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
Remember the Great Moderation, those sunny days of fun and laughter before the Great Recession stomped into town and set fires everywhere? (Imagine if old Uncle Bernanke and his canasta partner Mr Monti didn’t have that hose handy..?)
Well, Goldman Sachs have taken a look at just how far memories have faded by the way that disaster risk is now priced. It may be that the US was singed first, but it is far more relaxed than Europe. The overall return to moderation, however, is not yet complete. Read more
Citi’s Hans Lorenzen is inciting a rebellion against central bank repression. Now more than ever, he suggests, is the time to fight the Fed.
First, he notes, realised volatility in credit is down almost 90 per cent from its peak two years ago, and spreads are now at 50-year lows. He blames this on central banks, which are “suppressing risk across markets”. Read more
The working theme at FT Alphaville towers is that we’re in somewhat of a damned if we do taper/suspend QE, and damned if we keep going with it.
There is, as we’ve long been noting, good reason to suspect the economy cannot handle any more quantitative easing in its traditional form.
What’s more, we now know that even the whiff of tapering — which is anything but an unwind, as we’ve noted here – can cause undue chaos in risk assets. In which case, perhaps tapering isn’t as much of an option as many believe it to be.
After all, QE reflects the sovereign put. It’s the government subsidy which takes volatility away. If you stop dishing it out, there’s every chance bad things may happen.
And the following chart, which comes to us by way of Aurelija Augulyte, reflects this relationship perfectly: Read more
Yes yes — suddenly, a bad last day of May for the stock market:
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?
Taken together, the policy vol crunch and regret factor must be putting the remaining bears in a paroxysm of remorseful fear.
He’s very quotable, Nomura’s Kevin Gaynor. Read more
Remember the whipsawing days of 2008? The days when commodity prices couldn’t get crazier?
Not since Andy Haldane noted that an impatient market was not a happy market, has the BoE looked at the issue of high frequency trading and its effects on market quality – and particularly price discovery – in such depth.
From the abstract of the Bank’s latest working paper, by Evangelos Benos and Satchit Sagade, on Monday (our emphasis): Read more
Central bank puts have done a great job of removing tail risks.
Such is the conclusion of the team at Bank of America Merrill Lynch upon analysing the remarkable drop in trade conviction of late.
In FX, the move in volatility has been notable… Read more
Oh dear, many an FX trader is gonna be disappointed by this one — history suggests FX volatility is heading down, not up, as we exit November.
From Deutsche Bank’s Alan Ruskin… Read more
There’s basically nothing happening. Sure we’ve got plenty of rhetoric, a Swiss franc floor and QE — but FX volatility is touching recent lows:
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
Oops, we missed this from Macro Risk Advisors on Tuesday — the charts track realised volatility being higher on days the S&P 500 has closed up than when it’s fallen, so far this year. Which, they say, is a little unusual.
How much longer does this go on?
Spanish 2-year bond yields at 2.9 per cent – down from 6.6 per cent when we first said there was something to what Draghi was saying about convertibility risk. The Italian 2-year’s at 2.3 per cent. Longer-maturity debt has also rallied, despite falling outside the remit of the European Central Bank’s OMT purchases. 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
Are volatility-linked exchange-traded products (ETPs) getting too big for the Vix futures market? Are they comprising the price discovery role of Vix futures? Are they the reason why implied volatility curves have become steeply elevated?
As it turns out, Barclays Capital’s equity strategy team apparently thinks yes, it is possible (H/T the FT’s Ajay Makan). 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
The S&P 500 has suffered its worst day since December amid a global retrenchment in risk assets, the FT reports. The Dow dropped 200 points and the Vix shifted from recent quiet levels to above its 50-day moving average, Reuters adds. A combination of investor nerves about the execution of Greece’s debt restructuring and a spate of bad news about global growth was blamed for the sell-off. Brazil recorded its second-worst annual growth rate since 2003 in 2011, expanding 2.7 per cent, Bloomberg reports.
Holy cow! Index Universe – self-described defenders of the ETF industry — have admitted there may be an issue with these products affecting the underlying assets, after all.
The case in point is the TVIX ETN, which started behaving oddly (ballooning in size) at the beginning of February. Note our stories about the matter here and here. 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
Here’s something to ponder for the commute home, via Deutsche Bank:
One topic of conversation with investors is why realized volatility has been similar to levels during 2010 (the onset of the European sovereign crisis), whereas investor’s perceptions of the current crisis (as well as option implied volatility) suggest the crisis is closer to 2008/09 in scale and severity. Figure 7 makes it clear that current realized volatility (based on a standard “close-to-close” measure), is broadly in line with 2010 and early 2008 volatility spikes. Read more
Apparently Sarkozy has phoned Hu Jintao on Thursday, to beg er, ask China to wire cash through the EFSF. Somehow.
Shouldn’t someone also be calling Mrs Watanabe? Read more