By Lawrence G. McMillan
With so many volatility derivatives and products available for trading now, a debate has arisen as to what is influencing their pricing. Is it actual volatility expectations, or is it supply and demand – or possibly something else altogether? It is important to understand these relationships for several reasons, the most obvious of whish is that it can help one to construct theoretically profitable trades.
By Lawrence G. McMillan
These days, there are more and more volatility indices and futures than ever. One can observe the same sorts of things about them that we do with $VIX futures – in particular, the futures premium and the term structure. We thought it would be an interesting exercise to see how these other markets’ futures constructs compare to that of $VIX. The $VIX construct, for a long time (see chart, page 12) has been that of large futures premiums and a steep upward slope to the term structure.
By Lawrence G. McMillan
Bond ETF’s (IEF and TLT) are both making all-time highs (in price). Stock volume patterns are very strong. This is the point that all the stock market bulls (especially on CNBC) seem to miss: yes, government bonds are yielding small interest rates, but if you own them, they are rising in price as the yield falls. In the last year, IEF (the Barclays 7 year - 10 year bond ETF) is up 15% in price, and TLT (the 20-year bond ETF) is up 35%!!! So what if they only yield 1.6% and 2.7%, respectively?
By Lawrence G. McMillan
Is this current market decline the harbinger of a new bearish market phase, or just a pause in the general bull market that was launched in March, 2009, with a couple of healthy bumps along the way? One answer to that question can be observed in the behavior of the $VIX futures. The stock market’s decline in the past two weeks has caused the $VIX derivatives to lose some of the bullishness that they have been displaying since last November. Not only have the futures lost premium, but the term structure has begun to flatten as well.
By Lawrence G. McMillan
The total put-call ratio includes all the volume that takes place on listed index and equity option markets (not futures). Most of the time it’s not of great interest, although we did publish a system utilizing it in extremely bearish markets. That system was designed to capture large moves, and its signals usually result in at least a 100-point gain in $SPX. The last signal of that sort was a successful one, with a buy issued last September 12th. The 100-point target was achieved on November 3rd.
By Lawrence G. McMillan
One should be aware of a potential problem in these ETN’s. I am not referring to the “net asset value” problem that engulfed the “Double VIX” (TVIX) a couple of weeks ago. Rather, I am referring to the fact that an ETN is a credit obligation of the issuer (Barclays, in the case of VXX, VQT, and many others). An ETF, on the other hand, is collateralized by placing underlying securities on deposit.
By Lawrence G. McMillan
We have been writing commentary for months now, detailing the steepness of the $VIX futures term structure. But recently, it has risen to levels never seen before in the listed VIX futures markets (volatility derivatives began trading in 2004). In this article, we’ll look at the current situation, compare it to past extremes, discuss appropriate strategies, and see if there is any predictive value to these extremes.
By Lawrence G. McMillan
In our daily letters and in last week’s hotline, we have written extensively about the “levitating act” that the stock market was performing. Essentially, it had gone from late December through this past Tuesday, while hovering above a number of standard indicators.
By Lawrence G. McMillan
The gaps between historical volatility and implied volatility have never been larger. Furthermore, the gaps between $VIX and the intermediate-to-long-term futures have rarely been larger, as well. Trading desks around the street are aware of these facts and those with “volatility desks” are writing about the situation or making recommendations because of it. The one thing that no one seems to be addressing, though, is why the term structure of the futures is so steep and remains that way.
By Lawrence G. McMillan
About this time last year, a popular study was released that showed the results of trading just the first trading day of the month. That is, buy “the market” at the close of the last trading day of one month and sell out your position at the end of the next day – the first trading day of the new month. In 2010, it was so successful that one could have captured 93% of the $SPX gain for the entire year by just being invested on 12 days – the first day of each month.
