Intro To Using The Volatility of Volatility Index (VVIX)

Many people have some knowledge of the VIX, the volatility index for the S&P 500. It provides a measure of the expected volatility of the S&P 500 over the next 30 days. It is widely covered by financial media and cited extensively, especially during market sell offs when it is often referred to as the "fear gauge" since it tends to spike higher as the S&P 500 moves lower. (Those new to VIX can read all about it on Investopedia).

However, not many people know about VVIX, which is the volatility index for VIX. Using similar methodology, VVIX provides a measure of the expected dispersion of the VIX over the next 30 days. 

On Sept 20th I tweeted this chart about VVIX, which identified concerns about the market. Most people, including traders who spend a great deal of time in the volatility world, pay little or no attention to VVIX. However the gauge is actually quite useful to those who take the time to study its behavior and I'll discuss a couple of entry-level points in this post.

I like to refer to VVIX as the "panic gauge" since it tends to spike to its highs as the VIX moves higher. Generally VIX and VVIX move in the same direction, but when VVIX diverges from VIX it can provide useful information about market conditions. I'll provide some examples of what to look for using the following weekly charts which show the S&P 500 (top graph), VIX (middle graph), and VVIX (bottom graph) over the past 30 months.

First note how VIX and VVIX are generally moving the opposite direction of the S&P 500. This is by no means a law and it is quite possible that all could move the same direction (that explanation will have to be a topic for another day). However it is always important to note when the indices are not moving in their typical inverse correlation manner so that the behavior can be explored.

I've circled recent S&P 500 highs (Jan 2018, Sep 2018, Apr 2019, Jul 2019, and Sept 2019) in blue and lined up the corresponding VIX and VVIX values (yellow lines). I've also used green support lines to indicate times where SPX, VIX, and VVIX are diverging from their typical behavior.

Note that at most of these times where SPX was at or near all-time-highs, VIX and VVIX were near recent lows. But the subtle difference in Sept 2019 was a VVIX at 100 is roughly 25% higher than it should have been given S&P 500 highs and a VIX of only 15.

That 25% difference in VVIX (a reading of 100 versus an 80) is not trivial and has a specific and direct impact on the price of VIX calls by nearly doubling their price. So what we had the week of September 16th were large investors showing up to pay a 90% premium for portfolio hedging via VIX calls (this premium was demanded by sellers of the VIX calls), and thus the reason for concern.

VIX spiked 40% and the S&P 500 fell nearly 5% over the following 2 weeks after I posted the VVIX chart.

Another way, VVIX can be useful in detecting tradable market bottoms. When VVIX does not confirm with higher highs while VIX moves higher, it is often a sign that panic is subsiding and large buyers are stepping in (see dashed line at Dec 2018). As VIX spiked higher to 35, VVIX diverged from its October peak of 150 and only reached a December high of 112. This was a signal that investors had already sufficiently hedged their portfolios and VIX calls were no longer in demand, i.e., the "panic" was over although "fear" was still elevated.

There are many nuances around VVIX which require close inspection. You can look specifically at the implied volatility on VIX  options to gain additional insight whether VIX is skewed to the upside or downside. This can be done by looking at your broker's option data or by looking at the data on our new (Free) Skew Charts Page. As an example, the current VIX skew looks like this. showing a high premium for upside VIX calls.

I invite you to visit the page and look at the current VIX skew or skew for any other stock with options. As always don't hesitate to Contact Us with any questions.

Don't Fight The Fed?

Ex-Goldman Sachs CEO, Lloyd Blankfein, felt compelled to hop on Twitter yesterday to remind people of this investing platitude.

The assumption by most readers is that he is referring to being long or short the stock market. However, you would be deeply mistaken (and poor) if you followed this adage and applied it to stocks.

Take five minutes and review the Federal Reserve's actions on interest rates since 1970 to see for yourself how useless it is against stocks.

Or, just take a look at the following chart which tracks the Federal Funds Rate vs the S&P 500 and decide if it makes sense to be short stocks when the Fed is raising rates, and be long stocks when the Fed is lowering rates.

If you need any more help, you can take a look at the follow chart which shows the Fed lowering rates from 2007 - 2009 vs the VIX. 

Yes, that's right. If we apply this adage to equities you would buy stocks in Sept 2007 and keep on buying as the S&P gets cut in half and VIX spikes to 80 in late 2008. 

I don't recommend you do this.

Instead, apply this adage elsewhere. As you can see from the chart below, this rule really only applies to bonds.

When the Fed is on a tightening course (that is, they are raising rates) don't be long bonds. You need to be short bonds since their prices fall as yields rise.

When the Fed is lowering rates, don't be short bonds. You want to be long bonds since their prices rise as yields fall.

The Fed Funds rate will generally line up pretty well with the U.S. 10-year bond's yield. As of yesterday the Federal Reserve set its rates to a range of 1.75 - 2.00% vs a 10-year yield of 1.77%. At this point we probably have to assume rates at headed back to at least the 0 - 0.25% range as the Federal Reserve does everything in their power to delay the next recession.

As for what we can expect from equities there is less of a guarantee. Generally rate cuts happen just before or during a recession and equities move steeply lower. 

This provides further evidence for the setup of our Once-A-Decade Volatility Trade that we discussed last week. It is time to properly prepare your portfolio and be ready for this trade by applying smart tail-risk hedges. 

For more information don't hesitate to reach out to us via the Contact Page or visit our Subscribe Page. 

New Tool For Identifying Stocks Ready To Move Higher On A "Short Squeeze"

At Trading Volatility, our main goal is to identify major trends in the market so that people can make trades using volatility ETPs. We focus on swing trades, which means making around 20 trades per year, to achieve better performance than the overall market. We use short volatility (SVXY) and long volatility (VXX) strategies.

Now there is a new tool available for people who prefer to look at unique opportunities in individual stocks. 

Now, we have introduced a new tool for those who are interested in finding unique opportunities in individual stocks. It's called the "Gamma Exposure" (GEX) dashboard. This dashboard measures the Naive GEX of stocks by analyzing all the outstanding options contracts associated with them.

Naive GEX indicates the amount of shares that Market Makers need to buy or sell to maintain a neutral position in their trade book, based on certain assumptions. To understand the inner workings of Naive GEX, please refer to the explanation below.

 

The dashboard is updated throughout the day. I've been posting the dashboard results to twitter and to an automated email distribution list (which is currently free) for everyone to follow.

Be sure to check out all the new tools for individual stocks at http://stocks.tradingvolatility.net including Open Interest charts (Max Pain), Gamma Exposure Charts, Skew Charts, Dark Pool Interest charts, and Yearly Pivot Markers. Announcements on additional updates will be posted on this blog as these tools evolve.


Part 2:

Let's delve into the technical aspects to understand why "Gamma Exposure" (GEX) is significant:

Recent research has explored the concept of Gamma Exposure (GEX) related to the options market makers' positions.

In summary:

- Market makers play a crucial role by facilitating the buying and selling of options for traders.

- Market makers don't simply take the opposite side of investors' trades. Instead, they hedge their exposure to effectively manage their options portfolio and generate profits.

- These hedges need to be adjusted on a daily basis to maintain a neutral position as the prices of the underlying stocks fluctuate.

- In scenarios where "Gamma Exposure" gets off balance to the negative side, Market Makers must sell as prices drop and buy as prices rise, accentuating the movement in stocks. Oversold conditions result in a setup for a short squeeze, where both investors are buying oversold conditions AND Market Markets are re-hedging their positions by buying as the stock price rises. The result is a pop higher in the stock.

- Our leaderboard takes daily measurements for a fixed set of ~1,2000 stocks automatically.



What gets measured and displayed in the Dashboard:
- Our data looks at all options contracts with less than 94 days to expiration.
- "GEX(shares)" is calculated by summing gamma from calls at every strike (gamma * Open Interest * 100) and puts (gamma * Open Interest *-100).

- "GEX($) per 1% move"  is given as "Naïve GEX"   meaning that it is calculated under assumptions that Market Makers are buying calls and selling puts. 

- A stock's Call Skew influences the "Skew Adjusted GEX" (SA-GEX), which changes to reflect estimated MM exposure. A positive Call Skew is common in stocks which have outsized speculative call buying.  This is the approximation of how much stock MMs must buy/sell per 1% move in order to remain neutral in their positions.

- Positive Skew Adjusted GEX: Daily movement subdued as Market Makers re-hedge by buying as stock price falls, and adding to their short as stock price rises.

- Negative Skew Adjusted GEX: Daily movement accentuated as Market Makers re-hedge by buying as stock price rises, and adding to their short as stock price falls.

- "GEX/Volume" is the ratio for GEX (in shares) to the daily average trade volume (in shares). The more negative the GEX/Volume ratio the better the opportunity for a squeeze higher. This impact of this value is relative to the security's historical GEX levels. 

- The "Flip Point" is the level where gamma changes from positive to negative, or vice versa.
       - While above it, stock movement gets suppressed (Market Makers re-hedge by buying as stock goes lower, and selling as price moves higher).
      - When below, stock moves are accentuated (MMs re-hedge by buying as stock goes higher, and selling as prices moves lower).

The Once-A-Decade Volatility Trade

The once-a-decade moment that we as volatility traders look forward to is on the horizon and quickly approaching.

This is a significant change in the market. After all, the majority of our gains here at Trading Volatility have been made by betting on a decline in volatility by buying inverse volatility ETPs, SVXY and XIV, as can be seen in our past performance updates (2013, 2014, 2015, 2016, 2017, 2018 & 2019: see below). The easy money has been made by shorting volatility in this bull market.

The moment I'm referring to is the coming stock correction that has been set up by a a record 12-year bull market and driven volatility levels into the basement. After hitting a low of 8.56 in November 2017, the VIX has been putting in a higher base which now sits near 12.0.

At this point we need to shift gears and be ready for the big gains. I'm talking about the gains that come from being long VXX and often happen in a short period of time. As you can see in the charts below, October 2008 is the best example of what we're about to see (May 2010, Aug 2011, Aug 2015, Feb 2018, Oct 2018, and Dec 2018 are examples of "more ordinary" months with VXX trades). Most people in this market are greedy in buying stocks and now is the time to be looking at taking the other side of the trade and buying volatility. 

Many people have disregarded the warnings about the yield curve inverting as a signal for a recession. However, the reality is that the yield curve has inverted (where 3-month bonds yields are higher than 10-year bond yields) in many countries across nearly every continent in a sign of global recession.  

Dozens of Central Banks are doing their best to fight a recession and spur growth by cutting interest rates. The continuation of falling bond yields around the world, often into negative interest rate territory, signals a world of declining growth. 

Corporate Insiders are selling their stock at a pace not seen since 2007 as doubts about the sustainability of these valuations grow. 

THIS. IS. HAPPENING.

There's just one little problem though.

You can't just sell your stocks to move to cash, buy inverse ETFs or just buy VXX yet. 

Why? Because the Federal Reserve still has the confidence of investors. There are rates to cut and Quantitative Easing to promise and/or deliver, which could drive stocks higher. 

Or not. Maybe market participants get collectively concerned if the Fed sees the situation as dire enough to make big rate cuts and push liquidity into the system as they did in the 2008-2009 financial emergency?  Perhaps we come to realize that the problem is rates are already low due to the inability to raise them from the emergency levels of near 0% set 10 years ago.

Since the timing for a stock correction is difficult to predict, what you can do now is diversify. Carve out a portion of your portfolio and dedicate it to protecting your gains through a form of "tail risk" insurance using volatility. 

"Tail Risk" as most people think of it is generally a losing proposition that can be as simple as buying VXX, UVXY, or TVIX or as involved as buying rolling puts or selling calls on the S&P 500. This is quite simply, a terrible idea. It works maybe once every 10 years, but only to the extent that it would have been better to not do it all. There is a built in Negative Bias against volatility ETFs due to how they are designed -- it is precisely why VXX quickly lost 99% of its value 5 years after the time it was first launched in 2009.

Our form of Tail Risk protection is different because it is dynamically allocated:

• When there is no immediate danger we are actually short volatility and collecting premiums from all those who are continuously buying protection. It generates gains.
• Our indicators inform us each day on whether the likelihood of a spike in volatility is significant, and prompts us to move to cash or long volatility when necessary. 
• By doing this we don't spend money on portfolio hedging when it is unlikely to make money. We only hedge when necessary.  

We've been providing services for applying dynamic volatility positions using strict rule-based decision making to investors for over six years now with an average annual gain of  over 40% per year. 

Our offerings have grown and are now used by people investing small $10,000 accounts and Financial Advisory managing $100,000,000+ in assets. 

Your opportunity is to join us now because once the next volatility spike it's too late. Our gains will be made and those without hedges in place will have lost. It's that simple.

We make it as easy as we can for people to follow our strategies by sending automated signals change alerts, preliminary alerts, and daily summaries.

Check out what we offer to subscribers by viewing our Subscribe page. Considering the information you get from our service, our subscription prices are actually ridiculously cheap. And for those who are afraid of commitment, we offer day passes with full access to our site for as little as $4/day.

To learn more visit our Strategy page. You can also view all the trades that our strategies have generated over the years by looking at the spreadsheets on the Results page or links to Collective2.

Free E-book:

If you'd like to learn more about our how volatility ETFs work you can read our free e-book, Fundamental Concepts and Strategies for Trading Volatility ETPs, which is available for free download. If you are curious about how our Bias forecasts work and why they have been successful in identifying long-term trends under a variety of market conditions, be sure to give this a read. It explains the basic concepts of VIX and VIX futures as well as the main price drivers of various volatility ETPs, including the popular funds VXX, VIXY, SVXY, UVXY, ZIV, and VXZ. I believe that the concepts outlined in the e-book are critical to understand if you're going to trade these products.

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Hypothetical and Simulated Performance DisclaimerThe results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Hypothetical and backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET

Day Pass Memberships Now Available for $5

We understand that there are investors who don't have the need for a continuous monthly subscription. For some, the timing for buying and selling volatility ETFs is limited to particular moments where they see an opportunity arise and they are ready to make a trade. Other people just want to access to our set of volatility metrics on occasion when they perceive the market to be at a potential turning point.

I am pleased to announce that you can now purchase a Day Pass to Trading Volatility+ to gain full access to our members-only site at http://members.tradingvolatility.net/ on a non-recurring basis..

Day Passes will provide you with access to:
- The members' Daily Forecast page --  See the current day's indicators as well as the next day's indicators (after 4:33pm ET).
- The members' Intraday Indicators page -- View the indicator values as they update live during regular trading hours.
- Automated change alerts -- Receive an email if there is a buy/sell alert.

Day passes are available at our Subscribe page, with the option to purchase access for 1, 2, 3, 4, or 5 consecutive days (for which the market is open). Each Day Pass is valid from the time it is activated until 11:59pm ET.

Day Passes can be purchased for as low as $4/day**.

For those who may not be familiar with our services, we have offered subscribers a set of buy/sell indicators for volatility ETFs since 2013. Our superior returns were frequently hard to believe so we started having our performance tracked by a third party in 2016.

For more on how our indicators work and can be used, please see our Strategy page. Should you have any questions feel free to reach out to us via our Contact page.


**Pricing for day passes and monthly subscriptions is subject to change.

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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs.  Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY,  VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Market Crash Protection

The VXX ETF often gets a bad rap. Throughout this bull market of the past ten years it has seemingly only declined.

But VXX is actually an incredibly useful security to own when equities decline. Consider:

- In February 2018, VXX gained 44% (measured month start to end)
- In Octiober 2018, VXX gained 40%  (measured month start to end)
- In December 2018, VXX gained 36% (measured month start to end)

At this point you have to consider whether a decade-long trend is changing. Take a look at the price of VXX over the past two years:

Obviously there is significant movement in VXX and the key to making money off it is to have the ability to time entries and exits well. Enter our VXX Bias indicator...

Our VXX Bias indicator was first made publicly available in 2013 and has been tracked by a third party (Collective2) since 2016.

A snapshot of our results over that time (below) shows a gain of 348%, thanks largely to huge gains in VXX during the months where equities declined heavily. Specifically:

• February 2018 (+36%), 
• October 2018 (+28%), 
• December 2018 (+21%).

But our strategy doesn't just excel when the equity market does poorly. That's because our VXX Bias signals when to buy VXX as well as when to short VXX. It successfully identifies times when the market is strong and it is appropriate to short VXX (or buy the inverse ETF, ticker SVXY).

Equally significant gains are made by shorting volatility. Specifically:

• March 2016 (+25%), 
• May 2016, (+20%), 
• June 2016 (+34%), 
• January 2017 (+30%)

I wouldn't fault you for being skeptical of these results since they are outside the norm of what people are told is possible. Which is exactly the reason why I wanted to have the results tracked by a third party over three years ago. People like see actual trades and results. Our customers now include DIYers, Financial Advisors, and hedge funds.

If you look closely at the monthly returns you'll see that we also have months where the strategy does poorly. It should come as no surprise to you that trading is difficult and there is no strategy that works in all market conditions. We typically find ourselves struggling through choppy markets and sharp reversals. We do take losses, for this is not a magic money machine. Fortunately these episodes are relatively brief and our indicator is tuned to maximize profits over the long term.

It has been my honor to have helped thousands of subscribers over the past 6 years. From my initial post in Dec 2012 my mission has been to help investors navigate the use of volatility ETPs and enhance their portfolio returns. We look forward to helping others who can benefit from our expertise.

We make it as easy as we can for people to follow our strategies by sending automated signals change alerts, preliminary alerts, and daily summaries.

Check out what we offer to subscribers by viewing our Subscribe page. Considering the information you get from our service, our subscription prices are actually ridiculously cheap.

To learn more visit our Strategy page. You can also view all the trades that our strategies have generated over the years by looking at the spreadsheets on the Results page or on Collective2.

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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs.  Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY,  VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Professional Volatility Strategies

Six years ago on this blog I wrote "XIV: When A "Sure Thing" Goes Bad, highlighting that the key drivers of Volatility ETPs are 1) the change in price of the relevant VIX futures contracts and 2) the term structure. While XIV no longer exists after last year's blow up, the message is still relevant to XIV's reduced leverage replacement, SVXY. In fact, an alternate title for this post could be "When a "Sure Thing" Goes Bad -- SVXY Edition"

Similar to XIV, SVXY is a fund that can be used as a play when an investor believes that volatility will decline. Although SVXY has only half the leverage that XIV had (-0.5x vs -1x), it can still produce strong gains and losses.

Below is a chart of the price of SVXY calculated as if it had the -0.5x leverage since 2004 (prices prior to the fund's official leverage reduction have been constructed by calculating the index value using 1st and 2nd month VIX futures data).

I've highlighted most of the larger price drops to help illustrate that SVXY is not a buy-and-hold security, even in its reduced leverage form. When the market structure changed in 2007 & 2008, SVXY still lost 70% of its value due to strong backwardation in VIX Futures.

As long-time readers know, the term structure of VIX futures is what drives various VIX funds, including SVXY, VXXB, UVXY, TVIX, VIXY, VIIX, and ZIV.

SVXY performs best in years where there is a strong and persistent contango, the condition where VIX is lower than VIX futures. The best way to measure the degree of contango for these products is to look at the weighted value of first and second month VIX futures as compared to spot VIX. Below is a graph of the weighted VIX futures values to spot VIX over the past 11 years.

The trendline here provides a way to filter out the daily noise and allows us to verify that the years in which SVXY performed the best experienced the largest and most persistent contango. On the flip side, the time frames that SVXY performed badly experienced backwardation and/or a small contango.

The fact that the term structure is such a strong driver of VIX ETPs is why professionals track this data closely. We track VIX Futures data and associated metrics shown on our website and use information from the term structure, price momentum, historical volatility, and the volatility of the VIX as inputs to our automated algorithms for buying and selling. The algorithm values are then used to trigger automated buying and selling of VIX ETPs and are emailed to subscribers. We track this data intraday as well and post it to both our Intraday Indicators page as well as our Daily Forecast page.

Our results (as tracked by a third party) substantially beat the S&P 500 over the long term. A screenshot of the VXX Bias and VRP+VXX Bias since we began tracking them on Collective2 are shown below:


VXX Bias:

VRP+VXX Bias ("Trading Volatility 1"):

Over the long term our approach can do well in both bull and bear markets, as seen in by our hypothetical backtest summary.

Clearly not all years are huge winners but the data shows that the use of the term structure data tends to be extremely valuable. If you are interested in checking out what we offer to subscribers you can view our Subscribe page.

One more note: We made a change to our VRP indicator in January 2019 so that it can now be used as a standalone strategy. As such, I am now having Collective2 track that as well. It can be found under Enhanced VRP.


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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs.  Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY,  VXXB, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Fidelity Lifts Restrictions On SVXY

After prohibiting SVXY as part of fallout from the XIV blow up last year, Fidelity is now allowing people to purchase inverse volatility funds provided they complete a one-time Investment Disclosure.

After attempting to place the order, you will need to read their disclosure and check a box to indicate that you agree. 

After that you can trade SVXY there as before in either retirement or cash accounts.

Other brokers have lifted restrictions as well so it may be worth checking yours as well if you previously faced issues with inverse volatility ETNs.

Barclays To Replace VXX With VXXB

As planned in the original VXX prospectus from its launch in 2009, VXX will be delisted as a security next week on Jan 30, 2019. Barclays has issued the replacement, VXXB, which is currently trading and is essentially identical to VXX.

To help with the transition, Barclays has published a VXX/VXXB comparison sheet as well as guidance around the transition process.

We have been keeping an eye on the outstanding number of ETNs for both VXX and VXXB over the past month. Very little progress has been made in the transition and VXX continues to hold about 3x the assets of VXXB, with VXX holding $921M as of yesterday.

If VXX's market cap does not come down substantially by Jan 28 there exists a potential for a temporary volatility crash on Jan 29 through Jan 30 as Barclays will need to pay cash out to holders on VXX on Jan 30.

However, as outlined in the guidance document, there exists an option for larger investors to take no action and simultaneously sell positions in VXX and buying equivalents in VXXB and may happen in the last days of VXX trading. This would be the smoothest transition route but it is not clear the percentage of holders will be utilizing this option.