Skip to main content

Morning Update

Since the beginning of 2013 the VIX has fallen over 30% and is now at lows not seen since 2007. But one trader believes that this could soon change: yesterday someone bought 100,000 VIX Feb. 16 calls for $0.55. This is a $5.5 million bet that the VIX will settle above 16.55 (30% higher) 13 trading days from now. The trade occurred just before the VIX spiked from about 12.60 to a high of 13.50 before reversing again to close at 12.75.

The VIX is a mean reverting product and this is a bet that it will revert off of its current exceptionally low level back towards its long term average, which is roughly the 15-20 range. However, there is no guarantee that the VIX will move back to these levels anytime soon. For instance, during 2005 and 2006 the VIX rarely popped above 15, preferring to stay between 10 and 15 since the market was bullish and realized volatility was low. During the financial crisis the VIX took off and has since spent much of its time above 20. As the ramifications of the US financial crisis fade and European debt crisis is resolved the VIX could move into its pre-crisis range of 10-15.

This trade was likely put on as a portfolio hedge instead of as a pure speculation on the VIX however. As a portfolio hedge it has lots of attractive qualities. First, the VIX typically moves up 4% for e very 1% down move in the S&P 500. When the VIX is at current low levels however it can become even more volatile. For instance yesterday the S&P 500 was down 0.20% and the VIX was up over 5%. Another reason it is an attractive hedge is that the implied volatility in VIX options is near all-time lows. If the VIX spikes the VVIX will spike too as traders rush to buy VIX calls as portfolio protection. A long VIX call will profit from both a rise in the VIX and an increase in VIX implied volatility, giving this hedge a good bang for your buck.



Comments

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…