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Market Volatility Bulletin: What Trade War?

Apr. 09, 2018 11:52 AM ETACWX, DIA, GLD, IWM, QQQ, SLV, SPY, SVXY, TVIXF, UVXY, VXX11 Comments
The Balance of Trade profile picture
The Balance of Trade


  • Stocks are giving the upside another whirl.  We've been here before, but volatility does seem to be giving traders some cover.
  • US-China trade is getting a lot of attention, but spillover is certainly possible.  Germany is truly the exporting powerhouse.
  • Tug-of-war between realized vol and VX is going to end with a very definitive loser IMHO.

Market Intro

CNBC: 11:30 AM EST

Stocks (SPY, DIA, QQQ, IWM, ACWX) are trying to put last week behind them. Indeed, the S&P 500 trades almost identical to where it did just prior to the jobs number release. In the weekend MVB, I asserted that it was actually the comments from Chair Powell that pushed stocks off the cliff. We'll see if stocks can hold their gains.

Bitcoin may call in sick today, and at least in the past (see graphic below from February 13) some have looked to relationships in return variation between stocks and cryptocurrencies. Given how volatile the asset really is, 6 percent is pretty run-of-the-mill. In any event, calm seems to be what most markets are trying for today.

Amid all the trade concerns, gold (GLD) and silver (SLV) have been remarkably range bound. Platinum and palladium, however, are enjoying a pretty meaningful bounce as we enter the afternoon session.

Thoughts on Volatility

At present most of the trade tiffs have been between the US and China. But there is scope for such "friendly banter" to expand.


German exports are truly staggering when one stops to consider that Germany has a population of about 82 million - about 6% that of China, and 25% of the US. We do live in a global and connected world, and most economists would argue that this is mostly for the better.

At any rate, for better or worse, trade appears to be on the docket for items that the Trump Administration wants to address. Personally, I think at least from America's standpoint, this can be good or bad news depending on your pre-existing political persuasions. The key for this forum is to ask whether spiraling trade tensions are a true threat. If yes, then the impact on large corporations could be quite painful.

This article was written by

The Balance of Trade profile picture
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Comments (11)

querty profile picture
"The Tug-of-war between realized vol and VX is going to end with a very definitive loser IMHO."

The way this year has gone, I suspect BOTH sides will end as definite losers. Grrr!
Chaffey profile picture
I was looking for a horrible tweet but instead it was the raid on Trumps personal lawyer. Whoever is worries about Trump's policies...be it the Democrats or Republicans or the Aliens from outer space...things are moving now. There is a lot of bad stuff going to come down the pipe now.
Chaffey profile picture
Oh and that makes a small long position on TVIX a good bet for tomorrow. Who knows what all this stuff will bring? Our next president needs to be blind, deaf, and dumb.
Chaffey profile picture
All I know is TVIX looks like it can't fall much. Big rally in the SP500 didn't transfer into a huge drop in TVIX. Maybe the upside is limited now too. We'll see when they pull the plug on this rally. I expect we'll hear news of a couple of Raytheon targeted missles hitting somewhere in Syria very soon.
ItsPlaytime profile picture
I agree with this:
"If the end is fixed at the mean logic dictates that an above average VIX the term structure must be in backwardation while with a below average VIX the term structure is in contango."

However, the near-term VIX on average will be lower than the long-term VIX - because of time risk, similar to the underlying options. This is the time factor which somehow keeps getting lost in this discussion. That's why most of the time, we're in contango - and any other theoretic situation would have bizarre consequences. Not sure how to explain this better...
The Balance of Trade profile picture
I get what you're saying ItsPlaytime, but I don't extend the agreement to contango-as-insurance.

VX futures are pretty young. Of all the time that they've existed (since 2004) there has been one year of a bear market. "Most of the time" isn't relevant because there haven't been enough different kinds of time.

Furthermore, the beta of the futures at the front end is higher than at the back end. This means that it is near-term vol shorts, not long-term vol shorts, who take more risk.

Finally, asymmetry gets accounted for in the implied vols of the options themselves by those writing the options. In other words, spot VIX, irrespective of futures, already carries a premium to compensate the shorts.

Shorts do not need to be "double counted" as it were by reassigning a premium to long dated futures.

Now we can agree that the median VIX reading may be below, well below, the mean reading. We can also agree that it should be uncommon to witness sustained backwardation in the term structure when spot trades below average, or contango when the term structure trades above average. But you and I diverge on the notion that back-end VIX shorts take on more risk than front-end VIX shorts and therefore require extra compensation.
Silent Trader profile picture
"However, the near-term VIX on average will be lower than the long-term VIX - because of time risk, similar to the underlying options."

There is no such a thing as short or long term vix. Vix is the 30 day iv index. You may of course calculate an IV index for a different duration, but that has in principle nothing to do with the vix term structure. The vix term structure is an estimate of vix at expiration time. As we don't know the future the only logical estimate for that expiration value far in the future is the average (How that average exactly should be calculated is open for debate). You may plead that a short vix future is more risky then a long one, but even if that is the case, what should the risk premium be? I'ld say if you go far enough out on the curve next to nothing so for practical purposes the curve at infinity must be fixed at the average vix. If there is no risk premium at the far end, I don't see how it could at the short end.

If you mean to say that the vix will spend more time under the average vix then above average vix then I tend to say you're likely right. I'm however not sure that time in contango>time in backwardation means that contango is the natural state of the curve. In the end contango and backwardation have to be balanced, if not there would be free money and people would pile in (and if to the extreme get punished like in februari).
ItsPlaytime profile picture
They do not have to be balanced - there must be "free money". It's not free. Volatility and tail risk are being transferred into the receiving portfolio. In fact, if this "free money" is missing, why take the risk?
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