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SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives. He has been in the financial services industry for over a decade and would like to share his experience and enthusiasm in the financial markets with those who have a natural curiosity and... More
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  • VIX – Tale Of Two Tails 1 comment
    Apr 2, 2013 3:17 PM | about stocks: VXX, VXZ, XVZ, VIXY, UVXY, SPY

    Often it is worth taking a step back and assessing the big picture. ZeroHedge left its readers with a P/E10 Valuation Chart from dshort.com that leaves you feeling a little uneasy:

    (click to enlarge)

    ZeroHedge: "US Retail Investor - Do You Feel Lucky?"

    Aside from valuations, what has left my uneasy is the incredible decline in both historic and implied volatility. All is right in the world again. The theft of deposit Euros in Cyprus caused a little less than a hiccup. The volatility on the S&P 500 was about 12.7% Year to Date 2013 has been dampened further to a modest 10.2%

    The reality is that we are in a de-leveraging environment. Consumer debt has fallen, but government debt has gone through the roof as an offset. The overall debt is a major headwind that causes low growth and a precarious market environment. Japan is a foreign example that could be considered a better starting point than our own:

    (click to enlarge)

    Can the Federal Reserve truly prevent us from experiencing the same levels of volatility following the Great Depression or the Japanese asset bubble?

    In a less subjective measurement, just where are we compared to historic volatilities? Below the 20th percentile on the short end of the implied volatility curve:

    The lopsided tail in the distribution can be better represented using a chart:

    (click to enlarge)Reversion to the middle or to the right?

    So in summary:

    1. US Valuations are in the upper quintile
    2. US Volatility is the in the lower quintile
    3. The Eurozone is showing less stability and more destructive policy actions

    Do you want to add or reduce risk?

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  • Nitin Gulati
    , contributor
    Comments (312) | Send Message
     
    I completely agree with your analysis, some thing is not making sense in this market. But if you analyze, all fed has been doing is removing the uncertainty from the market which is pushing future volatility expectations further down- this is what we are seeing from contraction in vix futures curve. I believe trade which kind of makes sense is playing implied- realized vol spread , butterflies or condors in index, play the contango effect in vxx. There are opportunities in individual equities to trade volatility .
    3 Apr 2013, 06:47 AM Reply Like
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