I agree with you about putting things into perspective. The move in the VIX by itself is not entirely disconcerting,especially given its low starting level, but the move in commodities will definitely have some reverberation across the markets. We will see how this week plays out...today we are happy again.
If you have a strong conviction that the market is going to fall soon, then the VXX is an ok hedge. VXZ is a better hedge because it does not have as strong of a time decay if you hold the position over weeks and months. Alternatively, you might want to look at long put spreads as well. I am fine with using VXX as crash protection over short intervals, but as a long term downside bet there are better alternatives.
Inflationists vs. Deflationists: The Battle Rages On [View article]
I never made a statement on whether the actions were right, good for taxpayers or good for investors - only that he would ultimately be successful in sparking inflation.
I will always have a bearish view on *implied volatility* and try to have a negative vega position *of some sort* most of the time. That might be vague, but the positions change often. I also often have short positions on the equity indices that offset losses due to spikes in implied volatility.
As to why I have a bearish view on volatility overall is related to global liquidity. Despite the headlines and freakouts, the fed and other governments are pushing money into every arena at unprecedented rates. You can partly see this through the spread between the 10Y and 2Y treasury. Please check out this article to see the correlation between volatility and this spread: www.surlytrader.com/li.../
For the next few years I expect average annualized volatility to be in the 18-23% range. When I can buy implied volatility in the mid to low teens I will do so and when I can sell implied volatility above 30 I will do so and the strength of my conviction will depend upon the magnitude of the dislocation from the median. The fantastic thing about volatility is that you can truly average in and feel confident in your position. You just need to be able to stomach the mark to market losses as everyone runs for the exit doors. That ability to stomach it is the reason that you get paid for being short volatility in the first place.
Extreme Fear in S&P 500 Option Skew [View article]
It seems like the market wants to trade down from here so I could easily see 950-975 on the S&P in the short term. Beyond that, I have a hard time believing a further fall. As I have pointed to in the past, the earnings yield of the S&P 500 is about 8% at a 1,000 level compared to a 10 year treasury rate of 3.2%. Either earnings are completely wrong, treasuries are way over-valued, stocks are undervalued, or a combination. If you are scared to make a direct play, then it is an opportune time to sell out of the money puts and buy out of the money calls. The skew is only making that more attractive for you.
My short position is actually in very good shape unless VXX trades above 35. Volatility is mean reverting and a VIX of 45 is unsustainable. 45% means that 33% of the trading days should have moves that are greater than +/- 2.8%. If you buy volatility at those levels then you are making a mistake.
Volatility of Volatility: Can We Count on a Reversion to the Mean? [View article]
I will agree that the average is meaningless, but the standard deviation of volatility is not. I cannot come to a conclusion that the 99th percentile confidence interval for vol of vol is X to Y%, but I can make comparisons between the standard deviation today and the standard deviation during the crisis. We can only make comparisons between current market returns and historical market returns and many of these comparisons can be very useful in developing an investment thesis.
Financial Reform Bill Misses the Target [View article]
This grilling of the Goldman guys has been painful to watch today. I am just waiting for one of these guys getting pressed to say, "None of these garbage mortgages would have been originated if the government had not pushed 'A home for every American' policy. No one would have bought the garbage, thereby propping up the market, if the Fed had not kept interest rates so low for so long, thereby forcing investors to buy riskier and riskier assets in search of yield"
Goldman Sachs: (Lack of) Ethics on Wall Street [View article]
It was a pipeline. Banks bought or originated mortgages, put them in CDO's and sold them to clients. The issue for the banks was that the pipeline was not cleared before the market tanked. They were left holding the bag.
The "price" information starts at 100 at the inception of the two ETN's using the actual daily returns of each individual ETN. So the price was fabricated using ratios of daily returns.
If I believed that social security was a 100% guaranteed stream of payments and that stream was enough to mute out any large drawdowns in my equity portfolio given my cost of living then I would agree with you.
You could also invest in a fixed annuity that would act much like that social security fund and have similar logic. Unfortunately it is difficult to make these types of blanket statements without knowing each individual circumstance.
An even more interesting question: if a retiree annuitizes enough of their savings to cover the base-line cost of living, will they act more rationally with their remaining retirement funds?
Risk Flare Ignited [View instapost]
VXX Outperforms The VIX [View article]
And in Oil:
http://bit.ly/r1fymQ/
Zombie Nations? [View article]
US
www.bloomberg.com/apps...
China
www.bloomberg.com/apps...
Why You Should Hate VXX [View article]
Inflationists vs. Deflationists: The Battle Rages On [View article]
Long-Dated Volatility Opportunities [View article]
I will always have a bearish view on *implied volatility* and try to have a negative vega position *of some sort* most of the time. That might be vague, but the positions change often. I also often have short positions on the equity indices that offset losses due to spikes in implied volatility.
As to why I have a bearish view on volatility overall is related to global liquidity. Despite the headlines and freakouts, the fed and other governments are pushing money into every arena at unprecedented rates. You can partly see this through the spread between the 10Y and 2Y treasury. Please check out this article to see the correlation between volatility and this spread: www.surlytrader.com/li.../
For the next few years I expect average annualized volatility to be in the 18-23% range. When I can buy implied volatility in the mid to low teens I will do so and when I can sell implied volatility above 30 I will do so and the strength of my conviction will depend upon the magnitude of the dislocation from the median. The fantastic thing about volatility is that you can truly average in and feel confident in your position. You just need to be able to stomach the mark to market losses as everyone runs for the exit doors. That ability to stomach it is the reason that you get paid for being short volatility in the first place.
-ST
Extreme Fear in S&P 500 Option Skew [View article]
Fading Volatility [View article]
Volatility of Volatility: Can We Count on a Reversion to the Mean? [View article]
Financial Reform Bill Misses the Target [View article]
Goldman Sachs: (Lack of) Ethics on Wall Street [View article]
A VIX ETF Pair Trade: VXX/VXZ [View article]
A VIX ETF Pair Trade: VXX/VXZ [View article]
A VIX ETF Pair Trade: VXX/VXZ [View article]
Relative Value: Stocks vs. Bonds [View article]
You could also invest in a fixed annuity that would act much like that social security fund and have similar logic. Unfortunately it is difficult to make these types of blanket statements without knowing each individual circumstance.
An even more interesting question: if a retiree annuitizes enough of their savings to cover the base-line cost of living, will they act more rationally with their remaining retirement funds?