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Overcomplacency in the Market?
Following up on my outlook 2011, Brendan Conway of the WSJ reports, Options Flash a Caution Sign for '11:
The
options market has a handful of signals for investors looking to the
new year. The most glaring: Rougher trading in the stock market may be
right around the corner.
Investors can plumb prices in the options
market for hints on stocks' outlook, specific sectors or even scenarios
like bank-stock dividend increases. The broadest measure of investor
sentiment, the Chicago Board Options Exchange's Volatility Index,
suggests the market is more confident than at any time since the
financial crisis. The "fear index" of Standard & Poor's 500 options
prices recently sunk to levels last seen in July 2007, suggesting a
green light for stocks.
But sophisticated investors also trade
futures on the VIX, as the gauge is also known, to hedge or act on
their views a few months out. Those futures show skepticism in the form
of much higher volatility expectations. March contracts point about
38% higher than recent VIX levels, a view that would bring some
gyrations to the stock market if it bears out.
"You definitely
have some upcoming catalysts that could drive volatility, such as
earnings results or renewed European sovereign concerns," Credit Suisse
equity derivatives strategist Terry Wilson said. Mr. Wilson, who
predicts that a rockier market could come as soon as January, calls the
relatively low prices of options an opportunity to guard stock
portfolios.
The low VIX level itself,
viewed against its elevated futures, strikes some observers as
cautionary. Dan Bystrom, head of U.S. equity derivatives trading, at MF
Global Inc., views the contrast as one of several signs of
overcomplacency in the market, at a time when a variety of
macroeconomic head winds could blow stocks back.
Diving down to
specific sectors shows the market's quite placid volatility outlook
isn't fully echoed in a few key areas. For instance, for stocks to
advance on full throttle, emerging markets and financial services are
two areas where many investors would want to see a bullish outlook.
But
over-the-counter "outperformance" options on emerging markets and
financials show the market isn't pricing in much direction for either.
The odds look to be roughly even for emerging markets and financial
stocks to outperform or to underperform the S&P 500 index next
year, according to a recent analysis of those contracts by UBS AG's
derivatives strategists.
UBS also looked at the options market's
view for the S&P 500 to fall to the 1000 level any time this year.
The probability came in at a not-insignificant 38%.The
uncertainty persists even though at least some of the stock market's
most hotly anticipated positives are showing up in the options market.
For instance, the prospect for bank-stock dividend increases was one of
the factors boosting investor confidence this past fall. Options have a
say on that subject, since their prices reflect an "implied dividend"
in order for the contracts to trade. The outlook is growing more
positive.
J.P. Morgan Chase & Co.'s options show a widely anticipated dividend increase, as do contracts for Wells Fargo & Co. and PNC Financial Services Group Inc., according to an MKM Partners analysis. US Bancorp is also pricing in an increase, albeit smaller, the firm found.
Much
of the anxiety leads back to the same subjects that roiled markets in
2010: Europe's sovereign-debt woes, the potential overheating of the
Chinese economy or the uneven state of the U.S. recovery.
"Volatility
is going to be a lot like 2010—low for much of the year, but we may
see some spikes as these macro head winds emerge from time to time,"
UBS AG equity derivatives strategist Mitchell Revsine said.
One
area that bears an especially close look is the health of the U.S.
consumer. Retail is a sector that strategists mention repeatedly when
recommending which stocks to hedge.
Credit Suisse recently
recommended locking up some of the holiday froth in retail stocks by
buying put options on the SPDR S&P Retail exchange-traded fund. In
particular, the firm read Best Buy Co.'s tough quarter as a sign that analysts have overshot the good news that many retailers can deliver.
"There's
an opportunity to acquire cheap protection right now, because
volatility in the market has been so muted lately," Credit Suisse's Mr.
Wilson said.
Does the low VIX indicate
overcomplacency in the market? Maybe, but I wouldn't read too much into
the low VIX level. The VIX might remain low for an extended period as
markets edge higher. Vol make look cheap now but a year from now, it can
look cheaper. In fact, I read this interesting comment on the OnlyVix blog written a couple of weeks ago:
As
I'm writing this VIX is trading at ~15.60, very close to it annual low
of 15.23 back in April. This level is obviously significantly below
what I expect a month ago, but also lower than investor expectations.
The front month futures expiring on Wed, Dec 22 that have only 2 full
trading days until expiration are still relatively juicy at 17.30! Of
course the big question on everyone's mind is what is next for the
market and for the VIX.While the future is uncertain, I think that VIX has entered a low-volatility regime (see my post here). I
think economic uncertainty will not allow long-term VIX futures to
fall much lower (back months are about 25) , which means that term
structure premium is likely to remain high. If I'm correct in my hypothesis, we can see a steady decline in VXX due to increased rolling costs.
I
also believe the VIX has entered a low-volatility regime. This means high
frequency trading platforms will need to lever up to make the extra
juice. Pensions should be taking a closer look at volatility arbitrage,
either internally or through external managers that specialize in this
strategy. Pensions should also be using some basic option strategies to
protect their downside and/or enhance their returns. Some practitioners
even feel that investors should treat volatility as a separate asset class. I agree, if done properly, investors can make money trading vol.
»
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Presenting: The Q-ratio
http://dshort.com/articles/Q-Ratio-and-market-valuation.html
F6
Didn't Bob Pissonme at CNBC make this same statement? I'm pretty sure he did. There's nothing more credible than taking your advice from the dunce of the NYSE floor.
Leo...your worthless...a gutless wonder.
https://www.tsp.gov/investmentfunds/fundsoverview/fundManagement.shtml
Well I guess the New Year's ceasefire is over now.
Damn sure is HPD.
I'm sick of socialist Keynesians rolling grenades down the aisle and hauling ass...they're intellectually, morally & fiscally bankrupt.
Like I said on the open thread;
http://www.youtube.com/watch?v=S0YrXjeRSoE
Fuck em.
MCT- I am surprised you are confused. You seem to have all the answers tonight.
Unknown- I feel your pain on the vxx. It sux to lose money to manipulation. While we are admitting mistakes, I cleared out all my palladium four months and three hundred dollars ago. DAMN.
Sorry. My sausage finger hit the junk button trying to reply on this tiny android. I screamed at everyone i knew to buy palladium at 260. Yet i too sold out too early. Remember ultimately pigs get slaughtered and many who brag now wont admit their losses later.
Please, if you feel you must play the VXX, realize that the VXX has suffered a reverse 4:1 split recently, and is being utilized as a tool........it appears that it is being shorted in order to effectively support the stock markets. Shorting VXX helps maintain a low VIX which helps inflate the stock market indices.
I lost a shitload of money going long VXX in 2010. Fucktarded as I am, I actually BELIEVED Ben Bearshankme when he testified before Congress that he would NOT monetize the debt. I was stoopid enough to think he would go to jail for perjury if he did....and guess what: I got fucked and he just laughs and snickers...fuck me, right?!
Anyway, I have at long last unwound this horrible trade. I have capitulated to the bad boyz in the ZH fight club (RoboTrader et al) that indeed the VXX is headed for zero.
As long as Brian ballSacks via the Primary Dealers is buying, the VIX will stay low, the markets will stay relatively flat, and this charade will continue to be the biggest stealth tax on anybody who is investing in the stock markets, especially in the US markets. Meanwhile the corporate insiders will continue to exercise their options and cash in their shares at taxpayer expense...all paid for by the US taxpayer (via QE2 POMO) and everyone who is a retail investor in the US stock markets. The markets will adjust upwards due to inflation but not due to value.
It is an illegal TAX
It is an illegal scam
It is real and there is not a damn thing you or I can do about it.
I will not lose more money in 2011 betting the VIX or VXX will increase.
I am not giving advice, and even if it was, then you should realize my comments are worth exactly what you paid for them....nothing. I'm just tossing out some food for thought.
Disclosure: I am so long on silver right now that I'm up in the middle of the night checking the price. I have exactly ONE share of VXX just to remind me of what a fucking idiot I was to lose so much money on it in 2010.
Cheers.
...me too on the silver....I own a few miners = 90% of my stock investments.
Bittersweet ending here too; thank God trading is not my living, it's like maintenance on a boat to me these days. Went long VXX mid-April just under 21 and should have had the sense to sell when rocketed to the mid-30s. I let it ride and was stopped out at 22 & change. I'm still stupidly hanging onto a small position today purchased on a dip several months later.
We do appreciate your anger and for telling it like it is. Just another example of why the markets are slaughterhouses for those of us on the outside. "inwestor" beware.
How the hell does shorting the VXX keep the VIX low? That's like saying shorting the right weather futures contracts keeps it cold outside. The VXX is a derivative of derivatives of an index of derivatives of an index of 500 individual stocks - so there are a lot of drivers involved other than what Bernanke might have meant in a single statement.
well, I hope you're right, BUT as long as all the indexes & derivatives keep getting forced up, what's the diff? effect is the same
In all fairness, what shafted VXX longs in 2010 was the failed "end of the world, hyperinflation [or default] is nigh!" sentiment that permeated the right side of the political spectrum for so long.
Reality was that the debt situation was not nearly as bad as it was made out to be (developed economies survived much higher debt ratios in the past - without the help of being the global reserve currency) - with the US printing its own money, with the US being indebted in its own money, with the US being the reserve currency of the world and with the VXX being priced in USD there was little point in going VXX long. Further monetary easing was essentially pre-programmed.
In 2010 there also was a very hefty premium on longer-term VXX option chains (i.e. irrational fear), almost inviting shorts.
Full disclosure: there's a chance that I was one of the VXX short counterparties you lost so much money to in 2010 :-/
well played to you...
You know, it does take a man to admit when he got beat. I really got the shit kicked out of me on this trade. The worst part is that as I replay my rationale and look at the information I had at the time, I am ashamed to say I would play it the same way again. I honestly can't say I learned anything other than don't trust the Fed Chairman's carefully chosen words. That scares the fuck out me.
how about these famous Bernanke quotes:
"The fundamentals of the economy are sound" = I lose money
"We will not monetize the debt" = I lose money
"rates will remain low for an extended period" = the next way I will probably lose money
So, anyhow, I will continue to learn from the ZH community what my miseducation didn't teach. I really wish I could have seen the world the way you did. Good play.
Everything you have said seems absolutely correct. I hate being wrong for all the right reasons also. Sentiment changes are almost impossible to predict in the short run and long run broad cyclic changes dont provide any speculative incentives versus traditional investing strategies. Vx is probably irrationally low to many of us and I will go one step further and say silver is irrationally high versus pure industrial supply and demand. However sentiment in both of those markets are difficult for me to understand yet I will continue to slightly fear a silver long position right now that depends primarily on the expectation of a frothy irrational phase as part of its speculative thesis. I always talk my book and wish everyone would get out of silver so I could buy in again at fifteen and not sell out at 21 to 27 like I did previously.
Ok, color me somewhat confused there - how can you interpret that as a VXX long signal?
The federal funds rate remained low and in fact it was further reduced down into negative -2% effective interest rate territory via QE2. (The main goal and effect of QE2.)
That kind of easing trickled over into equities almost automatically: making bonds less attractive made stocks more attractive - it's a pretty much zero-sum game. Even in the worst case of a failed attempt at easing it would act as a buffer against permanent fluctuations - i.e. more of a VXX short signal.
Equities are doing a replay of the 1982- 84
1982-1984? No.
Try 1934-1960
Or better yet, 1929-1932.
Historically, a VIX below 20 is not particularly low - and such conditions can persist for months - sometimes for years.
Right now it looks somewhat risky to go long VXX options: there's a significant uptick in employment, plus QE2 still has months to go. There's a fair chance that the VIX index could go below $15, before the next crisis hits - and holding those options over a longer time is not particularly cheap either.
They can be very profitable though if you get the timing right.