Crowded trade alert.
Chris Cole, of volatility fund Artemis Capital, has an insightful piece in the latest edition of the CFA Institute Conference Proceedings Quarterly warning about one of the most popular trades of recent times: the shorting of volatility via Vix ETPs.
The speculative shorts on Vix futures as a percentage of open interest, for example, are already running at an all-time high. In Cole’s mind this now equates to the shoeshine boy trade of the modern era.
One of the ironies, he also notes, is that the trade simply synthesizes a much less efficient version of a 3-4 times leveraged position on the S&P 500. Read more
Before we comment about the strange behaviour of the Vix this week, we’d like to engage in a bit of a thought experiment.
There are two hypothetical scenarios that we’d like you to consider.
The first relates to the rampant nationalisation of everything:
What happens to market prices and volatility in an economy where government intervention becomes de rigeur every time prices misbehave?
What should we make of this? The CBOE VIX, the barometer of choice for those monitoring market volatility, dropped like a stone between Xmas and New Year. And the trend has continued in the days since…
Volatility guru Christopher Cole, who heads up the volatility fund Artemis Capital Management, is known for making interesting arguments when it comes to volatility and risk. Previous philosophical thoughts have questioned the concept of volatility, proposed that risk itself is changing, and that QE and other forms of government intervention are warping volatility beyond recognition.
His latest note, though, takes us to an entirely new dimension of market abstraction. Read more
Once again the financial world is a bit mystified about the performance of the Vix.
How can it be that the Vix index is trading at five-year lows when expectations are anything but bullish? Note, for example, the below chart via Also Sprach Analyst: Read more
This is a guest post for FT Alphaville by Theo Casey, a columnist at Futures & Options World, blogging on the back of FOW’s European Equity Options conference in Amsterdam.
The year is 2017. Read more
If anyone can bring metaphor and illustration to the market in volatility, it’s Chris Cole at Artemis Captial Management, a volatility-focused investment firm.
Take the intro of his latest note as an example: Read more
Vega. The brightest star in the constellation Lyra. Or, jargon for the sensitivity of an option’s value to the change in expected volatility.
Usually, it’s described as the absolute change in an option’s value for every percentage move in volatility. Read more
Here’s an interesting chart that’s just landed in our inbox.
It comes courtesy of Fred Sommers at Basis Point Group, a firm specialising in the analysis settlement fails across the financial industry: Read more
Last week a rather interesting thing happened in the world of volatility ETNs. The VelocityShares 2x short-term Vix futures ETN, backed by Credit Suisse and known as TVIX, announced that after a brief period of suspended issuance it would reopen the note to issuance orders from market makers.
It had previously closed issuance on February 21 citing “internal limits” at Credit Suisse. Read more
There’s been a lot of talk about the carnage in the TVIX on Thursday. The VelocityShares 2x short-term ETN, whose new issues were suspended by Credit Suisse on February 21 due to “internal limits”, fell 29 per cent. Curiously, the slide came just before an announcement from the provider that some level of issuance would be reinstated.
Understandably, the idea that the re-opening was leaked ahead of time is now doing the rounds. After all, why would the ETN, which had been trading at an 80 per cent premium to NAV, suddenly converge with its indicative value for any other reason? Read more
Helen Bartholomew at International Financing Review (IFR) has an interesting story out this week about the industry’s push to create a workable correlation product.
Currently, if you want to take a view on correlation, it’s pretty difficult. Bilateral correlation swaps generate mark-to-market risk, while option strategies require a lot of delta hedging of both the index and the constituents — what’s more, this may become hugely expensive if and when Europe introduces a transaction tax. Read more
What on earth is going on with the TVIX ETN?
Last week we pointed out that there has been a hugely unusual rush into the double volatility ETN — which is managed by VelocityShares but backed by the banking prowess of Credit Suisse. Daily trading volume has also been noticeably high. Read more
Macro Risk Advisors’ (MRA) Dean Curnutt has picked on a very interesting development in the land of volatility ETNs. In the last few days there’s been an absolutely astounding amount of vega trading through these products.
As he notes: Read more
Are VIX ETNs and Vix-related funds influencing the Vix futures curve?
Has the popularity of Vix trading come to impact wider volatility surfaces, if not the S&P 500 options used to construct the Vix index themselves? Read more
“All we have left to show for our three year liquidity orgy is the most correlated period in modern finance.”
That’s the succinct and telling view of volatility guru Christopher Cole at Artemis Capital Management. Read more
As the Vix and More blog duly noted last Friday, not only has spot Vix been spiking in its own right (last print seen around the 40 mark on Monday), the entire Vix term structure has flipped into backwardation over the last 10 trading days:
Macro Risk Advisors, headed by Dean Curnutt, are specialists in derivatives strategy. One of their chief occupations is thus evaluating risk and volatility.
Given that, it’s probably fair to say they’re in a good position to comment on matters “systemic risk” related. Read more
As FT Alphaville has written before, the volatility is out there.
You just have to look for it — and not by glancing at industry-standard, the CBOE Vix index. Read more
We ♥ this note from Bank of America Merrill Lynch’s Ruslan Bikbov and Priya Misra.
It’s on a subject dear to our own hearts here on FT Alphaville — the curious case of persistently low volatility and the idea that it might be masking systemic risk. It also weaves together a plethora of other themes — massive short volatility positions, search for yield, correlation, LTCM – we’ve touched on. Read more
With hedge funds going into the meedja sentiment business this is probably worth exploring:
Finance news articles mentioning ‘crisis’ are at a three-year low, say Société Générale’s cross-asset research team using a famed indicator: Read more
What is the fair value of a Vix future? In truth, it’s actually pretty hard to say.
This is a point FT Alphaville has raised before of course — whilst pondering some other volatility-related issues, like the current elephant in the room that is Vix-related ETNs (arguably tramping about on the supply and demand balance of the Vix curve), and the question of why spot volatility remains so stubbornly low while longer-dated volatility and variance pound higher. Read more
We’ve pondered before why volatility is currently so low .
One theory we presented was the rise of new strategies to fund tail-risk protection, focused on long-dated far out of the money options, funded by options sales nearer the front. Read more
By Theo Casey, a columnist at Futures & Options World, blogging live from FOW’s European Equity Options conference in Amsterdam.
Presenting the best trading idea of the conference… Read more
What do dividend futures have in common with the Vix, and Vix futures?
Our hypothesis: both have seen excessive demand from structured products desks skew price discovery in their markets. And in the case of the Vix, there’s been a breakdown in its function due to the effect of the so-called Bernanke-put too. Read more
FT Alphaville has pondered over why the Vix is currently so low.
We’ve also wondered if QE may be inadvertently triggering a gigantic ‘Bernanke put’ in the equity market, pushing volatility elsewhere — specifically into the FX market. Read more