If you follow our blog closely, you know we have a thing or two or twelve to say about VIX and volatility investing. We even put some of that information together into an easily digestible whitepaper. But that still didn’t cover it all. In light of the VIX and volatility investing hype, here’s every article we’ve written about Volatility and the VIX over the last year:
Suffice to say that the guys and girls with PhDs and sophisticated algorithms for tracking market prices and identifying patterns don’t quite like their life’s work boiling down to a coin flip. They despise these binary events, as they temporarily invalidate all of the math and research which go into the modern day systematic global macro or managed futures program.
There’s no doubt volatility, and protecting against it, is at the forefront of everyone’s minds, but the problem with these ETF and ETN is that they are more short term bets on volatility spiking, say, tomorrow – than long-term hedges against volatility for a diversified portfolio.
Where will it happen this time round? When will it happen? The obvious conclusions seem to be an interest rate hike and the presidential election, but it could be something completely different. If you’re looking for timing, history suggests it might be closer than we expect
But while most of us are using the VIX as a metric to measure asset classes, others are treating it as a unique asset class in its own right, designing investment strategies around the futures and options which are tied to the CBOE’s VIX index.
Maybe it’s just us – but we don’t think a “wait-and-see” approach bodes all that well for a portfolio when it comes to volatility. It’s a little like trying to put on your seatbelt in the middle of the car crash.
The $4 Billion dollar questions are how crowded can this short volatility trade get before the dam breaks? And will it amplify any such breaking? We also wonder if there is a never ending supply of long volatility dupes, or if they will eventually wake up to the issue of giving up the 4,300% outlined by Goldman in their research? And at what point does the insurance become too costly to deploy day after day after day?
But a 1.5% move in implied volatility over the next month can be a big deal for someone like a hedge fund which is levered and trading derivative products with built-in leverage. That small move can cause much bigger issues in such cases, and that’s why just about this time people start asking how Hedge Fund and Managed Futures programs performed during yesterday’s sell off.
There’s been a growing chorus lately suggesting that perhaps the record low VIX readings aren’t due to record low feelings about volatility, but instead due to the dramatic increase in VIX products and assets betting on decreases in volatility.
This has led to an increasing amount of so-called “smart money” (hedge funds and large speculators) building up an almost always short VIX futures positions, as represented by the recent CFTC commitment of trader’s report:
Despite the fact that the average daily closing value of the CBOE Volatility Index® (VIX®) is about 11.5 so far this year, VIX futures and options both had record days for volume and for open interest this month.
We ran the data for the first six months of 2017, and a whopping 89% of the markets experienced consolidation over the first six months of 2017, leaving only five markets that expanded. The average volatility movement in the markets was -17%.
We’ve talked in the past about Pascal’s Wager and simple decision matrices, and couldn’t help but think that today’s market rebound as the perfect example for why the VIX gets slammed off its spikes so frequently.
For those looking to find returns in these moves, it’s far too difficult to time these markets when weather events like Hurricanes happen. Like trying to catch a falling knife where the consequences of not timing it perfectly can be drastic. The better approach would be to try and capture an overall rise in commodity volatility based on an overall rise in Global Weather Volatility – which we just happened to write about.
If you aren’t using Stocktwits to track your favorite stock symbols, you may be doing it wrong. There are spam and oddballs and all the rest you would expect of a social network, but the gif game is usually off the charts. Here are some of our favorites from the world of short VIX traders of $SVXY.
That’s actually a trick headline, as you can’t trade the VIX directly. It’s just an index of options prices. But you can invest/trade in products that track the VIX, like VIX futures, VIX ETFs, inverse ETFs, and more (here’s an in-depth research report). It’s called trading volatility, and with seemingly everyone giving it a shot of late (Billions are in VIX futures-related ETFs), we thought a nifty flowchart of just how to proceed would be worthwhile.
Sick of waiting for volatility to return to the markets? Seems that the folks at ICE are too and they’re doing something about it. In two days, futures on FANG stocks – you know – Facebook, Amazon, Apple, Netflix, and Google – will be traded on the Intercontinental Exchange as a FANG+ futures contract, merging the built-in leverage and liquidity of futures contracts with the seemingly endless promise of today’s five horsemen of techno-wonder.