Expmonthly Vol3no8 Dec 1

7/27/2019 Expmonthly Vol3no8 Dec 1

http://slidepdf.com/reader/full/expmonthly-vol3no8-dec-1 1/16

December 2012 | Vol. 3 No.

MONTHLYT H E O P T I O N T R A D E R S J O U R N A L

Volatility Review and

2013 Outlook

An Event Theta Stage

FRAMEWORK

Will the Binomial Market

Stay with Us in 2013?

Weekly VIX

Effect



www.expiringmonthly.com December 2012 2

ONTHLYT H E O P T I O N T R A D E R S J O U R N A L

editorial

bill Luy Jad Woodad

mak Sastian

Andw Giovinazzi

design/layout

Laun Woodow

contact information

editoial onts: [email protected]

Advtising and Sals

expiing monthly Psidntmak Sastian: [email protected]

Phon: 773.661.6620

Th infoation psntd in this puliation dos not onsid you

psonal invstnt ojtivs o nanial situation; thfo, this

puliation dos not ak psonalizd ondations. This info-

ation should not onstud as an o to sll o a soliitation to

uy any suity. Th invstnt statgis o th suitis ay not

suital fo you. W liv th infoation povidd is lial;

howv, expiing monthly and its aliatd psonnl do not gua-

ant its auay, tilinss, o opltnss. Any and all opinionsxpssd in this puliation a sujt to hang without noti. In

spt to th opanis o suitis ovd in ths atials, th

sptiv pson, analyst, o wit tis to expiing monthly that

th viws xpssd auatly t his o h own psonal viws

aout th sujt suitis and issuing ntitis and that no pat of th

pson’s opnsation was, is, o will latd to th spi o-

ndations (if ad) o viws ontaind in this puliation. expiing

monthly and its aliats, thi ploys, ditos, onsultants, and/

o thi sptiv faily s ay ditly o inditly hold posi-

tions in th suitis fnd in ths atials.

Options tansations involv oplx tax onsidations that should

afully viwd pio to nting into any tansation. Th isk o f

loss in tading suitis, options, futus, and fox an sustantial.

custos ust onsid all lvant isk fatos, inluding thi own

psonal nanial situation, fo tading. Options involv isk anda not suital fo all invstos. S th options dislosu dou-

nt chaatistis and risks of Standadizd Options. A opy an

downloadd at http://www.optionslaing.o/aout/puliations/

haat-isks.jsp.

expiing monthly dos not assu any liaility fo any ation takn

asd on infoation o advtisnts psntd in this puliation.

No pat of this atial is to podud o distiutd to oths y

any ans without pio wittn pission of expiing monthly o its af-

liats. Photoopying, inluding tansission y fasiil o ail san,

is pohiitd and sujt to liaility. copyight © 2012, expiing monthly.

contents

4 e’ n

Bill Luby

5 a ev t s fk

Bill Luby

8 w B mk s u

in 2013?

Andrew Giovinazzi

10 Weekly VIX Efect

Mark Sebastian

15 Volatility Review and 2013 Outlook

Jared Woodard

mailto:editor%40expiringmonthly.com?subject=

mailto:marks%40expiringmonthly.com?subject=

http://www.optionsclearing.com/about/publications/character-risks.jsp




mailto:marks%40expiringmonthly.com?subject=

mailto:editor%40expiringmonthly.com?subject=




About the

Expiring Monthly Team

Bill Luby

bill is a pivat invsto whos sah

and tading intsts fous on volatility,

akt sntint, thnial analysis,

and eTFs. His wok has n has n

quotd in th Wall Stt Jounal,

Finanial Tis, baon’s and oth

puliations. A ontiuto to baon’s

and minyanvill, bill also authos th VIX

and mo log and an invstnt

nwsltt fo just noth of San

Faniso. H has n tading options sin 1998.

Pio to oing a full-ti invsto, bill was a usinss stat-

gy onsultant fo two dads and advisd lints aoss a

oad ang of industis on issus suh as statgy foula-

tion, statgy iplntation, and tis. Whn not tading o

logging, h an oftn found unning, hiking, and kayaking

in Nothn califonia.

bill has a bA fo Stanfod Univsity and an mbA fo

cangi-mllon Univsity.

Jared Woodard Jad is th pinipal of condo

Options. With ov a dad of

xpin tading options, quitis,

and futus, h pulishs th condo

Options nwsltt (ion ondos) and

assoiatd log.

Jad has n quotd in vaious

dia outlts inluding Th Wall

Stt Jounal, bloog, Finanial

Tis Alphavill, and Th chiago Sun-Tis. H is also a on-

tiuto to ThStt’s Options Pots svi.

In 2008, h was pold as a top options nto in Stoks,

Futus, and Options magazin. H is also an assoiat

of th National Futus Assoiation and gistd pinipal of

clinan Finanial Goup LLc, a oodity tading adviso.

Jad has ast’s dgs fo Fodha Univsity and th

Univsity of edinugh.

Mark Sebastian

mak is a pofssional option tad

and option nto. H gaduatd

fo Villanova Univsity in 2001 with

a dg in nan. H was hid into

an option tad taining poga y

Goup 1 Tading. H spnt two yas

in Nw Yok tading options on th

Aian Stok exhang fo

oving ak to chiago to tad SPX

and DJX options Fo th nxt v

yas, h tadd a vaity of option poduts sussfully, oth

on and o th cbOe oo.

In D 2008 h statd woking as a nto at Shidan

Option mntoing. cuntly, mak wits a daily log on all

things option tading at Option911.o and woks pat ti

as isk anag fo a hdg fund. In mah 2010 h a

Dito of eduation fo a nw duation OptionPit.o.

AndrewGiovinazzi Andw Giovinazzi statd his a in

th nanial akts aft gaduating

fo th Univsity of califonia, Santa

cuz with a b.A. in eonois in 1989.

H joind Goup On, Ltd. and quikly

a a of th Pai Stok

exhang (and lat th cbOe), wh

h tadd oth quity and indx

options ov a 15 ya span. Duing

that piod h nv had a down ya.

At th sa ti, Andw statd and an th Dsignatd

Piay makt mak post fo GoupOn on th oo of th

cbOe. It a on of th highst-gossing posts fo th

opany in 1992 and 1993. Whil ativly tading, Andw was

instuntal in ating and anaging an option tad tain-

ing poga fo Goup On.

H lft Goup On, Ltd. to o-found Hny capital managnt

in 2001. Andw thn joind Aquin LLc (2008–2011) to hlp

ing 3D quoting and analysis to nanial data. H is chif

Options Statgist at Option Pit.




Editor’s

NotesBill Luby

while 2012 was not without its daa (Gk

ltions, spiking uo zon dt yilds, th sal li and

onstant ntal ank intvntion) it ndd up ing a la-

tivly quit on in ts of volatility, with th VIX failing to

gt into th 30s fo th st ti sin 2006. Th lak of a

ig volatility spik also hut options volu to so xtnt,

with total ontats tadd down 12% in 2012.

In Volatility Review and 2013 Outlook , Jad Woodad

povids a suay of th ya in volatility aoss goga-

phis and asst lasss and also ps into th futu with

th hlp of th iplid volatility t stutu.

Andw Giovinazzi takls so siila sujts in Will

the Binomial Market Stay with Us in 2013? and in so doing

aps so of th ky volatility vnts of 2012, as wll as

th tading oppotunitis thy psntd. Andw disusss

th liklihood that statgis whih w sussful in 2012

will wok again in 2013 and also os his thoughts on th

oing ya.

This onth’s tou d fo is mak Sastian’s Weekly

VIX Eect . I say this not just aus I a a VIXophil, ut

aus mak’s atil stats with so intsting histoy

fo th ash ash and th U.S. dt downgad, thn

launhs into a fasinating analysis of th potntial ipat

that wkly options hav had on th VIX. This is a thought

pi that is su to kp th whls tuning in you had fo

at last anoth xpiation yl.

I also wnt th thought pi out this onth, with

An Event Theta Stage Framework , whih is an attpt to

xpand upon th “vnt thta” onpt I intodud h in

July 2011 in Crises, Event Theta and Risk Assessment . This

ti aound I tun y fous to th stags that volatility

vnts go though and disuss v nt iss in th on-

txt of th odl.

Thanks to all who ontiutd to th suss of expiing

monthly in 2012 and a patiula not of gatitud to Laun

Woodow, who has n th liflood of this agazin fo

th past fw yas.

Happy Nw Ya and hav a good xpiation yl,

bill Luy

Contributing Editor




An Event Theta

Stage FrameworkBill Luby

in the july 2011 issu of

expiing monthly, I intodud th

onpt of “vnt thta” in Crises,

Event Theta and Risk Assessment as a

ans y whih to dsi whth

o not th passag of ti is xptd

to inas o das th isk (and

potntial volatility) assoiatd with

an vnt.

Th pupos of this atil is

to xtnd and updat that analy-

sis, outlin a stag odl fawok

fo thinking aout vnt thta, and

us that odl to dsi so of

th salint fatos of a slt goup

of nt iss, inluding th s-

al li and th ost nt ound of

th dt iling dat, fo July and

August 2011.

A Review o the Event Theta

Concept

On of th ntal ths of th July

2011 atil dalt with undstanding

th ol ti plays in vnt thta. In

that atil, I highlightd v itial

lnts that play a ky ol in dt-

ining th potntial volatility ipat

of vaious volatility vnts:

• contagion

• Duation

• Advan Noti• run

• rvsiility

Th last fou of ths lnts a dif-

fnt ways of dsiing how ti an

ditly inun an vnt. A volatil-

ity vnt that is long-lasting, has no

advan noti, is a on-o vnt, and

annot vsd is on that has th

potntial to injt a high dg of vol-

atility into th nanial akts. Thow

in th ontagion aspt, wh ti

plays a o sutl ol and on has

a faily good dsiption of th 2008

nanial isis.

On th oth hand, sothing lik

th nonfa payolls pot ous at

a singl point in ti, with th ti-

ing known in advan, happns vy

onth (so that data outlis an

idntid with th passag of ti)

and an vn vsd, in th fo

of susqunt visions to th oiginal

data. This onoi pot has alost

zo ontagion potntial and whil it

an injt shot-t volatility into th

nanial akts, th volatility ipat

is gnally if and lativly sall.

Whil th v lnts analysis is

usful in thinking aout th full ti-

lin assoiatd with a volatility vnt,

I hav also nttd fo thinking

aout volatility vnts aoss th

dint stags in thi dvlopnt.

Think of th lnts analysis as a

vtial appoah and th stag odl

appoah as a hoizontal appoah

if you will. Whil I liv ths

appoahs a oplntay, I will

fous th alan of this atil on th

vnt thta stag odl.

A Three-Stage Model or

Volatility Events

I lik to haatiz volatility

vnts as typially passing though

th stags:

1. Prologue—Th piod of ti in

advan of th vnt wh th

fous is on pvnting a volatil-

ity vnt, dvloping a plan to

itigat isk and also dvlop-

ing a plan to solv any ngativ

ts aft th fat du to liita-

tions of th pvntion ots and

th isk itigation.

2. Deadline—On th dadlin has

n ahd, th phasis tuns

to xtnding th dadlin so that

additional pvntion, itigation

and solution ots an ipl-

ntd. H th dadlins a

ith xd/had o o uid/soft.3. Outcome—Aft th dadlin

has passd, th agnitud of

th ipat of a volatility vnt is

not always known idiatly.

Sotis th ngativ ts

a only disovd with th pas-

sag of ti; sotis th is

onsidal untainty aout

what has happnd and what th

ipliations a; and sotis

that untainty is agnid y

Th vnt thta stag odl is a tool to hlp tads undstand

so of th ipotant haatistis

of volatility vnts.

http://www.expiringmonthly.com/crises-event-theta-and-risk-assessment.html







th possiility that th ipats and

phaps vn th vnt tigg

itslf an vsd.

Figu 1 at ight suaizs ths

th stags, th fous of attntion

and th ky qustion to askd in

gaphial fo.

So xapls ay hlp to illus-

tat how th stag odl an din-

tiat twn vaious volatility vnts

and how ths dins ight

itial to th volatility quation.

The Event Theta Stage Model

and Some Recent Crises

In od to illustat so of th di-

ns twn vaious volatility vnts,

I hav suaizd so of th dn-

ing fatos of th vnt in th ontxt

of th vnt thta stag odl fa-

wok. Th v volatility vnts a:

• Y2K (1999–2000)

• egny eonoi Stailization

At of 2008 (a fn to th

oiginal “TArP vot” in th Hous,

Spt 2008)

• Fukushia Daiihi athquak/tsu-

nai/nula disast (mah 2011)

• US dt iling isis (July–August,

2011)

• US sal li isis (Nov–

D 2012)

Figu 2 at ight uss so high-

lvl ullt points to outlin so of

th itial issus fo ah of th v

volatility vnts as thy lat to th

vnt thta stag odl.

To so xtnt, th fatus that

ak ah of ths vnts uniqu

an hlp to xplain th nts of th

odl. In th as of th Y2K isis, fo

instan, this is on of th vy fw

volatility vnts in whih th was a

xd/had dadlin ould not ngo-

tiatd away. As suh, a hug aount

of ot was xpndd on pvntion

ots, as wll as isk itigation plans

and plans to addss advs ts

that ould antiipatd. Fotunatly,

th Y2K oding ots w suss-

ful and th hanging of th dat fo

1999 to 2000 had a vy sall ipat

on softwa and itial systs. Also,

An Event Theta Stage Framework (continued)

Figure 2 Event Theta Stage Model Analysis of Selected Crises

Figure 1 Event Theta Stage Model




An Event Theta Stage Framework (continued)

th sults of ths ots w known

alost idiatly following th

tun of th alnda, with a vy high

dg of tainty and littl han

that thy ould vsd.

Whil th TArP vot (Hous voting

down th Spt 29, 2008 ail-

out pakag) was a atastophi fail-

u that tiggd an 8.81% on-day

dlin in th S&P 500 indx, it had

th ipotant fatu of ing vs-

il. Whn congss votd in favo of

a $700 ailout pakag fou days lat,

ths ations pvntd th nanial

isis fo spialing out of ontol at an

vn fast at.

Th Fukushia Daiihi nula

disast was a foal point of Crises,

Event Theta and Risk Assessment

lagly aus th was so uh

untainty latd to th dadlin

o itial dadlins, not to ntion

th tndous aount of un-

tainty aout th outo, vn aft

th isis appad to ding.

Th oth intsting fatu of th

Fukushia Daiihi nula disast is

that high dg of ot and xpns

that wnt into pvntiv asus,

fo ahittual and dsign issus

to gny spons plans, isk

itigation plans and th lik. H th

fous was on pvntiv asus

aus unlik so of th politial-

onoi iss (TArP, dt iling,

sal li, t.), politial anuvings

and poliy hangs annot ov th

dadlin o hav uh of an ipat on

th outo.

So ads ight onsid th

US dt iling and th sal li to

two spaat instans of th sa

undlying pol. Thy a listd

h as spaat lin its to highlight

th fat that whil th dt iling

dadlin of August 2011 was lagly a

xd/had dadlin, vaious Tasuy

dpatnt ativitis w ployd

to xtnd that dadlin. On th

oth hand, th sal li dadlin of

Januay 2013 is uh o uid. Th

oth ky fatu whih dintiats

th sal li fo th dt iling

ngotiations of 2011 is th inlusion of

th squstation (autoati udgt

uts) that a out of th sttlnt

of th 2011 sal li ngotiations.

Th intnt of th squstation was to

inas th poaility of a opo-

is solution in advan of anoth

volatility vnt, th sal li. Whil

th squstation was not al to fo

a ngotiatd sttlnt in advan

of th dadlin, it tainly aisd

th staks fo oth Doats and

rpulians in th vnt that ngotia-

tions w unsussful.

Conclusions

In this atil and in Crises, Event

Theta and Risk Assessment, y intnt

has n to tak th st stps in

dvloping a taxonoy of volatility

vnts so that th dins aoss

ths vnts an asi to idn-

tify, ophnd and apply to a gloal

ao viw of thats to th nanial

akts.

Th vnt thta stag odl is a

tool to hlp tads undstand so

of th ipotant haatistis of vol-

atility vnts and to aid th in sti-

ating th potntial isk and ipat

on volatility. Th vnt stag odl

is also hlpful fo undstanding th

tilin that is oon to all volatility

vnts and poviding a ontxt fo th

v itial lnts that play a ky

ol in dtining th potntial vola-

tility ipat of vaious volatility vnts

(ontagion, duation, advan noti,

un and vsiility.)

Last ut not last, th vnt stag

odl should povid a fawok fo

undstanding th vaious futu isks

and potntial agnitud of thos isks

as invstos gappl with anoth dt

iling dat in two onths and val-

uat oth thats as thy atializ

on th hoizon.

In y nxt atil on this sujt, I

will tak th xisting fawok and

apply it o ditly to th onpt of

vnt thta and dill down on how vai-

ous aspts of th stag odl and th

v itial lnts an hlp to ag

potntial high volatility vnts. EM

Further Reading

“ciss, evnt Thta and risk Assssnt”

Expiring Monthly , July 2011

“Volatility Duing ciss” Expiring Monthly ,

August 2011

“An (Alost) F Disast Pottion Play”

Expiring Monthly , July 2010

“building a Swan cath: Pat I” Expiring

Monthly , D 2010

“building a Swan cath: Pat II” Expiring

Monthly , Januay 2011


http://www.expiringmonthly.com/volatility-during-crises.html

http://www.expiringmonthly.com/archives/an-almost-free-vix-disaster-protection-play.html

http://www.expiringmonthly.com/archives/vol1no10-dec-buildingaswancatcheri.html

http://www.expiringmonthly.com/archives/building-a-swan-catcher-ii.html

http://www.expiringmonthly.com/archives/building-a-swan-catcher-ii.html

http://www.expiringmonthly.com/archives/vol1no10-dec-buildingaswancatcheri.html

http://www.expiringmonthly.com/archives/an-almost-free-vix-disaster-protection-play.html

http://www.expiringmonthly.com/volatility-during-crises.html





Will the Binomial Market

Stay with Us in 2013?Andrew Giovinazzi

Trading in 2012

Th quity and option akts in 2012

had a solid oll oast id sval

tis this ya. That sounds lik any

ya ally ut th natu of ths

ids was vy sv. Thy had th

fl of an all o nothing typ of out-

o as th akt tid to handiap

sval systi pols.

Thos pols in od this ya:

1) Th Gk cDS vnt in th

aly sping

2) Th Gk fndu of th

euo in aly su

3) Th Spanish and Italian yild

isis in id-su

4) Th Qe xpansions y th Fd

5) Th 2012 US Psidntial

eltion

6) Th Fisal cli

Whn I spak of quity and options

akts I a ally fing to th

akt fo options volatility spi-

ally. That is th wold of VIX, SPX

staddls, th volatility eTNs and eTFs

(lik UVXY and VXX), and th nw

slw of VIX-lik indxs lik th AAPL

VIX (VXAPL). Sin th ovhang of

unsolvd issus still louds th akt,

how dos an invsto us th vola-

tility poduts to anag th s-

ingly ndlss sis of politial fuls

that a du to o ou way? If an

osv lookd at th list aov thy

would had pssd to all any

of th pols solvd. Th akt

has allid on th ak of th lag

issus all ya. What I want to do is

viw how th akt pid 2012 in

twn th issus that will no dout

visit us to so dg in 2013.

What Binomial Means

In sipl ts a inoial vnt is just

a oin ip. A lassi txtook dnition

fo inoial is:

A discrete variable that can result

in only one of two outcomes is

called bnomal .

In akt ts it is ad nws

o good nws. 2012 was th ya of

ad nws o good nws. Th uniqu

thing this ya was th natu of how

th nws and dat was tlgaphd

in advan. Th quity akts hav

had volatil yas fo. Th 2008

Finanial cisis kind of snuk up on

vyon xpt fo a fw savvy

hdg fund anags. Ask th tad-

ing dsks aout th US downgad in

2011 and I a ondnt thy would

say that was a supis. Th tlling

thing aout 2012 was how th akt

sat and waited fo th dadful nws

that was su to o. Th gin-

ning of th ya statd with a solid

ally to ov 2011 only to sit and

wait fo th Gk dit vnt whih

patiipants knw was going to hap-

pn. Th ounty with a population of

just ov 11 illion popl hld a vot

that was asially a fndu on

th euo whih st th high VIX fo th

ya. That dat of th ltion was wl

known ut th outo was not. Whil

I annot atalogu all th vnts of th

2012, th ida stats to o la.

Th akt was waiting fo solutions

o answs and that auss tain

things to happn in volatility akts.

Th pol is th options odl has

a had ti with inoial vnts.

What the Black-Scholes Model

Wants

Th blak-Shols odl ally ush-

d in th ag of th divativ on-

tat. Options w in th nanial

spa fo yas ut ally took hold

aft th nanial pofssos statd

ossing ov into tading. Th asi

pol with blak-Shols (bS) is th

sa with any odl ally; it is only

as good as th inputs that go into it

and is uilt on assuptions. Options

odls lik a sooth path with lots of

data points, and a lognoal disti-

ution of data is pat of th options

odl haat. Fo anyon who has

usd thotial valus duing xpia-

tion wk, thy a vsd in th lii-

tations of th options odl. On th

nu of days stats to shink, th

odl has a tough ti sin it was

not ally dsignd fo that in th st

pla. This is wh tads land to

“fudg” y aking adjustnts to vol-

atility to adapt th odl output to th

Th tlling thing

aout 2012 was

how th akt sat

and waited fo th

dadful nws that

was su to o.




akt pla. If an invsto is looking

at th nxt euopan o US dfault on

a givn day, th pis you s hav

a lot of “fudging” in th. Tads

huk th odl and stat to handiap

th vnt.

Trading the Event

Noally option volatility will follow

so path latd to th alizd vola-

tility of th undlying suity. Whn

th two divg, that aks fo what I

all a tadal vnt. Thos statgis

an ll a ook ut th a so si-

pl idas on how to tad ths vnts

in th futu.

1. Th iplid volatility will stay id

no att what th undlying

(alizd volatility) is doing. This

aks fo so uh distotd

akts and tads that fad thisvolatility ally aly do so at thi

pil.

2. Th at-th-ony staddl on

th xpiation just following th

vnt will handiap th xptd

valu of th ov. This is tads

fudging y idding up th iplid

volatility to ov th xptd

“gaa”.

3. Th iplid volatility will at

aft th vnt. Long vga is alos post-vnt.

If you followd th inoial akt

vnt tading of 2012, this statgy

wokd ptty wll. eith owning ti

spads suounding th vnt in th

ig indxs o shot VIX-lik ontats

just into th announnts wokd

wll. Th ida is to tak th “gaa”

out of th tad. I think 2013 will aod

fw oppotunitis to tad this way.

Looking at th volatility akt fo

th iplid volatility and th alizd

volatility fo th piod just aound th

Gk rfndu in th aly su-

is instutiv. Th whit lin in

th gaph (Figu 1) is 10-day alizd

volatility fo th SPY and th d lin

is 30-day iplid volatility fo th SPY.

Th yllow gaph at th otto shows

th din twn th two and

noti how wid th spad was in th

din twn th two nus.

Just aft th fndu, iplid vola-

tility plutd just as th alizd

statd to tak o. by taking th shot

gaa out of th quation th tad

stups wok.

What Do I See For 2013?

Now w go ak to ou list. Th aln-

da of vnts in 2013 is not as full as

2012. bsids th Fisal cli talks now

going on as I wit this, 2013 is th

ya of uky wats. What is going to

gt th akt will not tlgaphd

in advan; it will o of a su-

pis. Th linging issus will slowly

sp out unlss th poliy aks an

jup ahad of th. I would not want

to handiap th hans of that hap-

pning. EM

Will the Binomial Market Stay with Us in 2013? (continued)

Figure 1




Weekly VIX

EffectMark Sebastian

when i look back at th past fw yas of tading, th a two signiant vnts

that stik out in y had. Th Flash cash and nsuing sll o in may of 2010, and th US dt

downgad in 2011. In any ways, as fa as th SPX is onnd, th only siilaity twn

th two vnts is th dition of th ovnt. Howv, whn w look at th options pis,

th paks of th VIX duing th two vnts a atually vy siila. Th asolut pak of th

VIX duing th 2010 isis was just und 46%; in 2011, th pak of th VIX was xatly 48%.

Dos that ak sns? I askd yslf and th answ is, not ally.

Figure 1

T D A i t a d

Whn I look at th pani of 2010, I ould asolutly nvision an intaday VIX at th pak of

th Flash cash ing na 2008 als. Howv, whn w look at th ovall sal of th two

vnts, whn th VIX was at 46 on may 20th 2010, was th akt xpining th sa fa

that it was xpining in th ash of 2011? Th answ is laly no. Th ak and foth, up and

down in August of 2011 was mUcH gat than th ovall ovnt w saw in 2010, no at-

t how w sli up th ov. Th SPeeD of th ov and th at at whih th akt ontinud

to ov duing August of 2011 was mUcH gat than spd and at of ovnt in 2010. In

Figu 1 w an s that th 20-day avag tu ang (ATr) of th akt in 2011 pakd wll

aov 30, and stayd aov 30 fo ov 60 days.

T D A i t a d

Figure 2




Th 2010 ATr nv got na 30 and only anagd to stay aov 20 fo a shot piod of ti,

aout 50% shot a piod of ti than 2011. In 2011, fo instan, th akt ovd a lag p-

ntag t fo ginning of sll o to pak of VIX in a uh shot piod of ti. If w look at

th VIX lativ to ATr, th pak of VIX tadd at a 180% piu to th pak ATr in 2010. manwhil

in 2011, VIX tadd at only a 150% piu to pak ATr. Why? Th a 2 possiilitis:

1) Th akt got sat.

2) Sothing ls is going on that was kping VIX atiially low in 2011.

Lt’s stat with possiility nu 1: th akt did not gt sat, tust .

So th answ ust li in nu 2. Th is sothing ls ating th VIX that is ausing it to

ov lss than w ight xpt. I think w s this ‘dapning t’ whn w look at th ATr of th

VIX itslf.

Figure 3

T D A i t a d

Whn w opa ATr of VIX in th two vnts, th ATr of VIX atually pakd out at a high lvl

in 2010 than it did in 2011. Whil in 2011, VIX ovd fo a long piod of ti. Th duation of th l-

vatd ATr is o a funtion of th SPX’s pak ATr. Howv, I nd it fasinating that th VIX’s pak ATr

in 2011 was lss than th pak ATr in 2010. What ould aus this?

Lt’s st disuss th VIX alulation itslf. Th VIX has a onstant duation of 30 days. To kp this

onstant duation, as y o-wit bill Luy xplaind in a VIXandmo log post, th VIX atually aks

down into VIN and VIF: VIX na onth and VIX fa onth. Th alulation quis that th ontats

standad ontats, and as th VIN appoahs 1 wk to xpiation, th alulation olls VIF to VIN and

adds a nw VIF, whih an podus so swy VIX pis sotis. This alulation aks a lot of

sns, in a wold wh w only hav gula ontat tading onths. Howv, in th last 2 yas, th

hav n ajo hangs in th tading of SPX options.

In id-2010 th cbOe launhd SPX wkly options with a Pm sttl (wkly options had atually

n aound a whil ut w not patial). rntly th SPX launhd up to 4 wkly options on-

tats olling ak full 4 xpiations. As I wit this, th a ontats xpiing in 2 days, 9 days, and

15 days 23 days, 30 days, and 43 days. cuntly th VIX uss th ontat that xpis in 15 days and

Weekly VIX Efect (continued)





43 days. In thoy th 15 and 43 day options would giv us gat vision into how ovall SPX options

vol is oving ight now. Aadis and sah folk will giv this lin:

“The Option expiring in 15 days represents daily market expectations between now at expiration.

The option with 2 days to expire’s IV is perfectly represented in the 15-day options price, otherwise

traders will buy the option that is too cheap and sell the option that is too expensive. The market is

ecient and will not allow markets to get out of whack.”

This is a load of ologna if I hav v had it. Whil th aov is tu whn w a in noal

akts (aout 90% of th ti), whn th akt is going azy, th VIX ying on way o th oth,

and tads a paniking, th options a alost NeVer in lin. Tads in th pits and pofssionals

a hasing gaa, tying to uy na t options and slling long t options to ollt as uh

piu as possil. Thy a also UNLOADING on skw at thos piods of ti, typially in th ak

onths. Th ky is ths tads nd to anag gaa. Thus vy na t options atually gt

id. manwhil, hdgs a uying long t options and out-of-th-ony puts (thus tads a

slling vga and skw). This holds up th pius in long datd options. W nd up with a situa-

tion wh tads a al to hdg in dint onths against isk. Tads id up na t options

with 2 o 9 days to xpi whih allows th to sll long t options, it 15 days o 43 days.

Pio to wkly options, if tads w slling piu to th akt th was ally nowh

to go to gt gaa. Thus, as th akt ovd, tads would nd to nd a way to hdg o thi

gaa. Th only options w to uy long datd options (awful ida), o th font onth ontat (not

pfal ut tt than uying long datd options). Sin oth hdgs and tads w uying th

sa onth in an iational akt, and that akt was a pat of th VIX alulation, th VIX ovd.

moving ak to ou 2010 vs. 2011 snaio . . . Lt’s opa avag daily wkly options volu

tadd duing th onth of may 2010, opad to th volu in August 2011.

Figure 4

c b O e





Th din is astounding. If w onsid th avag daily volu of SPX options is

aound 7–8 hundd thousand ontats, in oth may of 2010 and August of 2011 that volu

was los to 1.3 illion ontats. In may of 2010, th wkly volu was aout 3% of total

avag daily volu fo th ya, and lss than 2% of SPX option volu. In August of 2011,

avag daily volu was atually los to 1.3 illion ontats a day. That is an ov 8% of

daily avag volu, nothing to snz at. Now, all that at th ti w only had 1 wkly

ontat, so this is onntatd in 1 ontat; th oth 1.2 illion ontats a spad aoss

a nu of onths. This aks a stong as that th was a sious footpint fo wkly

options fo th August 2011 ash.

my onlusion: th VIX only touhd 48, aus duing th tu piod of iational tad-

ing, tads w uying gaa in th wkly options and slling piu to hdgs in th

gula ontat onth. essntially, wklys allow tads to put on shot ti spads against

th uying haits of hdgs, ath than hdging in th ontat onth. This auss th VIX

to undpfo in tis of pani. This is vy diult to pov, ut th andotal and iu-

stantial vidn is laly th.

W a now aying so any wkly options ontats, and tading is so divs fo

wkly options that th VIX—whil nv ilvant—ay hav hangd as an indiato. Tak a

look at how SPX options ovd fo and aft th sal li.

L i v v o l X

Figure 5

Noti how th Jan 4 ontat whippd aound VerY had aound th li. Whil on ight

agu that th IVs don’t att on a wkly, I would point out that ATm options in SPX—vn

aft th announnt—aid aout .50 of vga p ontat. That is no laughing att

and is still 1/3 th vga of th gula Jan ontat (that was ing alulatd). I would ak

an agunt—that aus th Jan 4 ontat has n aound fo 30 days, and tads w

piling in that ontat to tad th atual li—that as ntly as D 31, th wkly options

w dulling th VIX pak. On D 28th w all saw what happnd in th last half hou

of tading. Th SPX tankd and th VIX xplodd . . . to a littl ov 22. Noti th volu in

Jan 04 lativ to gula Jan.





Jan laly has o volu, ut th footpint fo th Jan 4 ontat should not ignod, and

laly was a ajo play in th li tad. With th swinging of nd of day IV, th is no way Jan 4

and Jan rgula w in lin at any point at th nd of th day.

IS this nssaily a ad thing? may, if iational pap has any plas th tad, th VIX will

giv th akt a tt opinion of what th unt ational ‘fa’ is in th akt. Thn again, ay

tads WANT to know how high iational fa is. If that is th as, VIX is going to nd to hang as

SPX wkly volu ontinus to xplod high. EM

L i v v o l

V I X c e N T r A L , d a t a : c b O e

Figure 6




Volatility Review and

2013 Outlook Jared Woodard

in this article, w viw th

histoial volatility and tun distiu-

tions of sval ajo asst lasss

and look at quity akt xptd

volatility fo th ya ahad.

Th sis of olling iss and pi-

ods of waknss sin lat 2007 hav

ought th onpts of volatility and

olation to th inds of invstos

who ay nv hav tadd options

thslvs. In that spt, info-

ation povidd y options akts

aout likly tun distiutions and

asst olations is valual vn fo

invstos who a not ativ in thos

akts, sin iplid volatility and

iplid olation an info asst

alloation disions and isk sttings.

Natually, th sa infoation is also

of dit lvan to options tads.

In alizd volatility ts, noth-

ing in 2012 opad to th vnts of

August and Spt 2011, whih in

tun w lss sv than th 2008

isis. Dspit th out of slling asso-

iatd with th sal li lat in th

ya, ost wold quity indxs losd

at o low thi an lvls fo th

ya. Th akts in this hat (Figu

1) w sltd aus thy appa

again in ou tad idas stion.

In 2012, th an 3-onth alizd

volatility fo th S&P 500 was 11.42%,

and th sa stiat was los to

10.6% in th nal wk of th ya.*

In asolut ts, th lagst dop

in volatility fo th ya aong th

akts shown aov was Austalia,

whos 3-onth stiat fll y 24 p-

ntag points to 15.25%. Th attst

y/y 3 volatility of ths was in Japan,

whih dlind ight points to 14.36%.

To gain so

psptiv on just

how quit akts

a in 2012,

onsid th volatil-

ity histogas fo

sval ajo assts

sin 2006 (Figu

2). eah histoga

plots th nu of

daily osvations

of 6-onth histoi-

al volatility at ah

thshold, giving an

intuitiv sns of

wh asst volatil-

ity lingd th longst ov th last

sval yas. Th ost nt os-

SPY

0.1 0.2 0.3 0.4 0.5 0.6

0

5 0

1 0 0

1 5 0

2 0 0

EEM

0.2 0.4 0.6 0.8 1.0

0

5 0

1 0 0

1 5 0

USO

0.2 0.3 0.4 0.5 0.6 0.7

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

GLD

0.15 0.20 0.25 0.30 0.35 0.40

0

5 0

1 0 0

1 5 0

2 0 0

FXI

0.2 0.4 0.6 0.8 1.0

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

TLT

0.10 0.15 0.20 0.25

0

2 0

4 0

6 0

8 0

1 0 0

1 2 0

FXE

0.05 0.10 0.15 0.20

0

5 0

1 0 0

1 5 0

Figure 2 6-Month Historical Volatility, 2006–2012

Jan 032011

Apr 012011

Jun 012011

Aug 012011

Oct 032011

Dec 012011

Feb 012012

Apr 022012

Jun 012012

Aug 012012

Oct 012012

Dec 032012

0 . 1

0 . 2

0 . 3

0 . 4

0 . 5

^GSPCEWZ

FXIEWA

EWJ

Figure 1 Equity 3M Realized Volatility



vations a aggd in ah

gaph in gn.

eah asst losd out th

ya in th otto half of th

7-ya distiution, and qui-

tis and gold w na th

lows.

exptations of an

vsion ight lad us to

favo high alizd volatility

in th futu, spially fo GLD, eem,

and FXI, ut it is ipotant to -

how uh ths distiutions will

hang ov ti. Th nanial isis

oviously ontiuts o upsid

tail osvations than w would no-

ally xpt to s (pun intndd). Fo

xapl, th an 3-onth YZ histoi-

al volatility in th S&P 500 was low

10% fo ah of th yas 2004–2006,

and was low 11% in 2007. So an

xptation of ontinud low alizd

volatility is non inonsistnt with th

tndny of volatility to an-vt

ov th shot t.

Not th iodal quality of th dis-

tiutions of volatility in U.S. Tasuis

(TLT) and th uo (FXe). Fo xapl,

TLT spnt quit a lot of ti with su-

8% 6-onth volatility and again lin-

gd in th 15% ang, without any

osvations in twn.

raining fousd on unt

akt onditions lativ to histoi-

al angs, w tun now to th akt

iplid volatility fo th S&P 500 v-

sus nt nos. Figu 3 shows th

t stutu of SPX option iplid

volatility, wightd using th failia

VIX-styl thodology.

Th unt IV t stutu is

notal fo sval asons.

1) Th atnss in th shot-datd

pat of th uv gd only in th

nal sssions of 2012, and was th

only signiant piod of th ya in

whih th was not stp ontango.

Flatnss and akwadation a la-

tivly a in SPX options, so th high

ids fo shot-datd iplid volatility

indiat th siousnss with whih

akt patiipants took th pospts

fo a akt sllo if politiians pov

unal to solv th udgt disput.

2) At th sa ti, xptations

fo akt volatility did not shift app-

ialy in th st of th uv. A 12%

ontango twn six- and 24-onth

stiats is not histoially ak-

al. Whil th t stutu shiftd

1–2 points high twn Nov

and D 2012, th shap of th

ak half of th uv did not hang.

W intpt this as an indiation that

akts a not piing isk high

fo 2H 2013 and yond. Th sll-sid

onsnsus is that udgtay naïvté

and slf-initd sal wounds ay

aus toul in th st two quats

ut that U.S. gowth pospts aft-

wad a vy positiv. Option

akt havio is in lin with

this viw.

3) Th lativ lvl of SPX

IV ons a positiv outlook

whn opad with stiats

on and two yas ago. With th

euopan anking isis ag-

ing in lat 2011, th two-ya

SPX IV stiat was na 35%;

chistas 2010 saw a two-ya sti-

at at 30%; th unt two-ya

lvl is 25%.

4) Finally, whil iplid volatility

at diu and long hoizons is la-

tivly low, options a still aggssivly

ovid in asolut ts. On ya

SPX histoial YZ volatility is 10.7%;

opa th option-iplid avag

of 23.7%. In oth wods, whil long-

t xptations hav ipovd v-

sus nt yas, long-datd options

still t a lag than noal isk

piu.

This opaison shows that vn

as alizd volatility has falln into a

ang onsistnt with pio ull a-

kts in quitis, th iplid volatility

uv is still pid at th dian of a

vy tuultuous onoi piod. In

oth wods, with anoth ya o so of

stal akt ation, w would xpt

to s th IV uv shift sval points

low. EM

* W a using Yang-Zhang stiats of al

izd volatility as a o alisti altna-

tiv to th los-los foula, although

th din at long hoizons is lss

ipotant.

Volatility Review and 2013 Outlook (continued)

2 0

2 5

3 0

Contract month

1 M I V

1 2 3 4 5 6 7 8 9 10

X2010.12.31

X2011.12.30

X2012.12.28

Figure 3 SPX Implied Volatility Term Structure

c b O e , c o n d o O p t i o n s

Documents

Expmonthly Vol3no8 Dec 1