Volatility Views

Volatility Views 142: The Swiss Franc Black Swan

Volatility Review: A look at the week that was:

• Swiss Franc: Deutsche Bank AG suffered about $150 million in losses Thursday after the Swiss National Bank abruptly removed the cap on the Swiss franc’s value, sparking a massive rally. Meanwhile, a major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a New Zealand foreign-exchange trading house collapsed.
• Crude Oil: Oil prices fell on Thursday after weak U.S. economic data spurred worries over crude oil demand. U.S. crude declined $2.23, or 4.6 percent, to settle at $46.25 a barrel. Brent crude was last down $1 to trade around $48 a barrel.

Volatility Voicemail: Listener questions and comments

• Question from Mark Brant - @Options How long does VIX backwardation normally last and are the reversions to contango sharp or mild?
• Question from Analygos - I have heard you discuss previously buying options prior to earnings to capitalize on free gamma with no decay. My question is about after earnings when the premium collapses. Is that technically options decay all coming out of the option at once? Or is it a collapse of implied volatility that is erasing the premium in the options? If the latter then is the decay technically occurring every day prior to earnings and just being overcome by increasing implied volatility leading up to the earnings event?

Crystal Ball: What is coming up for this week in vol? Expiration making things extra crazy.

Volatility Views 141: The Return of Euan Sinclair

Volatility Viewpoint: Euan Sinclair, author of Volatility Trading Editions 1 and 2 and Options Trading,is back. Euan is an option trader with over eighteen years of professional trading experience. He currently works on strategy design and is the risk manager at Bluefin Trading. He holds a PhD in theoretical physics from the University of Bristol.

He discusses:

• The major volatility takeaways/lessons from 2014?
• The dramatic increase in "vol-of-vol" at the end of the year, and the primary drivers of that?
• Did the flight of institutional liquidity from the markets contribute to the increase in "vol-of-vol", or is the lack of liquidity overplayed?
• His take on what we are seeing from a commodity vol perspective right now, particularly crude oil?
• His opinion of VXST, and why it has not gained more traction
• His opinion on the two VIX competitors in the works - Voldex and the Whaley Project
• A sneak peek at his new book and what he is looking out for in 2015

Crystal Ball: Non-farm payroll numbers were the only vol driver this week. Maybe the start of earnings season will inject some volatility back into this marketplace?

Volatility Views 139: Getting Angry About Volatility

Volatility Review: The week in volatility:

• VIX Cash: Low - 12.55, High - 21.09
• VIX Options: Total 6.66M (4.35M calls, 2.31M puts)
• VXST: Total 7,746 (5,185 calls, 2,561 puts)
• Oil Volatility: USO vs. XLE - Traders hedge oil ETF while energy stocks lure buyers.

Volatility Voicemail: Questions and comments from our loyal listeners

Question from CPunk - Hello Volatility Gurus! Long time, first time. Love your discussions of all things volatility, particularly your breakdowns of the different products. I listened to your episode with Scott Nations recently and it got me thinking about how most volatility products appear to be very flawed. VIX has obvious issues and the Voldex product does not appear to solve many of them beyond eliminating skew. The various ETPs all have very well-known issues as well. If I had to think of an ideal volatility product, it would probably be something along the lines of what your former sponsors VolX promoted - a product that essentially captures the actual volatility in the marketplace. I am not familiar with the underlying mechanics of their product to analyze it, but I think we need more products in that vein, that attempt to deliver the actual volatility in the marketplace versus some vague guesstimate that is probably wildly inaccurate. Do you agree? If you could construct your ideal volatility product, what would it be?

Crystal Ball: What do we expect to see in the last few weeks of 2014?

Volatility Views 138: The Action Is In Oil

Volatility Review: The week in vol

• VIX Cash: High: 14.75 - Low: 12.09
• VIX Options: Total 5.71M (3.84M Calls, 1.86M Puts). VIX shunned as few bumps seen for S&P 500 at years end.
• International Vol review: Its official - America is now No. 2
• Oil Volatility: Oil futures slide on Saudi price cut to U.S.
• Gold Volatility: Hard to be a bull in this gold market.

Listener Mail: Listener questions and comments

• Question from Michael Roberts - I came across your program while looking for new diversification options for my clients. I find your suggestions about collars and protective puts very interesting. I have also been reading new research about volatility itself being positioned as an alternative asset class. This leads me to two questions:

1. Do you agree that volatility is an asset class?

2. What is the best process to gain exposure to that asset class for my clients? Is simply buying an options with a substantial vega component sufficient, or must I purchase a dedicated volatility asset such as VIX options or an ETF life VXX?

• Question from Joe Hill - SPY vs SPX vs e-Mini Options Question. Hello from Georgia. I know that these products are supposed to be similar from an implied volatility perspective, but how similar are they really? After all, they are distinct products, each with its own volume and customer flow. Do they all trade in a similar fashion, or are there times when these products will exhibit discrepancies. Last - Can we get a show on just commodity vol on of these days? Thanks for your time.

Volatility Views 137: Crying Wolf in Volatility ETPs

Volatility Review: The week in vol:

• Global Derivatives Event: It was nice to see a lot of Vol Views listeners and former guests! Sell implied when VIX is low, buy implied when VIX is high.
• VIX Cash: High - 15.74, Low - 13.13
• VIX Options: Total 4.34M (2.89M Calls, 1.46M Puts)
• VXST: Another weird volume week - 300 to 3,000 contracts on various days. Total 11k (8305 Calls, 2801 Puts)
• A Review of Jared's Vol ETP Report - Crying Wolf: What the VIX alarmists are missing.
• Crude Vol: Nat Gas and Oil

Volatility Voicemail: Listener questions and comments

• Question from IndyJoe - I saw Marks tweet about buying high VIX/selling low VIX this week. Can he clarify what he meant by that? Seems counterintuitive.
• Question from Pat Cummins - I think the pounding the VIX has taken lately is overdone. I am bullish volatility in the long term. Question: What is the best way for me to express that view? You have already dissuaded me from buying VXX as that is clearly the road to ruin. Would I be better off buying and holding a 1-year future? Or is there a third option I am overlooking
• Question from Alagory - Which is more overpriced - VIX calls or SPX puts?

Volatility Views 136: Oil Volatility and VXST Volume

Volatility Review: The week in vol

• VIX Cash: VIX rallies - the market rallies has been a big story of this week. A lot of outlets have been jumping on the train.
• VIX Options: 2.3/1 call/put
• VXST: A decent week from a volume perspective. OI now at 10,244 (8,015 Calls/2,229 Puts)
• Introducing the launch of Treasury VIX futures.
• Crude Vol: XLE, Brent and WTI

Listener Mail: Listener questions and comments

• Question from Timinc - Hello volatility views hosts. I appreciate your fine program although much of it exceeds my expertise. My question involves the Black-Scholes formula. I’m a student studying quantitative finance and we’re learning about this formula now. My professor stresses the value of this formula but is it still widely used in industry? Do I need to study Black-Scholes in order to get a derivatives quant or modeling job after I graduate?
• Question from Alan Baxter - What is the best source for data on trading activity in the volatility swaps market?

Crystal Ball: Reckless, wild prognostication ensues. Jared flies solo in looking at the year ahead.

Volatility Views 135: Under-the-Radar Swiss Gold

Volatility Review: Vol premium over the past week. Implied volatility vs. realized volatility. Vol Commodities: Oil, currencies, etc. Russell 2000 - RVX

VXTYN - introducing the new 10-year volatility product.

Crystal Ball: What are we looking forward to in the coming weeks?

Volatility Views 134: Earnings Surprises and Greenspan Gold Fades

Volatility Review: Big surprises from an earnings vol/straddle perspective this quarter. AMZN - Sold off about $30. LNKD - Closed at $202.50. TSLA next week. CBOE this morning. VIX Cash: 17.87 - 14.04

VIX Options: Total 6.53m (4.46m Calls, 2.08m Puts)

VXST: Total 4927 (4918 Calls, 9 Puts)

Volatility Voicemail: Listener questions and comments

Question from Phillipono - Are there any good tools out there for comparing realized to implied volatility and determining the best times to sell premium?

Volatility Views 133: Skew Inversions and Dynamic Hedges

Volatility Review: The week in vol

• VIX Cash: Most major indices up on the week - volatility returns to Rocktober. High - 23.08, Low - 15.56.
• VIX Options: A whopping 6.14M contracts total.
• OTC Volatility: Volker rule and its impact on liquidity.
• VXST: When is it going to catch fire?
• Oil/Energy: Strong investment skew, heavy puts activity.
• Metals: An outlook on gold/silver volatility.

Volatility Voicemail: Return of the Don

Comment from Don S regarding this listener question - "Let me leave you with this question: Long term which do you think will outperform - dynamically hedged SPY ATM straddle or dynamically hedged VIX straddle? They should be roughly equivalent but clearly they are not."

Not sure anyone addressed this in a satisfactory manner. When you dynamically hedge an ATM straddle (meaning keeping it reasonably delta-neutral throughout), you are making a bet that the implied vol at which you buy or sell the options will turn out to be lower/higher than the actual volatility that the underlying goes on to display during the life of the trade. So, the first decision to make, which the writer did not address, when he asked about outperformance, is whether he was of a mind to be long or short the straddle. Naturally, being of sound mind, the only acceptable thing to do is to sell the straddle (!), as, historically, the implieds of the options are virtually always higher than what the realized vol of the underlying turns out to be.

So, now that we have decided to sell these straddles and dynamically hedge them, trying to earn the spread between implied and realized vol, the question is, which underlying might provide, on average, the better profit potential. Typically, SPY implieds average 2-4 percentage points over realized, but, of course, there is great variability in that spread, which even goes negative, ever so briefly, from time to time.

Unfortunately, I no longer have access to the comparable numbers for VIX, but, of course, we are now talking about making a bet not on the volatility differential between implieds and realized for an equity index, but rather for implied volatility itself (VIX), which means that the values we are dealing with are much higher (in the 90s, as opposed to in the teens). Again, I do not have the numbers, but I am guessing that the average spread between what amounts to implied vol of vol and actual vol of vol is somewhat greater than that of those same concepts applied to SPY.

Soooo, I am guessing that, for the strategy under discussion, the vehicle of choice would be VIX, and, of course, it goes without saying that the only sane thing to be doing with the straddle would be to sell it. :-)

Perhaps, next show, you would like to throw these ideas out there to see what everyone thinks. Regards,Don

Crystal Ball: More reckless guesses about volatility going forward.

Volatility Views 132: Wearing Tin Foil Hats in Crude Oil

Volatility Review: A week in volatility

• VIX Cash: Quite a week for VIX cash.
• VIX Options: Again, serious volume in VIX options this week. Top OI Positions: 367,046 VIX Nov-14 20 calls, 354,540 VIX Oct-14 17 calls, 244,354 VIX Jan-15 20 calls.
• VXST: Another wild market day - another mild volume day for VXST, only 858 contracts traded on Thursday.
• Energy: Saudi Arabia keeps the oil market guessing.

Volatility Voicemail: Listener Questions and Comments

Question from Neal Max - Sounded like you guys were a little skeptical regarding the VolDex product. What do you think of this products chances of actually making it to market? Do you think it has a shot against VIX?

Crystal Ball: Insane, compliance-offending predictions regarding volatility.