Volatility Monitor

64 total posts

Complacency Abounds

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 07/21/2015 at 8:13 am
by CAPIS on 07/21/2015

Boy is this market complacent.  A mid-day print of 11.71 yesterday put the VIX on the lows for the year.  It rebounded slightly to finish 12.25.  After touching 20.05 on July 9, it took only 11 days to drop over 40%.  Earnings season continues to plod along and the market complacency intimates that this is definitely a stock picker’s market.  Good earnings in one name are offset by bad earnings in another.  In other words, correlation among names is low and the index shows little movement.  Index implied volatility consists of two factors:  individual volatilities of index components; as well as, the (implied) correlation of index component price returns.  Right now, implied correlation is at multi-year lows for the S&P 500 Index.  The CBOE disseminates SPX implied correlation with the ticker ICJ (Jan/2016 maturity implied correlation), making it easy to follow (graphed below). VXX (iPath S&P VIX Short-Term Futures ETN), a common punching bag of the Volatility Monitor, continues on autopilot to as close to zero as mathematically possible.  It set a new all-time low yesterday.  The VXX is comprised of the front two VIX futures weighted to keep a constant maturity of 30 days.  Most people don’t understand the…

Boy is this market complacent.  A mid-day print of 11.71 yesterday put the VIX on the lows for the year.  It rebounded slightly to finish 12.25.  After touching 20.05 on July 9, it took only 11 days to drop over 40%.  Earnings season continues to plod along and the market complacency intimates that this is definitely a stock picker’s market.  Good earnings in one name are offset by bad earnings in another.  In other words, correlation among names is low and the index shows little movement.  Index implied volatility consists of two factors:  individual volatilities of index components; as well as, the (implied) correlation of index component price returns.  Right now, implied correlation is at multi-year lows for the S&P 500 Index.  The CBOE disseminates SPX implied correlation with the ticker ICJ (Jan/2016 maturity implied correlation), making it easy to follow (graphed below). VXX (iPath S&P VIX Short-Term Futures ETN), a common punching bag of the Volatility Monitor, continues on autopilot to as close to zero as mathematically possible.  It set a new all-time low yesterday.  The VXX is comprised of the front two VIX futures weighted to keep a constant maturity of 30 days.  Most people don’t understand the…

Recent Volatility in China (FXI)

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Volatility Monitor

posted by CAPIS on 07/15/2015 at 8:08 am
by CAPIS on 07/15/2015

SPX futures are up roughly 2 points to 2104 as Fed Chair Janet Yellen said prospects for a rate hike seem to be on track for 2015.  Wholesale prices in the US increased in June.  Both crude and gold are modestly lower.  The spot VIX dropped to 13.37 yesterday.  The VIX futures are a mixed bag this morning awaiting direction. Day after day we continue to hear about China and more importantly that investing in China is a risky proposition.  In fact, the first story I pulled up this morning on Bloomberg was “Is Investing in China Worth the Risk?”.  I was expecting something informative, but the article simple went on to explain standard deviation (or volatility) versus return on investment .. and wasn’t really about China in particular.  Obviously, China has definitely been volatile.  However, that volatility has only been over the past three weeks.  The 5-year graph for iShares China (FXI) below shows 1-month realized volatility and 3-month implied volatility.  Typically you’d match up 1-month realized versus 1-month IV or 3-month versus 3-month, but I’m starting to favor the “what have you done for me lately” approach.  Over the past five years, the 1-month mean realized vol is…

SPX futures are up roughly 2 points to 2104 as Fed Chair Janet Yellen said prospects for a rate hike seem to be on track for 2015.  Wholesale prices in the US increased in June.  Both crude and gold are modestly lower.  The spot VIX dropped to 13.37 yesterday.  The VIX futures are a mixed bag this morning awaiting direction. Day after day we continue to hear about China and more importantly that investing in China is a risky proposition.  In fact, the first story I pulled up this morning on Bloomberg was “Is Investing in China Worth the Risk?”.  I was expecting something informative, but the article simple went on to explain standard deviation (or volatility) versus return on investment .. and wasn’t really about China in particular.  Obviously, China has definitely been volatile.  However, that volatility has only been over the past three weeks.  The 5-year graph for iShares China (FXI) below shows 1-month realized volatility and 3-month implied volatility.  Typically you’d match up 1-month realized versus 1-month IV or 3-month versus 3-month, but I’m starting to favor the “what have you done for me lately” approach.  Over the past five years, the 1-month mean realized vol is…

S&P 500 Index Skew Right at Decade Highs

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Volatility Monitor

posted by CAPIS on 07/08/2015 at 7:54 am
by CAPIS on 07/08/2015

SPX futures are off 16 points to 2057.70 following the carnage in China.  Shares in Hong Kong dropped the most since 2011.  In fact, China’s security regulator has banned major shareholders from selling any shares for six months.  The spot VIX finished 116.09 yesterday, but will certainly move higher this morning on the negative tone.  The VIX futures are all higher this morning and all within 1.7 points of one another. S&P 500 Index (SPX) 3-month skew, as measured by the 90%/110% of spot strikes, is right around decade highs.  Skew as a ratio sits at 2.25, a reading in the top .3% of readings.  The high came in March of this year as the VIX showed a reading of 11.8.  Interestingly, for this skew spike the VIX now is 36% higher at 16.09.  In July of 2014, the skew ratio spiked to exactly where we are today while the VIX at that time was under 10.  In other words, skew typically spikes when we are in a very complacent market as the upside and at-the-money (ATM) strikes get killed while the only bid in town is to protect the market portfolio (downside strikes/puts).  During times of market stress, skew…

SPX futures are off 16 points to 2057.70 following the carnage in China.  Shares in Hong Kong dropped the most since 2011.  In fact, China’s security regulator has banned major shareholders from selling any shares for six months.  The spot VIX finished 116.09 yesterday, but will certainly move higher this morning on the negative tone.  The VIX futures are all higher this morning and all within 1.7 points of one another. S&P 500 Index (SPX) 3-month skew, as measured by the 90%/110% of spot strikes, is right around decade highs.  Skew as a ratio sits at 2.25, a reading in the top .3% of readings.  The high came in March of this year as the VIX showed a reading of 11.8.  Interestingly, for this skew spike the VIX now is 36% higher at 16.09.  In July of 2014, the skew ratio spiked to exactly where we are today while the VIX at that time was under 10.  In other words, skew typically spikes when we are in a very complacent market as the upside and at-the-money (ATM) strikes get killed while the only bid in town is to protect the market portfolio (downside strikes/puts).  During times of market stress, skew…

Grexit & EuroStoxx 50/DAX Implied Volatility Levels

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Volatility Monitor

posted by CAPIS on 07/06/2015 at 7:47 am
by CAPIS on 07/06/2015

SPX futures are lower by 16 points to 2052.75 as Greece’s creditors put pressure on Prime Minister Alexis Tsipras to come up with a plan to say in the euro.  While gold remains flat, crude is off over 4%.  Both European and Asian shares are lower as well on Greece.  VIX futures are all higher as the front three months are in backwardation.  The spot VIX finished 16.79 on Friday but will obviously print higher on the open. Greek news continues to dominate the headlines although it only accounts for less than 2% of the euro-area economy (Bloomberg).  Equities have shown quite a bit of volatility over the past several weeks.  The fear is a possible domino effect with perhaps Spain asking for less austerity.  Implied volatility levels for both the Euro Stoxx 50 (SX5E) and the DAX have both reached levels last seen in mid-2012.  With respect to the S&P 500 Index volatility, the ratio of 3-month implied volatilities are near all-time highs for both European indexes.  In the graph below, you can see the 3-month ratio for SX5E/SPX.  The ratio sits at 1.703 with a mean of 1.288, a reading in the top 1% for the last five…

SPX futures are lower by 16 points to 2052.75 as Greece’s creditors put pressure on Prime Minister Alexis Tsipras to come up with a plan to say in the euro.  While gold remains flat, crude is off over 4%.  Both European and Asian shares are lower as well on Greece.  VIX futures are all higher as the front three months are in backwardation.  The spot VIX finished 16.79 on Friday but will obviously print higher on the open. Greek news continues to dominate the headlines although it only accounts for less than 2% of the euro-area economy (Bloomberg).  Equities have shown quite a bit of volatility over the past several weeks.  The fear is a possible domino effect with perhaps Spain asking for less austerity.  Implied volatility levels for both the Euro Stoxx 50 (SX5E) and the DAX have both reached levels last seen in mid-2012.  With respect to the S&P 500 Index volatility, the ratio of 3-month implied volatilities are near all-time highs for both European indexes.  In the graph below, you can see the 3-month ratio for SX5E/SPX.  The ratio sits at 1.703 with a mean of 1.288, a reading in the top 1% for the last five…

Is Volatility Back?

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 06/30/2015 at 8:06 am
by CAPIS on 06/30/2015

SPX futures have rebounded soundly, up 14 to 2064.50.  Yesterday saw the S&P 500 have its worst one-day drop of 2015.  In addition to the woes in Greece, Puerto Rico is facing a financial crisis as it cannot pay back more than $70 billion in municipal debt.  Spot VIX closed higher the front six VIX futures (18.85) for the first time since late January.  The VIX futures are all lower this morning on the decidedly bullish equity tone in steepening fashion for the term structure. Finally some much overdue volatility has come our way as the S&P 500 shaved off a healthy 2% yesterday.  Equity futures have snapped back, however, by .6% this morning.  The question is whether or not this is simply short covering and will we continue the move lower?  If I had to guess, I’d say that we will shed the positive territory and move lower throughout the day.  Yesterday saw the 11th biggest move in percentage terms ever for the VIX, 34% (VIXandMore.com).  According to VIXandMore, there have only been 23 spikes in excess of 30% and on the whole it is worth noting that the SPX has a tendency to decline in the 10- and…

SPX futures have rebounded soundly, up 14 to 2064.50.  Yesterday saw the S&P 500 have its worst one-day drop of 2015.  In addition to the woes in Greece, Puerto Rico is facing a financial crisis as it cannot pay back more than $70 billion in municipal debt.  Spot VIX closed higher the front six VIX futures (18.85) for the first time since late January.  The VIX futures are all lower this morning on the decidedly bullish equity tone in steepening fashion for the term structure. Finally some much overdue volatility has come our way as the S&P 500 shaved off a healthy 2% yesterday.  Equity futures have snapped back, however, by .6% this morning.  The question is whether or not this is simply short covering and will we continue the move lower?  If I had to guess, I’d say that we will shed the positive territory and move lower throughout the day.  Yesterday saw the 11th biggest move in percentage terms ever for the VIX, 34% (VIXandMore.com).  According to VIXandMore, there have only been 23 spikes in excess of 30% and on the whole it is worth noting that the SPX has a tendency to decline in the 10- and…

Russell 2000 Implied Volatility at Decade Lows

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Volatility Monitor

posted by CAPIS on 06/24/2015 at 8:05 am
by CAPIS on 06/24/2015

SPX futures are off 5.7 points to 2110.80.  First quarter GDP now shows smaller decline than previously estimated.  Gold is slightly lower while crude is flat.  The VIX futures are  all higher this morning on the negative tone.  The spot VIX finished 12.11 which matches the low for the year. Russell 2000 implied volatility has hit rock bottom.  IWM (iShares Russell 2000) 1- and 3-month implied volatilities are the lowest they have been in over a decade.  As of the close yesterday, 1- and 3-month IV are sitting at 12.2 and 14.2, respectively.  Of course levels of IV will chase realized volatility.  If nothing is moving, nothing is moving.  One-month realized volatility is 10.3% and sits in the bottom 3% of readings going back a decade.  As stated in previous Vol Monitors, IWM IV is extremely cheap relative to the S&P 500 Index.  The 1-month vol spread between the two has dropped to 1.49 vol points (IWM > SPY).  The mean for the past 10-years has been 6.56.  This seems like good value, especially in hedging.  In times of stress, the spread seems to widen to at least over 10 points and back in 2011 it hit a decade high…

SPX futures are off 5.7 points to 2110.80.  First quarter GDP now shows smaller decline than previously estimated.  Gold is slightly lower while crude is flat.  The VIX futures are  all higher this morning on the negative tone.  The spot VIX finished 12.11 which matches the low for the year. Russell 2000 implied volatility has hit rock bottom.  IWM (iShares Russell 2000) 1- and 3-month implied volatilities are the lowest they have been in over a decade.  As of the close yesterday, 1- and 3-month IV are sitting at 12.2 and 14.2, respectively.  Of course levels of IV will chase realized volatility.  If nothing is moving, nothing is moving.  One-month realized volatility is 10.3% and sits in the bottom 3% of readings going back a decade.  As stated in previous Vol Monitors, IWM IV is extremely cheap relative to the S&P 500 Index.  The 1-month vol spread between the two has dropped to 1.49 vol points (IWM > SPY).  The mean for the past 10-years has been 6.56.  This seems like good value, especially in hedging.  In times of stress, the spread seems to widen to at least over 10 points and back in 2011 it hit a decade high…

SPX Volatility Skew

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Volatility Monitor

posted by CAPIS on 06/22/2015 at 7:41 am
by CAPIS on 06/22/2015

Skew– The elevated skew levels remain entrenched in the S&P 500 Index (SPX).  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Volatility skew is also often measured as a ratio.  In the graph below, you can see that the 90%/110% of spot strike skew is 2.03 (ratio), which is in the top 11% of readings over the past 5-years. It is fairly well known that the implied volatility of the SPX index has historically traded in excess of realized volatility when looking at a rolling one month time frame, the time encompassed by the VIX.  Implied levels have typically averaged 3 volatility points higher than realized going back twenty years.  The 90% of spot strike, or the 10% out-of-the-money put, has a spread (implied to realized)…

Skew– The elevated skew levels remain entrenched in the S&P 500 Index (SPX).  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Volatility skew is also often measured as a ratio.  In the graph below, you can see that the 90%/110% of spot strike skew is 2.03 (ratio), which is in the top 11% of readings over the past 5-years. It is fairly well known that the implied volatility of the SPX index has historically traded in excess of realized volatility when looking at a rolling one month time frame, the time encompassed by the VIX.  Implied levels have typically averaged 3 volatility points higher than realized going back twenty years.  The 90% of spot strike, or the 10% out-of-the-money put, has a spread (implied to realized)…

FOMC – S&P 500 Index Weekly Straddle

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Volatility Monitor

posted by CAPIS on 06/16/2015 at 7:43 am
by CAPIS on 06/16/2015

SPX futures are off 6.5 points to 2069.  Housing starts are up the most over a two month period since 2007.  Greece continues to be Greece, refusing to submit a proposal to avert a default on June 30.  Gold is off slightly while crude oil is up modestly.  Treasury futures are all higher with the 10-year trading 125-26 (+’07).  The spot VIX moved up to 15.39 yesterday.  The VIX futures are a mixed bag this morning in a flattening move for the term structure. All eyes are on the FOMC meeting tomorrow.  The economy has been heating up since the FOMC meeting in April suggesting a rate hike or two by the end of the year.  The majority of economists don’t think any such hike will occur this week, but rather September at the earliest.  In fact, Goldman put out a note yesterday predicting a rate of .625% by year-end, pointing to two 25 basis point hikes beginning in September.  The stock market has moved sideways for the better part of six months as has the 10-year note. The SPX 2080 straddle (weekly) that expires on the open Friday is priced at 1.39%.  Goldman notes that over the last year,…

SPX futures are off 6.5 points to 2069.  Housing starts are up the most over a two month period since 2007.  Greece continues to be Greece, refusing to submit a proposal to avert a default on June 30.  Gold is off slightly while crude oil is up modestly.  Treasury futures are all higher with the 10-year trading 125-26 (+’07).  The spot VIX moved up to 15.39 yesterday.  The VIX futures are a mixed bag this morning in a flattening move for the term structure. All eyes are on the FOMC meeting tomorrow.  The economy has been heating up since the FOMC meeting in April suggesting a rate hike or two by the end of the year.  The majority of economists don’t think any such hike will occur this week, but rather September at the earliest.  In fact, Goldman put out a note yesterday predicting a rate of .625% by year-end, pointing to two 25 basis point hikes beginning in September.  The stock market has moved sideways for the better part of six months as has the 10-year note. The SPX 2080 straddle (weekly) that expires on the open Friday is priced at 1.39%.  Goldman notes that over the last year,…

Implied Volatility Levels – US / Europe

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Volatility Monitor

posted by CAPIS on 06/08/2015 at 8:15 am
by CAPIS on 06/08/2015

SPX futures are off 3.5 points to 2088.50 following European names to their lowest levels since March.  The strong jobs report on Friday may lead to a move higher in rates by the Fed in the fall.  The IMF has advised the Fed to wait until 2016 to move but that seems unlikely.  The spot VIX finished 14.21 on Friday.  The VIX futures are a mixed bag this morning awaiting a more definitive move in equities. The German 10-yr yields rose 34 bps last week, which was one of the largest weekly moves over the last two decades (Goldman).  The German DAX Index moved to a record just two months ago, only to fall 10% and hit a three month low on Friday.  And as we noted here last week, DAX 1-month IV is in the top 3% of three of three year readings.  Germany and US are disseminating quite different readings when looking at premium (vol) in the options for the DAX and SPX.  In fact, the same can be said of most every major index in Europe with respect to the SPX as they all continue to move in lock step with every bit of Greek news. Skew,…

SPX futures are off 3.5 points to 2088.50 following European names to their lowest levels since March.  The strong jobs report on Friday may lead to a move higher in rates by the Fed in the fall.  The IMF has advised the Fed to wait until 2016 to move but that seems unlikely.  The spot VIX finished 14.21 on Friday.  The VIX futures are a mixed bag this morning awaiting a more definitive move in equities. The German 10-yr yields rose 34 bps last week, which was one of the largest weekly moves over the last two decades (Goldman).  The German DAX Index moved to a record just two months ago, only to fall 10% and hit a three month low on Friday.  And as we noted here last week, DAX 1-month IV is in the top 3% of three of three year readings.  Germany and US are disseminating quite different readings when looking at premium (vol) in the options for the DAX and SPX.  In fact, the same can be said of most every major index in Europe with respect to the SPX as they all continue to move in lock step with every bit of Greek news. Skew,…

Greek Debt, European Implied Volatility, & The VIX

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Volatility Monitor

posted by CAPIS on 06/02/2015 at 8:00 am
by CAPIS on 06/02/2015

As many of you noticed, the Volatility Monitor was in dry-dock for a two week hiatus.  SPX futures are off 3 points to 2106.25.  Greek jitters continue to weigh on European bourses.  The spot VIX finished 13.97 yesterday.  The VIX futures are all higher by a dime on average given the negative tone. The first of four Greek debt repayments is due at the end of the week.  All four are to be made in the month of June and total 1.6 billion euros payable to the IMF.  The problem as we all know is Greece is struggling to make such a payment.  Negotiations for a common proposal between creditors and Greece still continue.  Last night Greece submitted a proposal but has yet to hear from creditor institutions.  Apparently that doesn’t matter to Greek Prime Minister Tsipras.  “..we are not waiting for them to submit their plan… Greece is the one that submits the plan.”  Pretty comedic stuff coming from the debtor nation. As the deadline draws near, European equity markets have been choppy as of late.  Implied volatility, however, has been rising steadily since March.  DAX 1-month IV has climbed nearly 70% to 24% while the Euro Stoxx 50…

As many of you noticed, the Volatility Monitor was in dry-dock for a two week hiatus.  SPX futures are off 3 points to 2106.25.  Greek jitters continue to weigh on European bourses.  The spot VIX finished 13.97 yesterday.  The VIX futures are all higher by a dime on average given the negative tone. The first of four Greek debt repayments is due at the end of the week.  All four are to be made in the month of June and total 1.6 billion euros payable to the IMF.  The problem as we all know is Greece is struggling to make such a payment.  Negotiations for a common proposal between creditors and Greece still continue.  Last night Greece submitted a proposal but has yet to hear from creditor institutions.  Apparently that doesn’t matter to Greek Prime Minister Tsipras.  “..we are not waiting for them to submit their plan… Greece is the one that submits the plan.”  Pretty comedic stuff coming from the debtor nation. As the deadline draws near, European equity markets have been choppy as of late.  Implied volatility, however, has been rising steadily since March.  DAX 1-month IV has climbed nearly 70% to 24% while the Euro Stoxx 50…

S&P 500 Index vs. DAX – 3-Month Implied Volatility

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Volatility Monitor

posted by CAPIS on 05/18/2015 at 8:02 am
by CAPIS on 05/18/2015

SPX futures are down roughly 4 points to 2115. Europe is generally lower, while gold and oil are generally flat.  The 10-year Treasury future is trading off to 127-25+.  The cash VIX finished 12.38 on Friday.  The VIX futures are all trading higher modestly given the negative tone today. The S&P 500 closed at record highs on Friday, 2122.73.  Bloomberg had a note out this morning referencing Nobel Prize winning economist James Tobin’s Q Ratio.  “If you sold every share of every company in the US and used the money to buy up all the factories, machines and inventory, you’d have some cash left over” (Bloomberg).  That is the math behind the Q Ratio.  Apparently, the level we are at now is higher than any other time on record save the internet bubble and the 1929 highs.  Apparently the average since 1900 is a 30% discount (.70), not a 10% premium (1.10).  As you would expect, implied volatility for the index is rather low.  Three-month IV is 12.56, a reading in the bottom quartile looking back a decade. The major German equity index (DAX), on the other hand, is off roughly 8% in the last month.  In fairness, until the…

SPX futures are down roughly 4 points to 2115. Europe is generally lower, while gold and oil are generally flat.  The 10-year Treasury future is trading off to 127-25+.  The cash VIX finished 12.38 on Friday.  The VIX futures are all trading higher modestly given the negative tone today. The S&P 500 closed at record highs on Friday, 2122.73.  Bloomberg had a note out this morning referencing Nobel Prize winning economist James Tobin’s Q Ratio.  “If you sold every share of every company in the US and used the money to buy up all the factories, machines and inventory, you’d have some cash left over” (Bloomberg).  That is the math behind the Q Ratio.  Apparently, the level we are at now is higher than any other time on record save the internet bubble and the 1929 highs.  Apparently the average since 1900 is a 30% discount (.70), not a 10% premium (1.10).  As you would expect, implied volatility for the index is rather low.  Three-month IV is 12.56, a reading in the bottom quartile looking back a decade. The major German equity index (DAX), on the other hand, is off roughly 8% in the last month.  In fairness, until the…

SPX Implied Volatility Flat … Long Bond Rising

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Volatility Monitor

posted by CAPIS on 05/14/2015 at 8:27 am
by CAPIS on 05/14/2015

SPX futures are up 12 points to 2106.5 as jobless claims posted a surprise drop.  Wholesale US prices showed a broad based retreat in April.  The dollar has dropped to its lowest level since January.  Gold and oil are pretty much unchanged.  The spot VIX finished 13.76 yesterday.  The VIX futures are all retreating in a steepening of the term structure given the positive equity tone. While general levels equity implied volatility continue to stagnate, bond future implied volatility has moved up 60% since December. The chart below shows the 10-year comparison between the VIX (orange) and 1-month IV in TLT (iShares 20+ Year Treasury Bond ETF) (white).  Normally we’d look at the long bond future itself, but the recent Clinton bond episode (ie drastic change in cheapest-to-deliver) messed up the volatility on Bloomberg.  As you can see, the mean differential between the 1-month realized volatilites for both is 6.26 vol points (VIX > TLT).  The spread currently sits inverted with TLT higher by 2.44 points… a reading in the top 1% (10Yrs). While S&P 500 Index IV is at fairly low levels (13.76 VIX vs. 20 year mean of 20), skew in the index is in the top 3%…

SPX futures are up 12 points to 2106.5 as jobless claims posted a surprise drop.  Wholesale US prices showed a broad based retreat in April.  The dollar has dropped to its lowest level since January.  Gold and oil are pretty much unchanged.  The spot VIX finished 13.76 yesterday.  The VIX futures are all retreating in a steepening of the term structure given the positive equity tone. While general levels equity implied volatility continue to stagnate, bond future implied volatility has moved up 60% since December. The chart below shows the 10-year comparison between the VIX (orange) and 1-month IV in TLT (iShares 20+ Year Treasury Bond ETF) (white).  Normally we’d look at the long bond future itself, but the recent Clinton bond episode (ie drastic change in cheapest-to-deliver) messed up the volatility on Bloomberg.  As you can see, the mean differential between the 1-month realized volatilites for both is 6.26 vol points (VIX > TLT).  The spread currently sits inverted with TLT higher by 2.44 points… a reading in the top 1% (10Yrs). While S&P 500 Index IV is at fairly low levels (13.76 VIX vs. 20 year mean of 20), skew in the index is in the top 3%…

LPHI, OptionsExpress, and the SEC

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Volatility Monitor

posted by CAPIS on 05/13/2015 at 7:33 am
by CAPIS on 05/13/2015

Now that CAPIS is posting the Volatility Monitor and the Morning Macro News to the website, I feel obligated to bring back some of the better pieces over the years.  The following is a little piece on a lawsuit between Life Partners Holdings (LPHI) and the OptionsExpress in 2014: Life Partners Holdings (LPHI) filed a lawsuit against OptionsXpress, Inc for “the sale of millions of shares of counterfeit-phantom (LPHI) stock” that had a negative effect on the stock price. Ooh, interesting enough to get my attention! Now obviously the only firm that can issue LPHI stock is, well, LPHI. The lawsuit is essentially an offshoot of a case the SEC made (and won) a year ago that found OptionsXpress facilitating a perpetual fail-to-deliver of short stock in hard-to-borrow names by several investors. The strategy was one trying to take advantage of the reversal/conversion market in hard-to-borrow names. When a name goes hard-to-borrow (HTB), put/call parity seemingly gets way out of line. It appears that the puts are way overpriced with respect to the calls. The reason being is that no one can get locate (stock to borrow) to short the name. And even if you could get locate, you run…

Now that CAPIS is posting the Volatility Monitor and the Morning Macro News to the website, I feel obligated to bring back some of the better pieces over the years.  The following is a little piece on a lawsuit between Life Partners Holdings (LPHI) and the OptionsExpress in 2014: Life Partners Holdings (LPHI) filed a lawsuit against OptionsXpress, Inc for “the sale of millions of shares of counterfeit-phantom (LPHI) stock” that had a negative effect on the stock price. Ooh, interesting enough to get my attention! Now obviously the only firm that can issue LPHI stock is, well, LPHI. The lawsuit is essentially an offshoot of a case the SEC made (and won) a year ago that found OptionsXpress facilitating a perpetual fail-to-deliver of short stock in hard-to-borrow names by several investors. The strategy was one trying to take advantage of the reversal/conversion market in hard-to-borrow names. When a name goes hard-to-borrow (HTB), put/call parity seemingly gets way out of line. It appears that the puts are way overpriced with respect to the calls. The reason being is that no one can get locate (stock to borrow) to short the name. And even if you could get locate, you run…

Russell 2000 Implied Volatility Near 20-year Lows

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Volatility Monitor

posted by CAPIS on 05/12/2015 at 8:26 am
by CAPIS on 05/12/2015

SPX futures are off 14 points this morning while the USM5 (US Long Bond) has retreated over 10% now since the beginning of February.  Verizon agreed to acquire AOL in a $4.4 billion deal.  Crude oil is climbing while the dollar is weakening.  European names are generally higher.  The German 10-year bond yield is near its highest levels of 2015.  The spot VIX finished 13.85 yesterday.  The VIX futures are all rallying due to the negative equity tone this morning. Goldman put out a piece last week emphasizing that 1-month implied volatility in both the Russell 2000 and Nasdaq-100 are very nearly at 20-year lows.  In the 10-year graph below for the Russell 2000, you can see 1-month IV hit a low in March of this year.  It is still just a mere 3 points off that 12.77 low, sitting at 15.84.  In a relative sense, S&P 500 Index 1-month IV is trading rich to the Russell as you might expect given the 20-year lows for the Russell.  In fact, the 3-month IV spread (Russell vs. S&P) is in the bottom 5% of 10-year readings while also hitting a low in March of this year. On the flip side, both…

SPX futures are off 14 points this morning while the USM5 (US Long Bond) has retreated over 10% now since the beginning of February.  Verizon agreed to acquire AOL in a $4.4 billion deal.  Crude oil is climbing while the dollar is weakening.  European names are generally higher.  The German 10-year bond yield is near its highest levels of 2015.  The spot VIX finished 13.85 yesterday.  The VIX futures are all rallying due to the negative equity tone this morning. Goldman put out a piece last week emphasizing that 1-month implied volatility in both the Russell 2000 and Nasdaq-100 are very nearly at 20-year lows.  In the 10-year graph below for the Russell 2000, you can see 1-month IV hit a low in March of this year.  It is still just a mere 3 points off that 12.77 low, sitting at 15.84.  In a relative sense, S&P 500 Index 1-month IV is trading rich to the Russell as you might expect given the 20-year lows for the Russell.  In fact, the 3-month IV spread (Russell vs. S&P) is in the bottom 5% of 10-year readings while also hitting a low in March of this year. On the flip side, both…

S&P 500 Volatility Surface and the VIX

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/07/2015 at 7:39 am
by CAPIS on 05/07/2015

Take a look at the current S&P 500 Index (SPX) volatility surface for the extrapolated 1-month (orange) and 3-month (green) option chain below.  In a nutshell, the image gives you a visual depiction of a core violation of the Black-Schole’s model.  The model assumes that the volatility input for all strikes of a given maturity is constant throughout.  This is obviously not the case given that both lines are not perfectly horizontal.  What occurs in the real world is an obvious skew both in a month-to-month and strike-to-strike basis.  This makes volatility hedging a tricky endeavor.  Rather than assuming that volatility is a constant, traders consider them as variables.  As such, volatility is an added risk and subsequently an additional way to make or lose money.  The Black-Schole’s model isn’t perfect, but the fact that everyone uses a modified version of it is testament that it still is the best thing going. For today we are concerned with the strike-by-strike skew within the same month (generic 1- and 3-month expiry).  As you can see below (and is very typical in the equity world), the implied volatilities across all strikes within the same month when graphed looks like a smile.  The…

Take a look at the current S&P 500 Index (SPX) volatility surface for the extrapolated 1-month (orange) and 3-month (green) option chain below.  In a nutshell, the image gives you a visual depiction of a core violation of the Black-Schole’s model.  The model assumes that the volatility input for all strikes of a given maturity is constant throughout.  This is obviously not the case given that both lines are not perfectly horizontal.  What occurs in the real world is an obvious skew both in a month-to-month and strike-to-strike basis.  This makes volatility hedging a tricky endeavor.  Rather than assuming that volatility is a constant, traders consider them as variables.  As such, volatility is an added risk and subsequently an additional way to make or lose money.  The Black-Schole’s model isn’t perfect, but the fact that everyone uses a modified version of it is testament that it still is the best thing going. For today we are concerned with the strike-by-strike skew within the same month (generic 1- and 3-month expiry).  As you can see below (and is very typical in the equity world), the implied volatilities across all strikes within the same month when graphed looks like a smile.  The…

Synthetic Straddles via Delta-Hedging

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/05/2015 at 7:52 am
by CAPIS on 05/05/2015

SPX futures are off 3 points to 2106 as the Shanghai Composite Index has dropped roughly 4%.  This is the biggest drop in three months for China.  Crude oil has surpassed $60 in the US for the first time this year.  The spot VIX finished 12.85 yesterday on the slightly positive day for the SPX.  The VIX futurs are all modestly higher in a steepening of the term structure this morning. Synthetic Straddles–  A VIX term structure in the low teens is historically low, compared to the lifetime mean of roughly 20.  The options market seemingly thinks a move is not forthcoming, at least to the downside.  If everyone believed we were headed lower, the VIX would certainly be quite a bit higher. It seems very well positioned for upward momentum, or in the least not much movement in either direction. You can synthetically create many things with options.  Managers who are long only and believe a major move is coming, one way or the other, can get delta-neutral through the use of SPY at-the-money puts and create a synthetic straddle to take advantage of the impending move.  Being delta-neutral on an at the money call (put), means selling (buying) 500…

SPX futures are off 3 points to 2106 as the Shanghai Composite Index has dropped roughly 4%.  This is the biggest drop in three months for China.  Crude oil has surpassed $60 in the US for the first time this year.  The spot VIX finished 12.85 yesterday on the slightly positive day for the SPX.  The VIX futurs are all modestly higher in a steepening of the term structure this morning. Synthetic Straddles–  A VIX term structure in the low teens is historically low, compared to the lifetime mean of roughly 20.  The options market seemingly thinks a move is not forthcoming, at least to the downside.  If everyone believed we were headed lower, the VIX would certainly be quite a bit higher. It seems very well positioned for upward momentum, or in the least not much movement in either direction. You can synthetically create many things with options.  Managers who are long only and believe a major move is coming, one way or the other, can get delta-neutral through the use of SPY at-the-money puts and create a synthetic straddle to take advantage of the impending move.  Being delta-neutral on an at the money call (put), means selling (buying) 500…

Implied Volatility

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/04/2015 at 8:00 am
by CAPIS on 05/04/2015

S&P futures are up 6 points to 2107.50.  European names are up after the biggest weekly decline this year.  Manufacturing is up in the region more than estimated.  China’s PMI for April is up less than analysts’ estimated.  The cash VIX finished 12.70 on Friday.  The VIX futures are all lower in parallel fashion by a dime on average given the positive tone. Implied Volatility–  Occasionally, I’ll get an email or two that go something like this, “Why should I be so preoccupied with comparing realized stock volatility to that implied in the options if I’m just doing covered calls?”  Let’s take a step back. Definitively, volatility is simply the one standard deviation move in percentage terms of the underlying stock over a one year period.  Given the inputs in the options pricing formula (interest rates, dividends, time to expiration, stock price, strike, and volatility), the volatility is the biggest unknown and the “art” in pricing options.  The volatility input is the means by which one can artificially increase or decrease the price of the option.  That is why most market-makers quote in volatility and remember at what volatility they bought and sold particular months/strikes. Selling covered calls is essentially…

S&P futures are up 6 points to 2107.50.  European names are up after the biggest weekly decline this year.  Manufacturing is up in the region more than estimated.  China’s PMI for April is up less than analysts’ estimated.  The cash VIX finished 12.70 on Friday.  The VIX futures are all lower in parallel fashion by a dime on average given the positive tone. Implied Volatility–  Occasionally, I’ll get an email or two that go something like this, “Why should I be so preoccupied with comparing realized stock volatility to that implied in the options if I’m just doing covered calls?”  Let’s take a step back. Definitively, volatility is simply the one standard deviation move in percentage terms of the underlying stock over a one year period.  Given the inputs in the options pricing formula (interest rates, dividends, time to expiration, stock price, strike, and volatility), the volatility is the biggest unknown and the “art” in pricing options.  The volatility input is the means by which one can artificially increase or decrease the price of the option.  That is why most market-makers quote in volatility and remember at what volatility they bought and sold particular months/strikes. Selling covered calls is essentially…

Put/Call Parity and Hard-to-Borrow

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/30/2015 at 8:07 am
by CAPIS on 04/30/2015

You can glean a lot of information from the put/call parity relationship. Put/call parity (illustrated below) must hold true for names to ensure there is no free lunch arbitrage. The relationship also demonstrates one of the most basic rules of options trading:  puts and calls are interchangeable to a market maker. To a market maker, it makes no difference whether you are long (short) puts or calls on the same strike due to delta hedging. What does matter is the net longs (shorts) on any given strike. As seen below, it is easy to synthetically replicate a put with a call or a call with a put. Call = Put + (Stock – Strike) + PV(Interest on the Strike) – PV(Dividends) Sometimes ,however, the equation gets so out of line you wonder what the heck is going on. In training young market makers, I would often point out that if something is way out of line, assume that you are wrong before jumping in and strapping on a bunch of reversals or conversions. Just as you solved for the call above, you can rearrange the equation (given the market price of the puts and calls) and solve for the dividends…

You can glean a lot of information from the put/call parity relationship. Put/call parity (illustrated below) must hold true for names to ensure there is no free lunch arbitrage. The relationship also demonstrates one of the most basic rules of options trading:  puts and calls are interchangeable to a market maker. To a market maker, it makes no difference whether you are long (short) puts or calls on the same strike due to delta hedging. What does matter is the net longs (shorts) on any given strike. As seen below, it is easy to synthetically replicate a put with a call or a call with a put. Call = Put + (Stock – Strike) + PV(Interest on the Strike) – PV(Dividends) Sometimes ,however, the equation gets so out of line you wonder what the heck is going on. In training young market makers, I would often point out that if something is way out of line, assume that you are wrong before jumping in and strapping on a bunch of reversals or conversions. Just as you solved for the call above, you can rearrange the equation (given the market price of the puts and calls) and solve for the dividends…

Volatility Monitor – Synthetic Positions

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/29/2015 at 7:33 am
by CAPIS on 04/29/2015

SPX futures are off 8 points to 2104 in concert with European markets this morning.  The Fed will provide details on its monetary policy today.  The dollar is headed for its first monthly loss in nearly a year.  Bloomberg says that 73% of economists believe that the Fed will raise rates in September.  The spot VIX closed 12.41 yesterday.  The VIX futures are all modestly higher in a flattening of the term structure.  Synthetics–    In meeting with institutional portfolio managers, I’m still amazed at the connotation of risk that accompanies the word option.  But maybe it’s the old market-maker in me and my view that simply being long or short the actual stock is the risky part.  Many a manager always seems to preface his actual use of options by stating that, “Our firm is very conservative in what we want to do.  We will routinely buy puts in some of our names.  We will definitely sell some covered calls.  But that’s it.”   I counter with  ‘Would you ever sell naked puts or buy deep calls?’  “No, no.  No naked shorts.  And no speculative call buying.” I’ve touched on this point before, but I think it needs repeating:  anytime you…

SPX futures are off 8 points to 2104 in concert with European markets this morning.  The Fed will provide details on its monetary policy today.  The dollar is headed for its first monthly loss in nearly a year.  Bloomberg says that 73% of economists believe that the Fed will raise rates in September.  The spot VIX closed 12.41 yesterday.  The VIX futures are all modestly higher in a flattening of the term structure.  Synthetics–    In meeting with institutional portfolio managers, I’m still amazed at the connotation of risk that accompanies the word option.  But maybe it’s the old market-maker in me and my view that simply being long or short the actual stock is the risky part.  Many a manager always seems to preface his actual use of options by stating that, “Our firm is very conservative in what we want to do.  We will routinely buy puts in some of our names.  We will definitely sell some covered calls.  But that’s it.”   I counter with  ‘Would you ever sell naked puts or buy deep calls?’  “No, no.  No naked shorts.  And no speculative call buying.” I’ve touched on this point before, but I think it needs repeating:  anytime you…

Options – Interest Rate/Dividend Plays

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/28/2015 at 8:04 am
by CAPIS on 04/28/2015

SPX futures are off 5 points to 2099.75 even against the backdrop of expecations of no rate change by the Fed.  September is generally the expected first date of any increase.  The value of global equities rose to a record $72.2 trillion yesterday (Bloomberg).  Gold is unchanged and crude oil is slightly lower.  The spot VIX finished 13.12 yesterday.  The VIX futures are in a bit of a flattening move with the front months up a bit more than the later months. Option Sensitivity-  In the very least most people associate options trading with gaining exposure (long or short) to a stock/index/etf/etc.  Delta exposure, as it’s called, to the underlying is the most obvious exposure to be sure.  There are, however, many other exposures that complicate things and make options a bit more exciting than simply being long or short a stock.  Volatility trading is another play that I’ve discussed ad nauseum and will not get into here.  But many people don’t realize that you can put on an interest rate or dividend play using options as well. Put-call parity necessitates that options of the same strike and month trade on the same volatility.  If not, an arb can be…

SPX futures are off 5 points to 2099.75 even against the backdrop of expecations of no rate change by the Fed.  September is generally the expected first date of any increase.  The value of global equities rose to a record $72.2 trillion yesterday (Bloomberg).  Gold is unchanged and crude oil is slightly lower.  The spot VIX finished 13.12 yesterday.  The VIX futures are in a bit of a flattening move with the front months up a bit more than the later months. Option Sensitivity-  In the very least most people associate options trading with gaining exposure (long or short) to a stock/index/etf/etc.  Delta exposure, as it’s called, to the underlying is the most obvious exposure to be sure.  There are, however, many other exposures that complicate things and make options a bit more exciting than simply being long or short a stock.  Volatility trading is another play that I’ve discussed ad nauseum and will not get into here.  But many people don’t realize that you can put on an interest rate or dividend play using options as well. Put-call parity necessitates that options of the same strike and month trade on the same volatility.  If not, an arb can be…

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