes as 2008! Additionally, if one were to round up a near miss from December 8th, last year would move into a tie for the #2 slot, just behind the euro zone carnage from 2011.


[source(s): CBOE, VIX and More]

Perhaps the most interesting thing about the 20% VIX spikes is that two of them came during the last month of the year and with a little rounding, the December 8th spike could have been number three. Toss in yesterday’s 28.1% VIX spike and that is four VIX spikes of at least 19.5% in one month. Uncharted territory? Not quite, with August 2011 having already marched down that path, but something not achieved in any other year, including 2008 or at any time during the bursting of the dotcom bubble.

The have been a number of important changes in the volatility space during the past year or so and going forward I will address quite a few of them, with additional analysis and commentary.

Related posts:

Disclosure(s): short VIX at time of writing

Sunday, November 30, 2014

How to Ride an Aging Bull (Guest Columnist at Barron’s)

Yesterday marked the fifteenth time I have served as a guest columnist for The Striking Price at Barron’s and How to Ride an Aging Bull is one of the few articles I have written for Barron’s that has not focused almost exclusively on the VIX and volatility.

In the Barron’s article I note that pundits have been calling this “the most hated bull market ever” for about three years and partly as a result of the mistrust of large bull moves, many retail investors have exited the market when they feared prices were getting ahead of themselves. As stocks have continued to rally, these same investors have had difficulty getting back in at even higher prices. Now, with 2015 just around the corner, quite a few of these investors believe stocks can continue to move higher and are wondering how they might be able to take advantage of a continued rally even though they believe the six-year bull is too long in the tooth.

An approach I discuss in the Barron’s article is one of seeking out value in underperforming sectors. In the article I cited the energy sector as the headline underperformer, but noted that while the energy sector ETP (XLE) is down 8.5% year-to-date, the metals and mining sector ETP (XME) is down 18.7% for the year. [Unfortunately, due to an editing snafu, the updated numbers I provided using data following the OPEC meeting were not incorporated into the publication.]

The XME March 33/38 risk reversal trade (short the March 33 put; long the March 38 call) cited in the Barron’s article uses strikes and prices that are quite stale now that OPEC has decided not to cut production. An updated version of the trade that would still generate a small credit would use the March 32 and 37 strikes, with a profit and loss chart that looks like the one below. Note that if XME is between 32 and 37 at expiration, the trade will generate a small profit. Should XME settle below 32 at expiration, the risk reversal (blue line) would lose about 2.24 less than holding the underlying (dotted gray line); if XME settles above 37 at expiration, the risk reversal gains would be about 2.76 less than if one had held the underlying.

XME March 2015 Risk Reversal 112914

[source(s): VIXandMore]

While metals and mining have had a difficult year, the recent rate cut by the People’s Bank of China and the anticipated near-term stimulus measures from the European Central Bank should provide a lift to metals and mining stocks. Other factors, including continued strong U.S. economic growth, could also bolster XME, which focuses mainly on steel, coal and aluminum for the U.S. market.

As noted in the Barron’s article, one could also make a similar trade with one of XME’s most liquid components, Alcoa (AA), where a short February 16/19 risk reversal has a similar profit and loss potential, yet taps into one of the metals and mining sectors, aluminum, that has been a very strong performer in 2014. As Alcoa’s options market is more liquid than that of XME, the single-stock version of this risk reversal should be considered as an alternative way of achieving similar exposure.

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

Thursday, October 16, 2014

Fear Poll: Fed/QE, Ebola and Technicals Top Worry List

Stocks may be in the process of putting in a bottom, but with the VIX hitting 31.06 yesterday at the same time VIX futures were setting new volume records, investor fear and anxiety is as high as it has been since the 2011 European sovereign debt crisis.

As the VIX and More Fear Poll results reflect, the current situation is particularly difficult for investors to grapple with because there is so much disagreement about what the biggest worry is and how some of these fears may be connected.

In the chart below, I have summarized the almost 400 votes from some 35 countries, with the U.S. accounting for 65% of all respondents.

It is worth noting that the responses appear to be somewhat headline driven, as yesterday Ebola topped the list of worries, only to be supplanted by concerns about the impact of the Fed ending quantitative easing and in so doing removing the safety net that has helped keep liquidity high, volatility low and investors more confident. I also find it particularly interesting that “market technical factors (breach of support, end of trend, weak internals, etc.)” are so important to a broad range of investors, which raises the question of whether technicals are more of a cause or effect in the recent downturn.

Looking at global economic weakness, slightly more investors expressed concern about the U.S. economy than that of the euro zone, with concerns about the Chinese economy a distant third.

In these types of polls, I am always interested to see how U.S. respondents differ from those outside of the U.S. In the current market environment, U.S. respondents tend to place more emphasis on the weak U.S. economy and the Ebola virus, while paying less attention to currency issues and China. Some of the detailed results certainly have a whiff of provincialism, yet it remains to be seen whether the global or Americentric perspective does a better job of honing in on what to focus on – a subject I will delve into at a later date.

For those who might be interested in the results of prior VIX and More Fear Poll data, the links below should be a helpful reference.

Last but not least, many thanks to everyone who participated in this poll, which I intend to periodically reprise as market conditions warrant.

VAM Fear Poll 101614

[source(s): VIX and More]

Related posts:

Disclosure(s): none

Monday, October 13, 2014

Largest SPX Pullback of 2014 Hits 6.4%

Every time there is a pullback, it seems as if I receive multiple requests for an updated version of the table below. With the S&P 500 index reeling and still trying to find a bottom, this looks like a good time to put the current pullback in the context of the 27 most significant peak-to-trough declines from new highs since the SPX bottomed in March 2009.

Note that the current 6.4% decline from the September 19th high of 2019 is roughly average in terms of duration, but makes it the second largest pullback in percentage terms since 2012, just eclipsing the January-February 2014 pullback, when emerging markets (EEM) and Crimea were weighing heavily on the minds of investors.

Keep in mind that as ugly has things have been in the SPX, the Russell 2000 small cap index (RUT) is down 13.8% since topping out in early July, while the NASDAQ composite index is down 8.5% since its mid-September top. Of course, some sectors have been hit even harder, with oil and gas exploration and production (XOP) down 33.3% from its 2014 high. Semiconductors (SMH) have declined 14.4% from their 2014 high, yet that high was established less than a month ago.

There is never an easy answer to the question of whether this has been enough pain to warrant a bottom, but after the events of the past week, all sorts of extreme scenarios now seem much more plausible.


[source(s): Yahoo, VIX and More]

Related posts:

Disclosure(s): none

Saturday, October 4, 2014

Song for My Father*

My father passed away this summer and in the intervening period I set aside my media hat. Before I formally return to the media space, I want to use this space to talk a little bit about my father.

My father was an eccentric man and sometimes a complete enigma even to those who were closest to him. For instance, while we share the same name, he insists that I was named not after him but his uncle Bill, who was a baseball player in his earlier years and later became coach, attorney and a judge. My father followed his uncle into the legal field, with his own twist, carving out his own niche as a modern-day country lawyer and advisor.

Outside of family and work matters, sailing, quantum physics and jazz were the three things my father was most passionate about. While part of the appeal of sailing was no doubt the escapist aspect of charting one’s one course – my father’s own moveable island – I have often thought that more than 90% of our father-son relationship and peer-to-peer relationship was formed while sailing together from Long Island Sound to Down East Maine. One particular trip that I often think about was a voyage from New London, Connecticut to Cape Cod Bay which was slowed dramatically by adverse currents and a lack of wind. Arriving very late one night at Cuttyhunk Island, we determined that the delays had almost entirely depleted our food supplies. After rummaging through the storage locker, my father declared that what remained were nine Saltine crackers and two bottles of wine. For dinner, he placed one bottle of wine on the table in front of me and pushed five of the nine crackers my way. I had begun that day as a 14-year-old boy, but when I woke up the next morning, I had no doubt that I was now a man. Several years later, we talked extensively about buying a Beneteau and sailing it back from Saint-Gilles-Croix-de-Vie, France, but this adventure never came to fruition.

Ironically, while my mother was a teacher, journalist and quite adept at communicating, my father preferred to use language as a puzzle, where he would leave a minimal number of clues and see if the recipient of those clues could find his or her way to the finish line. Dubbed “The Great Communicator” by some of those who spent extended periods in his verbal labyrinth, when he wanted to my father could be an expert writer or orator, but when he preferred to get overly creative with language, he typically lost most of his audience in a hurry.

As much as my father provided advice and counsel for countless family and friends, very little advice was aimed in my direction. One piece of advice I did hear over and over again was, “Keep your options open.” I have always attached a high degree of value to having options in life, but I often smile at the thought that a large part of what I do professionally is sell options to those who place a higher value on them than I do.  On a somewhat related note, when I was a child, my father was keen on having me play chess with him. I received no leniency, coaching, hints or advice of any kind while losing literally thousands of matches. Eventually, I was able to learn enough to win consistently and in the process also learned how to figure things out for myself, the value of tenacity and many other life lessons. Only after his passing did I find an old yearbook and discover that he was the chess champion at his high school. Needless to say, without his hand, I would never have developed some of the skills that I enjoy today.

Dad, wherever you are, I hope that the journey is smooth sailing and the wind is at your back.


[my father with my wife, Deborah, at the Cape Cod National Seashore, 2011]

Related posts:

Disclosure(s): none

*The title of this post also refers to one of my favorite jazzmen, Horace Silver, who wrote Song for My Father

Thursday, May 22, 2014

Low Volatility: How To Profit From a Quiet VIX (Guest Columnist at Barron’s)

Today I was once again a guest columnist at Barron’s, penning Low Volatility: How to Profit From a Quiet VIX for the venerable Barron’s options column, The Striking Price.  While this is my thirteenth turn as guest columnist, much to my surprise this is the firsts time that “VIX” has appeared in the title.  Since everyone seems to be talking about how low the VIX is, whether the VIX is broken, etc. I thought it would be an appropriate time to share some of my thoughts on the subject.

In the Barron’s article I make the point that while mean-reversion trades when the VIX spikes higher has been a viable strategy over the years, the mean reversion approach has not fared nearly as well when the VIX dives substantially below its long-term mean, which happens to be just a shade over 20.

As the chart below (monthly bars of the VIX) shows, most significant VIX spikes tend to be short-lived, but the VIX can remain well below the 20 level for multiple years in a row. Just look at 1994 – 1996 and 2004 – 2007 and think about the long-term viability of buying VIX calls or putting on a similar long volatility position during a period like this one, armed with the knowledge that eventually the VIX will have to revert to its historical mean.

VIX Macro Cycles 1990-2014


In fact, there have already been two instances (1990 – 1994 and 2002 -2007) in which the VIX declined steadily for a period of at least four years. With the most recent peak volatility in August 2011, it is not unreasonable to think about the possibility of volatility continuing to decline or at least tread water through at least August 2015.

While the Barron’s article does not give my options trade idea a label, it is a ratio risk reversal that contemplates selling VIX June 14 puts and (perhaps) investing the proceeds in twice as many VIX June 17 calls.

I encourage everyone to read the original article at Barron’s, but for those who might not click through, I will include my closing paragraph below:

“No matter what your market outlook, however, do not make the mistake of thinking that the VIX is no longer relevant, and be careful when it comes to equating a low VIX with complacency. The VIX has closed below 13 some 964 times – and almost all of these instances have been in the middle of a bull market.”

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

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