Our VIX post from yesterday got picked up by two of the deans of options blogging, Adam Warner (shown) and Bill Luby:
The Big Question for the VIX
VIX Jumping the Shark?
VIX and VIX
(and thanks also to Abnormal Returns for the link)
Not much to add in response to all this, except to agree that the increased coverage of this one instrument doesn’t change the fact that it still definitely serves a purpose. When all you have is a hammer, every problem looks like a nail, right? But just because some people erroneously use the VIX as a catch-all proxy for fear doesn’t mean that that particular hammer doesn’t still have its purpose.
The idea of a VIX hiatus sounds about right - at least in terms of parsing and explaining it. Surely those who have ears to hear will have understood by now that statistical measurements do not exert causal force - that any cause-effect relationship between the S&P 500 and the VIX moves only from the former to the latter.
Finally, what about the other volatility products, you know? RVX, VXD, VXN, QQV - those guys deserve more love than they’re getting.
New complicated products
Two product launches of note:
- Yesterday saw the announcement of the Merrill Lynch U.S. Forward Equity Variance Rolling (FEVR) Index, which “measures the performance of a long S&P 500 volatility strategy designed to be both tradable and efficient.” As to be expected from a press release, they don’t provide much insight as to what’s really under the hood, just the obvious remark that this index “efficiently tracks volatility using a strategy designed to minimize the carry cost associated with owning volatility” while still capturing the upside of being long vol. The claim is that being long 25% this FEVR and 75% the S&P 500 beats being long equities only. No mention of any retail-friendly implementation of this index, either now or forthcoming. But that’s Wall Street for you.
- Felix Salmon notes the introduction of some index ETFs that handle your allocation adjustments for you. His concern is that paying 25bp for a quarterly rebalancing might not be a smart use of your money, and we have to agree. The sponsors (PowerShares) should set the rebalancing back to annual, and cut the fee to 5bp. We’d buy that, or at least might consider putting our cousins and neighbors in such a fund.
Portfolio Update
A quick note to our members: again today we didn’t get filled on the order we’ve been working this week. Premiums just fell off too sharply today, perhaps in advance of the long weekend, and we weren’t in the mood to give chase.
The good news is that the same premium suckage that kept us on the sidelines has been fantastic for our current newsletter positions. Our IWM trade for June expiration is currently up about 7% after just a week; our SPY position is up 10%, which is our upper target for these trades anyway.
Reversal Readings
DIA - 2.76
SPY - 4.51
XLY - Consumer Discretionary - 0.53
XLE - Energy - 8.53
EWZ - Brazil - 5.52
XLB - Materials - 5.25
IYR - Real Estate - 2.12
