Thursday, August 18, 2011

Le Freak: "Volatility of Volatility" (VIX; VXX; XIV; TVIX)

VIX up 30.87% at 41.33. A threefer. First up, Surly Trader:

The standard deviation of equity returns is volatility.  Then what is the standard deviation of volatility?  The volatility of volatility.  One way of looking at this is to take the volatility of the VIX index.  If we specifically find the 10 day volatility of the VIX index, it shows us an interesting pattern:

I would describe these spikes in the red line as “mini-freakouts” and “total freakouts”....MORE

Highest "vol-of-vol" on record. Maybe the end is closer than our model had forecasted.
Next, from Bloomberg, getting caught naked in public:

Biggest VIX Swings Prompt Record Redemptions in Barclays ETN
Investors are using exchange-traded notes to speculate U.S. stock declines will slow, placing record bets that the benchmark gauge for volatility is poised to decrease after soaring the most in four years.

Outstanding stock in Barclays Plc (BARC)’s iPath S&P 500 VIX Short-Term Futures ETN (VXX), which rallies when volatility increases, plunged 48 percent last week for the biggest drop in its 30- month history. Credit Suisse Group AG (CSGN)’s VelocityShares Daily Inverse VIX Short Term ETN (XIV), a bet the gauge will fall, rose to a record 49.9 million shares, becoming the second-largest ETN tied to equity swings.
Volatility securities had record volume last week as traders bet on fluctuations in the VIX, which has moved in the opposite direction of the Standard & Poor’s 500 Index about 85 percent of the time in the last two years. Investors are wagering that the index, which measures the cost of options to protect S&P 500 shares, will decline from last week’s two-year high and return to its historical average.

“It’s a good bet,” Michael Corcelli, who has sold VXX call options, said in a telephone interview today. He is a managing member of Alexander Alternative Capital LLC, a Miami- based hedge fund that invests in equity-index options. “While I’m not wildly bullish on the economy, there’s been a tremendous amount of work done to cushion the landing from the macro standpoint on all these catastrophic risks.”...MORE
That was written two days ago. Ouch.
Finally, some old school market commentary from CHIC: