I am always amazed at how the financial media misunderstands the most basic of concepts. Today we again witnessed this in the form of the Fed mandate. It could not be simpler, low unemployment and 2% inflation. That is it.
Ben must hate going to Congress and speaking to reporters who ask stupid question after stupid question. How many times does he have to say "several months of improving labor conditions?" We get one or two months of decent payroll numbers, and everyone wants to panic about the end of stimulus. What is the unemployment rate right now? 7.7%.
Nobody listens. He constantly describes pulling stimulus too early and the historical significance of that error. He constantly talks about the damage long-term unemployment is doing to the economy. He talks about how every little start in the U.S. economy has been followed by a slowdown, and that he wants to see extended strength. Plain English is often the hardest to understand for some folks, especially pundits.
Twain said that ignorance and confidence ensures success. Apparently that is the definition of TV punditry.
Onto the VIX, which fell 12% or so today, just as we expected. Cyprus is almost done with its 5 minutes, because the issue is so minor and the media gets bored quickly. Once the small depositors are guaranteed to be off to hook for good, this story is probably over.
Bernanke did nothing, and answered a lot of questions reiterating that they are going to do nothing but the same for a long time. That bolstered markets though and the VIX and futures settled right back into last week's range in two days as if Monday and Tuesday didn't happen. The futures:
|VX H3-CF||S&P 500 VOLATILITY||March2013||16:41:10||12.64|
|VX J3-CF||S&P 500 VOLATILITY||April2013||16:15:00||14.45||-0.95||15.10||15.20||14.35|
|VX K3-CF||S&P 500 VOLATILITY||May2013||16:15:00||15.95||-0.30||16.10||16.10||15.50|
|VX M3-CF||S&P 500 VOLATILITY||June2013||16:15:00||16.70||-0.30||16.85||16.85||16.38|
|VX N3-CF||S&P 500 VOLATILITY||July2013||16:15:00||17.50||-0.15||17.55||17.55||17.10|
The March contract settled at 12.64 this morning. The ticker for this quotation is VRO: here
Here is a quick rap up of the settlement: here
I want to describe an error we made in trading VIX calendars that I hope will help those in the future not repeat the same mistake. About a week ago, we entered two long VIX calendars, at 13 and 14, selling March and buying April. We collected roughly .65 and .35 cents respectively for the March contracts and these fell to .10-.15 or so on Friday. With only two days to go to expiration and the VIX sitting on 11.30, we stood pat. Big mistake.
Always close the short legs when they have worked. If we had done that on Friday and were holding the long legs only, the calendars would have generated an enormous profit in just a week, well over 100%. Instead, with the VIX spiking to 15.40 on Tuesday right in front of VIX expiration, we were left chasing the short leg and closing the long leg as a prudent risk management move.
If we left the Aprils open, we obviously would have made a bad decision worse, as the VIX plummeted, and so did the VIX options. Incredibly frustrating and painful trade, having done almost everything right, just to have it taken away in a couple hours of trading with no recourse the next day.
Lesson learned: when you are short the front legs of a calendar, especially one with volatility, close the short leg when the risk/reward has shifted against you.
Still holding VXX $18 and $19 puts. The 18's have gained almost 100%, the 19s more than that, but we have them on the shortest of leashes. If I could have closed the 19s for .75 today, I would have. The risk for VXX is now to the upside, as the front month is the entire holding of the fund and it is trading for 14.45. Negative roll is around 10 cents per day. If the futures fall below 14, we may get long VXX options.
Still holding the VXX calendars:
Short Mar4 VXX 20/21, long April 20/21
Long VIX $14 options
Outlook: Quiet trading for a bit, with lots of housing data points tomorrow, Tuesday and Wednesday. Market closed next Friday, so will nervous nellies sell into quarter end? Volatility is coming, but our guess is that it will be shortly after the first of the month.
Additional disclosure: Long VXX calendars, long VXX puts and calls.