Volatility Views

Volatility Review: A look back at the week from a volatility perspective

• VIX Cash: High: 16.27 today. VIX remains somewhat muted heading into FOMC next week and Brexit the following week.
• VIX Futures: All-time record high OI for VIX Futures: 501,835 on June 7
• VVIX: Creeping back up toward the high of recent range. VVIX: 90.
• VXX: 13.20
• XIV: 32.56

Russells Weekly Rundown

• VIX Options: Mon: 732k, Tues: 552k, Weds: 472k, Thurs: 585k.
• Total 7.85m (5.75m Calls, 2.10m Puts)
• Soybean Vol: Still crazy town in soybean volatility.

Volatility Voicemail: Listener questions and comments

• Question from 777: Does the many VIX tradable products influence the underlying index to any great extent? Is the tail waging the dog?
• Question from Skiball: Where do you see the VIX going and how will it impact stock picking in this market?

Crystal Ball: Russell finally gets the win by being the least-wrong with the 15.25 guess.

Where will the VIX close on Friday? Don't discount FOMC, Brexit.

• Russell: 16.5
• Mark S.: 18.01
• Mark L.: 15.5

Volatility Viewpoint: Today we are featuring Taylor Lukof, CEO of ABR Dynamic Funds.

ABR recently introduced their new "smart volatility" mutual fund: The ABR Dynamic Blend Equity and Volatility Fund (ABRVX).

• What is it?
• How does it work?
• What next for ABR?

Volatility Review: A look back at the week from a volatility perspective

• The impact of Non-farms on volatility.
• VIX Cash: High of 15.25 on Weds - 13.63 today.
• VVIX: 79.54 - near the low end of the recent range.
• VXX: 13.09
• XIV: 32.82

Russells Weekly Rundown

• Russell Twitter picture is here
• VIX Options: Tues - 655k, Weds - 300k, Thurs - 549k, Total 6.79m (4.85m Calls, 1.94m Puts)
• Crude Oil: OVX/OIV: 36.64 - dramatically lower than earlier in the year.

Volatility Voicemail: Listener questions and comments

• Question from Gabe - How can something like the VIX be technically oversold?

Crystal Ball: It's time for everyone's favorite game "Where will the VIX close?"

Last week:

• Mark L. - 13.50
• Andrew - 12.95

This week:

• Taylor - 14.25
• Mark L. - 13
• Russell - 15.25
• Mark S. - 14.25

• Volatility Review: A look at the week from a volatility perspective.
• VVIX: 77.50 on the low end of the recent range.

Russells Weekly Rundown:

• VIX Options: Mon - 206k, Tues - 560k, Weds - 592k, Thurs - 266k. Total 6.34m (4.55m Calls, 1.78m Puts)
• XIV: Hit 29.98 this year - the highest level of the year. Relative strength above 60 and rising which points to continued complacency in the marketplace.

Crystal Ball: In which we predict the closing price of VIX.

• Andrew - 12.95
• Mark L. - 13.5

Volatility Review: What happened this week in volatility?

• Much ado about nothing?
• Vol higher, but range is another story
• Why does VIX sometimes understate volatility?
• Why aren't people using weeklies strategically?
• Russell channels Columbo
• Volume and OI low as nothing looming on the economic calendar
• What will the Fed to, and when?
• Headlines versus revisions
• RUT = growth; SPX = value?
• Why hasn't OVX dropped given the underlying?

Crystal Ball: Where will the VIX close on Friday? Russell: 14.75. Memorial day is coming, that means an extra headwind is coming our way. Mark S.:Below 14 at 12:30 central time, but 15 at 3:00 pm central time. People taking things easy, with a big vol dump on the 25th and 26th.

Volatility Views 204: Live - to Tape - from OIC 2016

This time, we are coming to you live (to tape) from OIC 2016, but fear not...Russell Rhoads was there, too.

Volatility Review: Red on the screen means green for the VIX. 16 will be over/under for high/low on VIX going forward. VVIX is back above 90, though, and that's pretty high. Earnings season starting to wane. Slow decline of ESPN weighing on DIS earnings. Shake Shack.

Russell's Weekly Rundown:

• May 11 auctions, May 18 expiration
• Why is VXX more successful than other, similar products?

Crystal Ball: Wild prognosticating. Russell offers the WILD idea of predicting May VIX settlement.

• Russell: 15.27
• Mark: 14.70

Volatility Review: CBOE Livevol launches new data shop website: datashop.cboe.com. Non-farms and volatility: VIX can be deceiving as steep curve shows uncertainty. New VIX ETFs: VMAX/VMIN.

Russells Weekly Rundown:

• VIX Options: A light volume week overall: only one day even remotely exceeding ADV. Total 7.63m (5.58m Calls, 2.05m Puts)
• Earnings: Last week premium buyers won the day, this week premium sellers are in charge.
• ATVI - $34.60, ATM straddle $2.45, approx. 7%

Question of the Week Earnings Straddle Battle edition: Which will be more accurate TSLA $20 (8%) or BABA $4.70 (6%) ?

• 26% Tesla
• 31% Baba.
• 17% Sell both!
• 26% Buy both!

Volatility Voicemail: Listener questions and comments

• Question from Topcat - Are options less risky and volatile than contracts for difference?
• Comment from Mark Brant - Since VIX inception, VIX trends up from July to Oct. every year! Just like seasonality in grains!Sweet! @Options ATO: Selling 1k July 18 Puts to buy 2k July 29 Calls for even money! Really liking this play!

Crystal Ball: It's time for everyone's favorite game: Guess where VIX will close. Here are the predictions from when we last met:

• Russell - 18
• Andrew -15
• Mark L. - 15.5

And for this week:

• Russell - 15.5
• Mark S. - 13
• Mark L. - 14

Volatility Review: A look back at the week from a volatilityperspective.

• VIX cash: Creeping back up - a crazy day, almost all of ourpredictions were valid today.

Russells Weekly Rundown:

• VIX Options: A light volume week overall - only on day evenremotely exceeding ADV. Lots of put love on Friday: Total 7.26m(5.41m Calls, 1.85m Puts)
• Earnings Volatility: A bad time for premium sellers. Most ofthe major names reporting the past few weeks have blown throughtheir straddles - AAPL, MSFT, GOOG, FB, AMZN

Volatility Voicemail: Listener questions and comments

• Comment from Mark Melin - @RussellRhoads Talk about"anticipatory" nature of VIX futures. I have known several fundmanagers to play this as mean reversion
• Comment from John K. - One of the Tyler Durdens @zerohedge is a"Credit Derivatives Strategist" @Options: Discuss.
• Question from R_Chang - The VIX is hovering at 2016 lows. Isthis a good time to buy VIX calls to profit from a potential roarback into the 20s or beyond?

Crystal Ball: It's time for everyone's favorite game "Where willthe VIX close?!"

Last Week:

• Russell - 16
• Mark S. - 13.5
• Mark L. - 14.5

This Week:

• Russell - 18
• Andrew - 15
• Mark L. - 15.5

Volatility Review: The VIX has traded below 20 for 37 straight days, the longest such streak in 13 months. The gauge slid 2.2 percent to 13.64 at 9:48 a.m. in New York.

Russells Weekly Rundown:

• VIX Options: A strong volume week - particularly Wednesday. Total 6.83m (5.32m Calls, 1.51m Puts)
• SEC extends test period to curb U.S. market volatility
• Big Earnings Week: GOOG, Goldman, INTC, IBM, MSFT, NFLX, SBUX, Southwest, United Airlines, YHOO.
• Crude Oil: OIV/OVX - 43.50, almost touched 80 back in mid-February.
• Gold: GVZ 17.90 - well off recent highs.

Crystal Ball: What are the VIX predictions? To review, last week:

• Mark L. - 15.5
• Mark S. - 14
• Russell - 17

This week:

• Mark S. - 13.50
• Russell - 16
• Mark L. - 14.5

Volatility Review: VIX got crushed, VIX IV did not. CBOE announced it has created a series of 13 "Buffer Protect Indexes."

Russells Weekly Rundown:

• VIX Options: A strong volume week - particularly Wednesday (1.08M). Total 8.52M (6.46M Calls, 2.07M Puts)
• Trading hours for RVX Futures expanded - new start time 7:30am CST.
• Earning volatility this week: Alcoa, Citigroup, JP Morgan Chase, Bank of America, Delta Airlines
• Crude Oil: OIV/OVX - up 9% to $50.50. WTI Crude - 3% into oil meeting.
• Gold: GVZ 17.83 - well off recent highs.

Volatility Voice mail: Listener questions and comments

• Question from LosAngelino: What happened to the single name VIXes? You guys talked about them on the show years ago for names like Apple and Amazon. But I do not see them trading anywhere. Were they ever listed?
• Question from Nick C. - Do OTM VIX calls suffer from the same inflated volatility premium as S&P 500 OTM puts? If so does it not make them both prohibitively expensive to use as a hedging vehicle?

Crystal Ball: Last episode the VIX guesses were:

• Mark L. - 14.5
• Russell - 17
• Mark S. - 15.5

Big earnings week next week: GOOG, Goldman, INTC, IBM, MSFT, NFLX, Southwest, United Airlines, YHOO

Volatility Review: Russells Weekly Rundown

• VIX Options: A moderate volume week.
  • M: 266K
  • T: 400K
  • W: 572K
  • Th: 614K
  • Total 7.45m (5.73m Calls, 1.72m Puts)
• Crude Oil: OIV/OVX - 46, almost touched 80 back in mid-February.
• Gold: GVZ 19.32 - Well off recent highs.

Volatility Voicemail: One giant listener question.

Question from Jeremy - Hi Guys, This show is a great resource and has taught me a lot throughout the years. I was listening to the most recent show on March 11th "Uncovered Covered Calls and IRA Options Debate" and I wanted to write in regarding the discussion on dynamic hedging of a short option position. First, let me quickly introduce myself to provide some context.

My name is Jeremy and I am in the final year of my PhD in computer engineering with a MS in applied mathematics and statistics and a BS in math. I have spent the past 4+ years researching for the NASA Ames Research Center. My PhD research focuses on the modeling, simulation and analysis of stochastic processes and the application of optimization algorithms to the air traffic control system. Here is a link to my LinkedIn to verify my academic record and list of publications.

In addition to my PhD research, I am working on starting a fund with two other academics. The fund specializes in delta neutral trading and has developed two tools to execute volatility premium harvesting strategies. I provide a short description of the tools below. In particular, the second tool is directly related to the dynamic hedging of a short option position and the discussion on the previous show.

1) Our stochastic volatility tool estimates volatility using high-frequency data, such that the microstructure noise is directly accounted for. The tool uses a Bayesian MCMC algorithm to provide estimates of the volatility where estimates are consistent across all sampling time scales. Moreover, the tool provides samples of arbitrarily large number of volatility paths though time.

2) Our stochastic optimal control tool to hedge a short option position (or a combination of short option positions). After the option is sold, the risk can be controlled by effecient delta hedging. This can be done by calculating the optimal price boundaries to trigger a hedge in the underlying asset. Moreover, these boundaries are informed by the dynamics of the volatility as calculated from our stochastic volatility tool.

The strategy that the Greasy Meatball provided on the show to hedge the short option at the close of every trading day is a good start. The problem with the strategy is that this approach is a sub-optimal timing mechanism. Many days you will hedge at the close when you don't need to, leading to increased trasaction costs. Instead, this problem should be formulated as an optimization problem that we can solve to provide the best strategy.

A little background on the academic literature. In an ideal world under the Black Scholes model with no transaction costs the options can be hedged perfectly. In the presence of transaction costs, a continuous hedging strategy is prohibitively expensive. Hence, it is impossible to perfectly replicate the option in this setting when there are transaction costs and, as a result, trading in an option involves an essential element of risk.

How to optimize with respect to this risk and uncertainty has been a topic of research throughout the economic and control literature. There have been many different strategies throughout the years. Briefly I will present one strategy which minimizes the standard deviation of hedging error when compared to many, if not all, of the other strategies.

The attached paper was published in 2009 in the Journal of Economics Dynamics and Control by a Professor of Statistics at Stanford. As can be found in the paper, the problem of option hedging in the presence of proportional transaction costs can be formulated as a singular stochastic control problem. The authors approach is based on minimization of a Black–Scholes-type measure of pathwise risk, defined in terms of a market delta, subject to an upper bound on the hedging cost. The approach can also be applied to solve the problem of maximizing the investors utility at the terminal time of the option contract.

The main idea of the attached paper is to calculate price boundaries that trigger a hedge in the stock. Moreover, the number of shares that should be held when we reach the boundary is also calculated. Attached to this email is a screen shot from the paper that illustrates these price boundaries. Without getting into too many details, the top figure illustrates the price boundaries for an option with "1 unit of time" left (think 1 month). And the bottom figure illustrates the price boundaries for an option with "0.25 units of time" left (think 0.25 months). As can be seen in the figure, the shape of these boundaries changes with respect to how much time is left to expiration.

This email is most likely too long so I will stop my explanation here, but I would love to continue this discussion with you guys. If you are interested in learning more about the stochastic optimal control or the stochastic volatility tools me and my fund have developed please ask. In particular, I can provide more detail on our stochastic control and how it is an enhancement of the control that is developed in the attached paper. The key difference being that their tool assumes a constant volatility over the time horizon, whereas our tool allows for the volatility to change as a function of time.

I hope to hear your thoughts and get any feedback you may have! Best, Jeremy

Crytstal Ball: Where did we think VIX would be?

• Two episodes ago: Russell - 15.5/8, Mark S. - 14.25, Mark L. - 15
• Last episode: Andrew - 13.01, Mark L. - 12
• This week: Russell - 17, Mark S. - 15.5, Mark L. - 14.5