Aaahh!!! This volatility is killing me

[naeron]

Boom ... Swish ... Vrooom .... Aaaaayeeeeeee...Slideeeeeeeee......Booommm
If each tick in the stock market index could be associated with some kind of sound the music will be really intestesting to hear. As a spectator with the morining coffee, happy lunch and evening coffee seeing the equity markets I am enjoying the music !!!!

Yesterday the markets were down below the prev day clsoing price for 1/3rd of the day and close.

Today most of the day markets were below previous day close. It dropped till 12600 climbed back again then dropped back to 12600 and then in the last managed to climb back to 12900. The Dow Jones industrials, down more than 340 points in afternoon trading, ended the day with a loss of just 13.

Countrywide did most of the damage. But interesting thing to be noted is that investors didn even cared about the 17 billion dollars injected into the markets!!!!!

now the investors think that FED should lower the interest rate. As i have indicated in one of my previous posts that 2001 IT bubble was replaced by the Housing bubble. If the Fed lower the rates be ready for a next bubble.

I can't understand why tinker with the markets with artificial stimulation. Why!!! Let the markets decide the fate. After all they are considered to be efficient.

a pinch of salt on raw wounds
"The Federal Reserve Bank of Philadelphia said its general economic index dropped to zero in August from 9.2 in July. This meant that the regional economy is not expanding, or contracting; the news only further soured the mood on the Street."

I am waiting for the Rating Agencies to come out with another set of downgrades in the corporate world and of course a new EXCUSE. I like these funny monsters. Anyways ...

Volatility is the King ruling its kingdom with a hard hand. Lets see what happens tomorrow.

Eddie whats ur expectation of the shift in equity indexes.


Flying to Quality
Aeron

 

[woody]

I don't think anyone posted this before. But did you know that they removed the "cannot short on a down tick" rule on July 7? Many are partially blaming this for the volatility. Others say it has no effect on day-to-day volatility.

Here's an article saying it's not to blame.

Uptick Rule Not to Blame for Market Volatility - Word on the Street

They did a study before they changed the rule:

Though there was an uptick in short selling, daily volatility didn't change and stock returns weren't affected. So the fear that large cap stocks could be negatively affected by short sellers to greatly exacerbate any downside momentum without the rule in place has been proven to be untrue. What has yet to be dismissed, however, are the potential consequences banishing the rule will have on low float stocks and smaller cap names that are often targets of manipulation - something that wasn't looked at during the SEC's pilot program. That is a debate worth having.

 

[Christian]

Naeron - check out VIX options. You could be making a killing. Anyone have much experience with these?

 

[naeron]

i am a big admirer of VIX. I am planning to start working on VIX again and see if we can see some interesting results...

 

[maciek]

i am a big admirer of VIX. I am planning to start working on VIX again and see if we can see some interesting results...

VIX Index is I think a good way to start trading volatility. VIX is based on the weighted average of implied volatilities of S&P 500 options accross a wide range of strikes and different maturities. There is a pretty complex formula behind the VIX. The idea is that VIX should reflect the overall future stock market volatility. Buying VIX is buying the future (sometimes called prospective) equity volatility, selling VIX is selling the future equity volatility. So in theory Trading VIX is similar to trading Variance swaps. The only differences are that each variance swap has an expiry date (so besides Vega it also has Theta) and is OTC traded olnly, while VIX is pure vega and of coarse it is listed.

You can actualy trade volatility using plain vanila european options on indices. However if you buy/sell a portfolio of options there is a list of other risks involved which you should remove (in case you want to trade pure vol). The risks are:

• underlying - you eliminate the risk by buing/selling futures on the underlying
• interest rate- small risk- but as Bernake showed this week--> still exists. Most volatility traders keep cash that earns LIBOR-Xbps to hedge it.
• dividend on the underlying--> for indices it's almost flat- ignore it (there is nothing to do with this tiny risk anyway)
• vol skew, smile or smirk- however you want to call it. Trading the skew is actually very interesting. To make the strategy look like VIX your portfolio should have options accross all strikes

When you trade VIX all you have to do is to look at the Macro. US and foreign. Have a solid understanding of macro economy. Trading options allows much more flexibility- most of all you can go beyound S&P and trade skew. You can trade S&P implied vol against NASDAQ implied vol, you can trade NASDAQ Skew agains MIDCAP Skew, you can open your strategy to some underlying exposure. It's just more complex. And then there is the whole world of american options on sigle stocks. So I would say trading VIX can be fun and doesn't require any sophisticated tools, while option trading does. And actualy this is exactly the only reason why VIX was invented. Make peolple like us (and companies) pay CBOE the commission/spread. All you have to do to trade VIX is reading newspapers and internet

 

[naeron]

Currently Vix is naer 32.. last 3 year high!!! ... If you guys remember May 2005 when the auto giants were in trouble with the Airliners I saw viz jumped to higher teens. but today its almost double. We can just imagine the panic in the markets.

I have always used vix as a PaincMeter for the markets and have not made done much study on its trading. Thouhg I agree with the VIX options.

 

[Eddie]

how do they back out the implied Vol for the VIX? Blackscholes? Anyone knows?

Yeah, I used BS to back out implied vols for some traded options, it's standing well above 30%, so now i know, when it was trading @ around 12% 2 months ago, it was so cheap, darn, another gone opportunity, lol. Guess it's ALMOST good time to sell option combos, huh?

 

[naeron]

They use a seperate method to do the VIX calc. There is a white paper on the website of CBOE if you are interested.

well lets have a view on the markets for the next week.

 

[pardasani]

To add: If one sees the implied vols across index options it peaked during the late 90's.... That was the period when variance swaps here first getting introduced....

(A great paper to learn about variance swaps is "More than you ever Wanted to Know about Vol swaps" -- a copy can be found here -- http://www.ederman.com/new/docs/gs-volatility_swaps.pdf)

The developement of variance swaps and subsequently options on index vol is often cited as one of the reasons why the implied vols may not ever reach the levels it did in the late 90's

And actualy this is exactly the only reason why VIX was invented. Make peolple like us (and companies) pay CBOE the commission/spread. All you have to do to trade VIX is reading newspapers and internet