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Goldman Recommends Shorting Vol Again, As Firm Is Now Waving Volatility In With Both Hands
Just because it didn't work once, and caused the firm to lose hundreds of millions in Q2 profits, doesn't mean Goldman is done pitching the short vol trade to someone, anyone, who is still stupid enough to listen to the firm's advice (the real important clients are already on the other side). Almost exactly 8 months after the firm came out with its top trade recommendation for 2010, namely the "short S&P 500 Dec10/Dec11 Forward Starting Variance Swap" which was opened at 28.20, with a target of 21, and is now at 30.38, and on which a client made hundreds of millions for doing precisely the opposite (to the chagrin of Goldman's flow desk). One thing to be sure of: Goldman won't be caught on the wrong side of the trade twice in a row.
Recommending a short Sep 2010 VIX position
We are recommending a short September 2010 VIX position, currently near 27.50, with a target of 22 and a stop of 30. We view this trade as a way of trading continued compression in elevated risk premium in a “carry-positive” way, above and beyond any directional view on the business cycle (though there are certainly elements of that here too).
Positioning for risk compression has been a key element of our trading stance across asset classes recently. The details of Europe’s stress test exceeded expectations in terms of disclosure and the resulting signs of easing in funding stresses in the financial sector have helped to reduce risk premia in fixed income and sovereign credit markets. US equity vol has come in a fair bit too, however the volatility curve remains upward sloping,
with the term structure at the very front-end particularly stretched by historic standards; September is trading about 5 points above spot as detailed in the August 2 “The Buzz: Views on US Index Volatility.” In addition, after a long stretch of US data disappointments this month’s PMI reading suggest that the global industrial cycle remains firm, even if evidence of further acceleration is muted. We suspect that markets are becoming more accustomed to the second-half slowdown notion, and now, even moderate signs of stability may also help to keep reduce risk perceptions.However, the economic backdrop is softening despite a US PMI that beat expectations and similar “strength” in many parts of Europe. The US Economics team has highlighted the possibility that they will lower their GDP forecast for 2011, as domestic demand in the US remains sluggish and risks of muted policy responses are a headwind. These concerns may make realized and/or spot VIX sticky at current levels even as other forms of risk are mitigated, which is why the premium embedded in the September contract (relative to spot) helps to enhance this trade relative to a pure market long.
Shorting volatility has been a dangerous trade this year. We remain short forward variance as a Top Trade, with vol levels too high versus likely outcomes. But long-dated vol spiked sharply during May and June and has retraced slowly. One advantage of the near-dated VIX contracts for tactical trades is that loss-limited strategies through options are available.
At least when Goldman was constantly wrong in its EURUSD recos, it would change the recommendation (over and over). Here, clients are not so lucky. Which can only mean that the capital at risk now (for Goldman) is quite material. And with Goldman selling vol harder than ever (not to mention hedging its own underwater variance swap legacy position), and Hatzius more pessimistic on the economy than ever, something big must be coming.
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Waving, bitchez
Haha, you crack me up... Light in this otherwise so dark period for a bear...
Vols have come down significantly in the past month or so. Seems to be VERY late to this trade. VXX peaked around 35, now $21. "Easy" money's been made. Just doesn't seem smart to be shorting Vol now, especially in the September expiry, where trading might pick up again after vacations...
Yes.
10k AUG 30 calls today coupled with SPX 700 puts, not a 'rosy' outlook at all.
Check Dec. 2012.
Cant see Dec 2012..?
But Jan 2012 call has an outstanding 25k in OI on the VXX
Its SPY I was referring to; sorry for not clarifying.
http://www.google.com/finance/option_chain?q=NYSE:SPY
Are SPY options still euro style exercise?
SPY = American
SPX = Eu
Also important to note the cash vs synthetic markets.
Its forward vol not vol, like a rates term structure trade.
Shorting Sep VIX is not a "vol" trade. It is a short gamma and short event risk trade. I think it is kind of stupid too, but that's just me.
The other trade recommended originally (short the Dec11 Dec12 variance spread), and still recommended as a top trade, is short a forward start variance swap, which is a slightly different animal. That trade is not available to the retail trader, even sophisticated ones, unless that particular retail trader has some serious coin, an institutional brokerage relationship, and significant product knowledge. There is no way to see that price on screen I expect (are variance markets quoted on a publicly available screen for informational purposes?)
It is NOT very late to the short forward start variance trade (well, actually, it has been going on a long time and hasn't gotten any better so I expect there are LOTS of people on the street who wish they had been later to this trade). And given the spread between variance and vol at term, one would think that being short the vol of vol on a forward basis would not be a bad idea, especially as lots of brokers trade capped var swaps as a matter of course these days. If margins were what they were back in the old days, I would probably be short forward start variance (5yr starting in 5yr) and long straddles short strangles for the short-term. Heck, even better would be to hedge the forward start variance short with vol term trades just to take out the term structure of the vol/var spread (which is steep as I have ever seen it in some markets), but those take time to put on in these markets, and managers/investors who have any kind of patience with that kind of trade are few and far between these days...
I hear ya.
Buying VXX!
No.
That thing has zero long-term correlation to the VIX:
http://finance.yahoo.com/echarts?s=VXX+Interactive#chart2:symbol=vxx;range=1y;compare=^vix;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
VXX is only supposed to track the VIX in the short term..
Not a buy and hold trade. Thanks for the heads up though.
Good thinking but beware; the correlation is not really implicative of co-movement. There is a good paper on arXiv.org titled "The volatiliy of volatility" that might help you in trading this. VXX and VIX are also mentioned in the context of a pairs-trade.
EDIT: Here you go; hope it helps you.
http://arxiv.org/PS_cache/physics/pdf/0608/0608242v1.pdf
Nice link!
Btw, talk below of forward starting variance swaps made me dig this up:
http://math.uchicago.edu/~sbossu/VarSwaps.pdf
That's an OK piece. I expect that gives more than enough information for most people on this board to keep themselves busy for the next half hour.
The problem for non-pros who want to trade one of these is that they are data/model-intensive. Building a home-built model is not just something you whip together in Excel in 15mins.
Indeed, AFAIK swaps are all OTC and hence institutional-based (minus the players packing big bucks on their own). Hard to foresee E-Trade suggesting a new platform for mom & pop dealing with swaptions!
And thanks for your response to my vega/theta Q below.
Already there since an hour ago (Two thumbs up)!
Could Goldman be right this time?
Reckon I'll buy the sep vix now and laugh at GS later...
Either I need a full translation or else a link to the "Zero Hedge 101" page that teaches me how to interpret these posts and figure out what to trade based on them.
Seriously - not all of us have paid our dues with a year on the trading floor.
same here WTF is he talking about?
This is the time when those of us who are not hard core traders simply grab a seat and munch on popcorn. This VIX trade is a road that is not suited for learner's permit holders.
The point of the article (obviously) is to either buy or sell....based on risk concerns and the duplicity of Goldman Saks.
Hey HedgingInfinite...
In the same boat many times here at ZeroHedge, but let me try to explain at least a little bit.
Goldman is recomending "short September 2010 VIX position, currently near 27.50, with a target of 22 and a stop of 30". A Short position means they believe the VIX will go down, they make a profit with a decrease in the VIX. They recomend opening the position at 27.50, setting a stop at 30 and expect a target of 22. I am thinking they are talking the Volatility Index, $VIX in some places.
Good luck...
1 caveat: id suggest NOT following GS, as they have made many truly impeccable calls in the past (most notable EURUSD to 1.15 when it was 1.22).
VIX = Volatility Index = "Fear Index". Wikipedia it.
Basically it uses options pricing to put a number on volatility expectations.
I wouldnt trade based on posts here unless maybe youre reading a piece of Nic Lenoir.
Anyway, the short vol trade. Volatility can show how much people are paying for premiums. Higher VIX = higher premiums, more to pay for any long option. So, when vol is high, an astute investor would sell premium and make relatively low risk money compared to buying premium then. Vice versa when premium is low; stock up on options directly, or buy some VIX calls.
Agreed. Just pick your least favorite bank stock and buy the puts. I generally like the wfc dryhump, but I'm sure there are plenty of other worthy skanks out there.
[insert robo picture of lady gaga with blankfiens head in it]
Heh he heh...
Spent my whole life on desks and I too fail to comprehend some of what is passed off around here as knowledge, insight, intellect and epiphanies.
GS recommends it...do the opposite.
Always.
What's coming - completion of the right shoulder in stocks, followed by a big drop lower right into the election, just like 2008.
This time it works against the Dems.
Don't you see? This is quadruple-reverse psychology in play again. Now that everyone has firmly shifted to the "do the opposite of what Goldman recommends," it gives them free rein to 'lie' by being honest.
Your logic is exquisite. The sound you heard was my head exploding.
Worse yet, other than the squid itself, who knows when to time either play?
They've turned themselves into a sort of bellows, where they can pull cash in either direction once they line up enough suckers on both sides of any trade.
So the people turned sheeple are now people again AND GS tells the truth?
I have to think about this.
Link-3 ways to lie:
1. outright falsehood,
2. half-truth, or
3. tell the truth, but so unconvincingly that they are sure that you are lying.
No.3 is the best artform.
- Ned
****BREAKING NEWS****
Goldman knows what manipulations are planned for tomorrow; YOU DON'T!
They make money 365 days a year, doing whatever takes the most money from the largest number of people. If you're a sorry sucker that thinks you know anything about what will happen tomorrow, you'd better hope you're on the right side of their daily manipulations, or you're going to LOSE MONEY.
And they have the full backing of their paid off people in Washington, D.C., otherwise known as our Federal Government! Do ANYTHING to seriously challenge them and you're going to end up six feet under, no matter who you think you are.
Now back to our show already in progress.
You nailed it Axe! Even Kaminsky says everything is non-corrolated.
http://www.cnbc.com/id/38521409?__source=yahoo|headline|quote|text|&par=yahoo
He just doesn't admit what you posted, they attack all vulnerabilities in all markets and exploit one after the other, where they rotate tomorrow is opposite of the herd, I bet that.
How GS recommends shorting vol at the near-term lows here is unthinkable - actually, its typical of GS.
Mean reversion has been the name of the game since April and, keeping with that thesis, the current short to medium term move for VIX from here is higher.
Medium term volatility is not as low as near term... But maybe consider doing half what they are doing by buying VXX and shorting VXZ... VXZ is high, bigger vol expected coming forward - but near term is too depressed.
Agree re pair trade, but i prefer options on these and VXZs have low IV with non-existent OI
it means QE 2.0 and giant melt-up has already started. learn from your mistakes, QE is the ONLY thing that solves the "stocks up, yields down, dollar down" conundrum.
It's August and everyone is on holiday, nothing happens intraday (see today, dull dull dull) so the vol term structure steepens, and forward vol goes up. This happens every year.
Selling it is maybe not a bad idea, as long as you close it at the end of August, when everyone is back and before vol rallies again as everyone gets nervous about the traditional September/October collapse. You have to get in and out.
But target 22? Dont make me laugh. Target 24, absolute minimum. And GS will get you in sub-27, guaranteed. So IMO maximum 3 points to gain.
Stop loss at 30?..... ah well. Here is where GS make $. What are the chances of something blowing up and the forward vol going up 2.5 points at some point in the next month? Lets say, generously, only 30%.
So GS has a 30% chance of collecting the whole bid/ask spread from you, in and out, and especially out when you call with your book on fire and your boss in your face asking you why you listened to those fucks at GS.... your stop may be at 30 but you will be out at 32.
So 30% chance you lose 5 points, paying GS say 2.5 in stressed bid/ask.
Say 50% chance you make fuck all and have to close it in september, pay GS 1.2 in normal bid/ask.
20% chance you make your 3 points, and pay GS 1.2 to get in and get out.
Full disclosure - am long vol, and in a past life I have made VIX option markets. It is consistently a very very lucrative business. No manipulation necessary, just clients who believe.
Nice post Mephisto. Can you comment on short Vega, long theta trades relating to the VIX? A friend at a desk in NY said they started doing this since the summer and have been profitable. I assume short vega is simply short vol but i dont see where the arb is more obvious than a plain vanilla short on the VIX
A plain vanilla short on VIX may be "short vol" (in the generic) but it is not a long theta trade. Short the underlying components of VIX with required delta hedges (and rehedging every day) would be short vol long theta.
It's amazing what people can do with a dollar.
Good question indeed. I am screwing around on notepaper but can't make much sense of what else can be captured with short vega/long theta over simply shorting vol.
Tricky one without much information. One thing I can maybe profitably talk about is the term structure of volatility. Just like for the yield curve, as TD provided for us here earlier today:
http://www.zerohedge.com/article/trading-curve-what-shape-treasury-yield...
where various regimes signify different economic stresses, if you replace the term rate with the par variance swap level, you have the variance term structure curve. What your friend may have done is
a) found expensive point(s) on the curve to short - a short vol trade, earning theta as you say.
b) sold forward variance (no spot gamma, no theta)
c) or sold a steepener/flattener (some residual short spot gamma, earning some theta)
These are all bank and hedge-fund strategies, not for individuals, as I believe bingocat correctly pointed out above, just thought you might like to see how the traders think
I think I figured it out. GS is going to be the next feeding frenzy.
Quants will say 'Thanks' for the heads up on GS strategy. The mob will turn on them and eat them alive. The game will be to eat GS's lunch since they have cash and a public strategy. Ho Ho Ho.
NO TYLER. STOP! WHAT ARE YOU DOING?
Don't you recall the post from today?
U.S. Spies Buy Stake in Firm That Monitors Blogs, Tweets
http://www.wired.com/dangerroom/2009/10/exclusive-us-spies-buy-stake-in-...
They are reading your posts and every single comment on this blog.
Now it is time to change the way you post it, let's reframe this topic title:
"Goldman Recommends Shorting Vol Again, ZH fully endorses the analysis and feels that shorting VIX is the only way to go"Please, be careful next time...
+100
Whatever. Billy Batts says, The whole system is fucked. Just buy stocks then go home and get your fucking shine box.
"Spitshine Tommy." or is it "Timmah"?!
"(the real important clients are already on the other side)."
The most important of those clients being Goldman I would guess. Their proprietary traders probably flipped and went long vol this time, hoping all those who liked watching them flop last time will go long again pushing the market right into Goldman's hand.
Hey they’ve got to try something new, bonus season isn’t that far off. On the long side all they have to do is crank up their hottest momentum multiplying HFT algos and they're in the money big time.
Actually GS was only wrong 3 out of the last 10 recommendations they made.
By only focussing on the most risky ones, people think they need to go against GS, but that is very and I mean VERY risky.
Trading the vix turbo's or speeders is just to risky and is plain betting.
And the VXX also has a reset date of 30 days.
Goldman top trades for 2010:
long 5yr credit protection in Spain vs. short 5yr credit protection in
Ireland at 13 bp, opened at 70 bp, with a target of 20 bp, for a
potential profit of 2.9% (inclusive of carry). [profit]
Thanks for the details. Details are sorely lacking here in the boards sometimes.
Was that a "top 10 for 2010"? I ask because some of the "stay" trades seem to have later start dates...
The full list of nine trades was originally sent to clients in December 2009. this is an update from a Goldman research piece (also posted earlier today).
Perfect. Thanks.
In that case, that is not such a great record for a "top trades of 2010" list.
their best is none too good. - Ned
The Sponge wins. Tyler could only find 9 .
Let's see:
Vix is probing lower bollinger band (usually provokes a snapback).
AJC getting press again pimping her SPX 1,300 year-end call (we all know what happens here).
And GS is screaming short vol?
I'll take the other side of that trade.
just look at their commodity trades and you'll find plenty of opportunities for that magic #10 to round it out.
They must have done much better in the 11-20 grouping...LOL
Only GS knows which of their own recommendations they will follow and which ones are just misinformation. The track record of their "recommendations" is irrelevant. The track record that matters is that they made money EVERY SINGLE DAY of the last two quarters.
GS will start playing double bluff soon.
China’s Shark Loan Ponzi Finance- As Ponzi Schemes Collapse the Chinese Government Fears Civil Unrest
Huang Qiao Town which is located in Taixing County, Jiang Shu Province is known as “No 1 town in North Jiangshu” According to the article, a few months back, expensive cars were roaming over the streets. But now after the collapse of a giant ponzi scheme supported by 9 so called “Mark Organizations” (local name for shark loan ponzi schemes), many cloth shops, and barber shops (in China, many so called barber shops are in fact brothels) are closed, and the expensive cars are gone. Town residents are posting their shops and cars for sale to pay back shark loans.
China’s Shark Loan Ponzi Finance- As Ponzi Schemes Collapse the Chinese Government Fears Civil Unrest
this seems fairly intrusive on the chinese people.
Now about 47,000 cameras scan Urumqi to ensure there are no more surprises. By year’s end, the state news media says, there will be 60,000.
In Restive Chinese Area, Cameras Keep Watchful Eye In Restive Chinese Area, Cameras Keep Watchful Eye By MICHAEL WINEShttp://www.nytimes.com/2010/08/03/world/asia/03china.html?hp
Intrusive on the Chinese people?
Do you really and truly think that your very own government is not similarly intrusive? What have you key stroked into your computer whilst on line or off line and later used a Google app/product? What have you said over a telephone? Sent by Fax? Copied anything lately?
Copies are stored in the machine so making, every keystroke, website visit, e-mail, IM has been archived and is readable or been read by some one you do not wish to have access.
Look up Echelon. Hell, try ONYX, as in Switzerland. Cameras, pablum.
We have no privacy.
Privacy is an illusion.
The illusion of privacy is delusional.
Lift the veil.
To Truly See is Freedom.
Beware the Gray Lady bearing American Ideals. Tool.
wow. i should get college credit for reading that string...
Technical analysis has become the mythology of what once passed as a reasonable way to gauge firm overall standing and movement with respect to other firms. It is OLD school thinking. Where capital is now assumed to cost nothing; and I mean nothing, there are no impediments to growth. Might I suggest your paradigm can't handle flat line or a growing shrinking economy. Sound nuts; well read on. You can shrink your overall economic base yet grow your overall GDP. It becomes a function of value definition. Today the value definition is driven through and by firms that can meld technological and industrial processes. Think Apple and increasing GOOGLE. These are not capital intensive industries as we know them. They have capital up the wazoo. They are knowledge and information centristic powered. SO, old school thinking is out. Production is not the worry. It's fitting into the global knowledge flowcentric heirarchy. The closer to the "truth" your are; the more you can shape the future; the perfect utopian society; no? So, today, we have a few bots bumping up the market with some fed nudge here and there in those tough spots. Nice, but to what end? to get every dime from our old school thinkers. Those retired or near retired market enthusiasts? To pretend all is well? Please, give us more credit than that. I continue to watch in amusement.
OK. 1. The Sept 22.5 VIX call options are currently more than 7x the price of the puts? This seems weird to me. Shouldn't they be more balanced...RoboTrader? Goldman is selling the calls and buying the puts before another lowvol ramp up?
Because they're ~$5 in the money?
no they are not $5 in the money...VIX was at like 22 yesterday. That's .5 in the money.
GLG, Moore Capital are long $VIX. Goldman a$$e$ playing the usual media marketing card. Bullsh1t recommendation !