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VIX-VXV Spread At 3 Year Lows
The massive squeeze in VIX has pushed the volatility index to level unseen since 2007. As the chart below indicates, a drop of a few more points will push the VIX to a level indicative not of the Great Recession but of Greenspan's Great Moderation, a time where vol was so law, it effectively killed the swaption market in corporate IGs (green box). This is troubling as it indicates market complacency about risk is dangerously high (more on that in a latter post).
Yet even more troubling in terms of market positioning, is the VIX (1 month) - VXV (3 month) spread. That particular relationship has now revisited lows last seen in 2006. It appears that in addition to assuming "all clear" for the bond and inflation market, yet not so much clear down the line, the same line of thought is migrating to equities. Could near-term volatility be underrepresenting the true amount of risk on a normalized basis?
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Posted earlier today:
What would someone say about buying call options on the VIX if it gets ~10? Long dated/Short dated?
I would be inclined to long dated options with a strike near the level of purchase. Still waiting to hear more from the Fed.
How do you go about buying options on VIX? Thanks
So how do you buy the vix? It sounds like a great deal, and will most like trend higher once Bernanke drops one of the plates he is juggline.
Buy SDS and SSO. Pretty closely follow VIX movement over the past 2 years.
Those are just SPX long/short funds right?
Seems like a heavy premium to pay for both of those, must be a more efficient way
VXX
VXX is one way, it is an ETN...Exchange traded NOTE, caution, this is a note not a fund.
VIX futures and options on VIX futures.
Options on VIX futures. Keep in mind that unlike a stock, which doesn't really expire, futures have expirations and thus options on different month of VIX are actually on different product, thus if you were to do an OTM calendar, be aware that you are also bearing some correlation risk.
There is also a fund that buys the futures, VXX I think. I don't really like it because you don't really know what you're buying. The fund is a blend of first term and next term. Each day they roll some amount from short term to next term, thus do not be surprised if you expected to play a rise in short term vol and the fund did nothing as people were long short-term volatility and short next term. I wish there was non-expiring futures for VIX, then it would be possible to construct a fund with direct exposure to VIX.
On a totally unrelated manner, number of years back, there as an idea for a historical volatility fund for SP500. That was a neat idea I think, but for some reason it got canned before it took off. I think this would have been a great product because it was simply historical volatility of the index, not the volatility gathered from options.
edit: There was a great post on VIXandmore blog that the index volatility is still too high relative to historical volatility.
http://vixandmore.blogspot.com/2010/01/spx-historical-volatility-at-two-... great post btw
Can we buy options with vix?
Why has it dropped so much with still so much uncertainty?
Wasn't that what it was doing in 2007?
And the simple, one-word answer is ... DUH!
I don't see how this qualifies as "Duh".
Treacherous times are ahead, maybe you can enlighten me.
hey risk averse...i read your blog every day and enjoy your approach and your insights.
your take on the put/call the other day was interesting.
Thanks for the head's up deadhead. I just read the article myself, and yes, it was interesting!
TD, I think you misunderstand.
If JPM is buying from GS, selling to the Fed, who is selling to GS, selling to JPM etc etc.......
....the VIX is way high, it should be zero. This is the new circle-jerk merry-go-round market. Come on guys!
Gold did pretty well when VIX was low.
This is near the time to buy the VXX. Stay tuned. The revolution will be televised!