The Latest

• Fix The VIX!
  Posted by Adam Warner on September 7th, 2010 at 10:21 am, Comments: 0

  
  Ever hear of the Williams’ VIX Fix? Neither had I, until this weekend.  Here’s the description by Frank of Trading the Odds.

  William’s VIX Fix is a synthetic VIX (CBOE Volatility Index) calculation which can be used in any market to mimic the performance (but not the quotes) of the well-known volatility index (the WVF is not based on option’s implied volatility but derived from historical and intraday prices only).

  William’s original formula:

  WVF = [Highest (Close,22) - Low) / (Highest(Close,22)] * 100

  The concept is that when WVF gets too high, it’s bullish for the underlying. The question is how you define high. Oh, and whether there’s an actionable system using it. Frank looks at, as does Michael from Market Sci blog.

  The gist from both as I take it (they’re both great stats guys btw) is kind of expected. You can catch much of market upside while only holding a fraction of the time. Of course any strategy that works like that misses extended moves. Clearly a volatility based one will miss a low volatility,  slow motion rally that persists and persists (2005-2006 comes to mind).

  I like the concept though. The world in general learned of volatility over the past decade, and imho gets it bass ackwards. Low VIX (or whatever you use for a volatility index) is now somehow thought bullish. But it’s the old “umbrella’s causing rain” fallacy. The VIX is often low precisely because the market is doing well, it’s not causing the market to do well.

  WVF applied this way is the opposite, and imho correct, interpretation. But the real question I suppose is whether it’s better than just the VIX itself. Michael promises to study that next, so we’ll see his opinion.

  
  

• Fun With Skew
  Posted by Adam Warner on September 6th, 2010 at 10:20 pm, Comments: 0

  We posted a skew chart of SPY the other day to show that basically….there’s still lots of desire out there to own OTM puts (as well as out month VIX future, OTM VIX calls, et. al.).

  But what about individual names, do we see the same sort of behavior?

  Well, here’s a few.

  Here’s what AAPL looks like (note: all the graphs show skew on different time frames vs. the same time frames over the past year)

  

  Pretty unexceptional. I mean you have to go out to paper with more than 90 days to expiration to get to the high end of AAPL’s range. And as you can see there’s not a lot of difference between low and high that far out anyway.

  Here’s NFLX

  

  Same thing, but worse.

  But AAPL and NFLX are up stocks, so maybe there’s just not big demand for OTM puts. How about an eh stock, like RIMM.

  

  Doesn’t really look different. And here’s GOOG.

  

  So what gives?

  Well, I think it’s more evidence of the “we’re all just ETF’s” theory. The over-demand for portfolio protection is really confined to SPX , SPX puts, and offshoots like VIX products. Relatively speaking, just not as much fear that an individual name will implode as there is that the whole market will implode.

  
  

• Game On
  Posted by Adam Warner on September 4th, 2010 at 3:16 pm, Comments: 0

  

  I’ll let Reuters do the promo’s for this upcoming Round of 16 match-up.

  A ruthless Maria Sharapova whitewashed American wildcard Beatrice Capra 6-0 6-0 on Saturday to set up a mouthwatering U.S. Open quarter-final clash with top seed Caroline Wozniacki.

  OK then.

  

  
  

• Enjoy The Weekend
  Posted by Adam Warner on September 3rd, 2010 at 1:49 pm, Comments: 0

  

  VIX held above the lows from early August! Of course SPX still 20 points or so from the *highs* then.

  Who cares though. Let the record state I posted Danica’s picture and called a TBT bottom within about a week of the actual bottom. Value added, baby!

  Anyway, enjoy the Holiday.

  
  

• Right Back at Skew
  Posted by Adam Warner on September 3rd, 2010 at 9:55 am, Comments: 0

  

  Haven’t mentioned Skew in a while. So here it is, in SPY.

  This chart compares options skew (more or less the degree to which options volatility gets higher as you go lower in strike price) over different time frames. And compares it to itself.

  Long story short, skew in the shorter time frames remains at high relative levels. Which essentially says that the perpetual OTM put bid out there has not left the building. Nor has that perpetual OTM VIX call bid which basically prices off this.

  We know of course that VIX futures maintain their hefty premium So still plenty of fear out there if you look past the drifting “spot” VIX.

  
  

• Even More About VXX Challenges
  Posted by Adam Warner on September 3rd, 2010 at 6:17 am, Comments: 0

  

  With VXX Fugliness a big topic here this week, certainly can’t hurt to remember why VXX fugliness exists in the first place.

  Check out this snapshot of VIX futures I took mid-day yesterday, particularly the September and October futures. There’s a 4 point spread there. Since VXX proxies a 30 day VIX future, it essentially has to sell Sept. futures (or a swap equivalent) and buy October futures in order to maintain proper duration. In addition, the futures premium itself of the 30 day VIX future they “create” will lose some small undetermined amount each day (most likely).

  VXX simply can’t help but wither away so long as the VIX term structure remains like this. And the term structure almost always looks like this.

  You can also see why VXZ faces virtually none of these headwinds. It proxies 4-7 month futures. Well, futures out 5-7 month’s are almost identical, and the December future would like trade the same place too save for the fact that it’s in slow December. In other words, that’s a calendar quirk that will roll away when 4-7 month’s out means January-April.

  
  

• A Day At The Open
  Posted by Adam Warner on September 2nd, 2010 at 1:40 pm, Comments: 0

  

  OK, first the good. I’m not exactly a big tennis fan, but what a fun day at the Open yesterday. Given the outrageous cost of seeing my bad baseball team (or if you’re a Yankee fan, the even more outrageous cost of seeing a very good one), the Open seems downright reasonable now. Grounds passes and bad stadium seats sell under face all over Stubhub. And the day session runs to like 9PM now, so it’s potentially 10 hours of entertainment (if you find watching tennis entertaining).

  And the bad.

  As I walk in carrying a backpack containing dangerous items like Zone Bars, bottled water and a spray bottle so my son doesn’t incinerate in the 100 degree haze, I’m told “no Backpacks allowed, go store it”.  Why I ask, when 20 people around me walk in with their backpacks. They play the terrorism card, telling me it’s a safety thing. See my backback had TWO straps. If it only had one I could take it in. So if I actually carried a machete in my backpack I suppose I could have cut a strap and gotten in with it. And they’d probably rather than since they do sell Evian for $5 a bottle, but no knives.

  But here’s the real reason. They charge you $5 to store the backpack they arbitrarily decide you can’t take in.

  My questions are many. Like, if it’s a safety thing, fine, I won’t take it in, but how can you then charge me? Makes no sense. Also, wtf is this “strap” distinction? Hypothetically that second strap makes a difference, how? And they’re inspecting bags anyway like they do everywhere, why not just inspect this one? Why not just go all the way and make you check all bags?

  So let me just be clear. I do not mind inconvenience as a tradeoff for a legitimate safety issue. I do mind throwing it out as a transparent excuse to just rake in a few extra bucks.

  
  

• VXX Breakdown!
  Posted by Adam Warner on September 2nd, 2010 at 9:55 am, Comments: 0

  

  Yes, saw some tweeting to that effect.

  Here’s my advice. Don’t look at VXX charts. And I recognize the irony of attaching a VXX chart to a post that recommends not looking at VXX charts. So let me amend that to say, don’t read much into VXX charts.

  It’s 17 levels of derivative of a stat that itself should be charted with the knowledge that it’s a stat and not an asset with more natural supply and demand characteristics. The VIX itself can simply move because the price of SPX moved up or down the skew curve.

  And even if you want to disregard that VXX is simply born to fail to begin with and attach significance to the breakdown, what exactly does it mean? Are you bullish on the market because of it? Volatility in theory mean reverts. An extended slump should get you looking for a snapback, not a continuation.

  
  

• Not All VIX Fear That Meets the Eye
  Posted by Adam Warner on September 2nd, 2010 at 6:33 am, Comments: 0

  They’re talking VIX again in the MSM, this time on Marketwatch.

  Here’s something I didn’t realize. The VIX rallied 14.5% in the month of August, marking the largest August VIX spike since 2001. Even after getting plowed Tuesday, the VIX still showed a 10.8% lift for the month.

  Should we get scared?

  Well, let’s just put the VIX lift in perspective. Here’s a chart of VIX over the past month.

  

  For balance of the post, please click thru to InvestorPlace.