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Ever Wonder Why VIX is so low?


winjitsu
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https://www.wsj.com/articles/are-traders-creating-a-bizarre-new-feedback-loop-feedback-loop-feedback-loop-1491557400

 

Brings to mind Soro's concept of reflexivity and Taleb's Black Swan. VIX is up today due to the Syria strikes, but I've wondered for a while now why its been so low given all the geopolitical events happening.

 

Whats the best strategy to take advantage of this? Rolling OTM index puts?

 

[Attached article. By the way, if you're on Chrome, check out the plugin Bypass Paywall as a work around to get WSJ + other publication...]

Are_Traders_Creating_a_Bizarre_New_Feedback_Loop..._Feedback_Loop...pdf

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Trump is a calming effect for business.

 

I don't have to watch the news like a hawk every day to see what kind of stupidity Elizabeth Warren will pull or Obama or some other anti-business freak.

 

While I am exaggerating, I still think it is true to a degree. 2008-2009 was a huge traumatism and having someone in being more pro business accompanied by Ross and Mnuchin makes you less focused on Washington's actions.

 

Cardboard

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http://www.cftc.gov/dea/futures/financial_lf.htm

 

Just focusing on VIX futures, I see from report above that buy side (asset mgrs and leveraged funds) are net sellers of vix futures. This lines up with the WSJ article above. Firms that used to buy insurance are now selling. Sounds a bit like reaching for yield in the bond market.

 

Buying OTM index puts would be one bet to take advantage of low implied vol, in the hopes that vol increases. I've been researching this stuff over the last few weeks. My thinking is to either sit on the side lines and wait for vol to increase to go short vol, or place small bets to be long vol.

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Volatility.

Some say there is more and some less. some even suggest it is suppressed.

Looking at a VIX graph, (max, for longer term)

 

https://ca.finance.yahoo.com/chart/%5EVIX?ltr=1#eyJtdWx0aUNvbG9yTGluZSI6ZmFsc2UsImJvbGxpbmdlclVwcGVyQ29sb3IiOiIjZTIwMDgxIiwiYm9sbGluZ2VyTG93ZXJDb2xvciI6IiM5NTUyZmYiLCJtZmlMaW5lQ29sb3IiOiIjNDVlM2ZmIiwibWFjZERpdmVyZ2VuY2VDb2xvciI6IiNmZjdiMTIiLCJtYWNkTWFjZENvbG9yIjoiIzc4N2Q4MiIsIm1hY2RTaWduYWxDb2xvciI6IiMwMDAwMDAiLCJyc2lMaW5lQ29sb3IiOiIjZmZiNzAwIiwic3RvY2hLTGluZUNvbG9yIjoiI2ZmYjcwMCIsInN0b2NoRExpbmVDb2xvciI6IiM0NWUzZmYiLCJyYW5nZSI6Im1heCJ9

 

one would think that, since 2008-9, the mid-term trend is down.

Perhaps many factors involved.

 

How to benefit?

Too hard for me. I tend to work on mental preparation if/when volatility shoots up.

If you like Minsky's unstable stability hypothesis, timing may be the challenge.

 

Is volatility good?

Business environment uncertainty and labile policies are no good. Institutions matter.

Suppressed volatility however, if it exists in this "Great Moderation" era, may be detrimental.

Unfortunately, creative destruction comes with a certain amount of embedded volatility.

Perhaps relevant (volatility, bubbles, connection of business with politics), Robert Rubin (Goldman Sachs, Treasury Secretary Secretary) is interesting when he describes deep (unappreciated) market forces at work and how, for the large part, those forces should be ignored. As an arbitrageur when he started out at GS, he learned to benefit from bouts of volatility. That was recurrent in his career. Of course, it helps if you're on the right side of the trade.

If interested, his memoirs:  In an Uncertain World: Tough Choices from Wall Street to Washington (ISBN 978-0-375-50585-0), co-written by Jacob Weisberg.

 

 

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  • 1 month later...

The VIX has been pretty low for a few years now. My feeling is that it has something to do with the reason why we've seen increased correlations for the past years. One thing to keep in mind is that over the past few decades every crash and crisis has set new records for the VIX. Just food for thought.

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Hi Al,

I've dabbled in VIX options.  I've resigned myself to shorted dated contracts due to the fact that they are European options which can only be exercised at expiry. It kind of pisses me off that they don't track the VIX very closely. I'd be interested in your experiences.

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Hi Al,

I've dabbled in VIX options.  I've resigned myself to shorted dated contracts due to the fact that they are European options which can only be exercised at expiry. It kind of pisses me off that they don't track the VIX very closely. I'd be interested in your experiences.

 

We shall see.  I expect to lose money. 

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Thanks for bringing this up.  Volatility is one of the few cheap "asset classes" currently so we need to at least consider investing here.

 

I purchased today some deep out of the money puts on Netflix (NFLX).  Of all the big tech companies that have boomed, this one seems the least solid to me.  Don't get me wrong, I like the company but from a valuation standpoint it is shaky.  The cost of content is huge which should inhibit profits.  Stock is selling at 7-8x revenue and an ungodly pe multiple.  They are competing against Amazon and to a lesser extent the cable companies.  I very well could be wrong here but the options are priced such that they could go 10x-30x if there is a large crash.  I think it is possible for NFLX to crash entirely on it's own independent of the market.  This is just a tiny position to help hedge my portfolio.

 

Interested to hear any other option plays, calls or puts welcome.  I actually suspect the best opportunities are in the call market as everyone is convinced we are at a peak.

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This current VIX situation feels a lot like what it felt like in 2005 when home prices in Las Vegas were obviously going to rise 20% per annum indefinitely and when IBM and General Electric were talked about by market watchers on CNNfn as takeover candidates by up and coming telecom players like JDS Uniphase in 1999.

 

There is an eerie "nothing to see here...this is the new normal" vibe to the market right now...

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CoBF is the reason we have no market crash in last 7 years!  8)

 

Sanjeev did it.

 

You're welcome!

 

Actually if Mobius is saying that, then do the frickin' opposite!  One of the highest profile and worst investment managers of all time!  Cheers!

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Thanks for bringing this up.  Volatility is one of the few cheap "asset classes" currently so we need to at least consider investing here.

 

I purchased today some deep out of the money puts on Netflix (NFLX).  Of all the big tech companies that have boomed, this one seems the least solid to me.  Don't get me wrong, I like the company but from a valuation standpoint it is shaky.  The cost of content is huge which should inhibit profits.  Stock is selling at 7-8x revenue and an ungodly pe multiple.  They are competing against Amazon and to a lesser extent the cable companies.  I very well could be wrong here but the options are priced such that they could go 10x-30x if there is a large crash.  I think it is possible for NFLX to crash entirely on it's own independent of the market.  This is just a tiny position to help hedge my portfolio.

 

Interested to hear any other option plays, calls or puts welcome.  I actually suspect the best opportunities are in the call market as everyone is convinced we are at a peak.

 

Agreed. I've been selling calls/puts on individuals names and using proceeds to buy puts on the indices. Not a straight arbitrage of difference in volatility between the two, but helps to fund downside protection and long vol positioning.

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Volatility. Sense of calm. Many theories.

Another one.

 

https://www.nytimes.com/2017/05/09/upshot/the-stock-market-is-weirdly-calm-heres-a-theory-of-why.html?_r=1

 

Clearly the “trend” is down (outside of isolated small blips).

Some suggest that low volatility is the result of better policies and better risk management.

The author even suggests that some of the volatility may be suppressed by the “technical” use of risk mitigating “products”. Hmmm…

My opinion is that there may be a component related to complacency.

 

Volatility has two components: volatility of fundamentals and volatility of market sentiment. Volatility levels and trends may be one of these things that can’t be explained or “predicted”. Mr. Market can be a friend. An unpredictable friend.

 

https://www.crestmontresearch.com/docs/Stock-Volatility-Cycle.pdf

 

Some food for thought:

-Volatility tends to be volatile.

-Swings can be violent.

-At best, volatility is a coincidental indicator.

 

Volatility perhaps is like riding a wave. To be on top requires preparation and balance but this is where you get your best opportunities. But it’s hard to catch the right wave.

 

Nexflix is mentioned and this is related to another topic: some divergence which may be visible in this sea of calm (apparent low volatility).

 

http://wolfstreet.com/2017/05/09/faang-stocks-gain-rest-of-sp500-lose/

 

This is short term but interesting nonetheless from the FAANG point of view.

 

https://www.ft.com/content/b3cb9a98-acb4-11e5-b955-1a1d298b6250

 

Similar longer term insights. Different currents under the surface. Reminds me too of the Nifty Fifty.

 

Difficult for a typical value investor to benchmark against the index. Isn’t it?

 

A lot has been said and written about the Nifty Fifty period. However, even if one bought at the top and even if one looked very awkward for a while, long term results (holding period of at least 20-30 years!) show that eventually, one would have done better than the index and quite well on an absolute basis. Moats matter. And then, if you were able to invest at the lows, one would have done as well as Mr. Buffett!

 

Of course history does not repeat itself.

 

Sorry, long post.

 

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CoBF is the reason we have no market crash in last 7 years!  8)

 

Sanjeev did it.

 

You're welcome!

 

Actually if Mobius is saying that, then do the frickin' opposite!  One of the highest profile and worst investment managers of all time!  Cheers!

 

He is a bad manager?

 

If I read that without knowing who said it I would've thought it is the stupidest comment I have heard in a while.

 

Now that is consistent given the brains of the speaker.

 

 

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