Navigating The Illusion of SafetyFalse security is dangerous. Wall Street's fear gauge is muted. Is the VIX cruising for a bruising?
As mentioned in our previous papers, current times are unprecedented, from geo-politics tensions, restrictive monetary policies, fractured corporate earnings, to sticky inflation. the VIX should be anything but sanguine. Any mild escalation could send equities tanking or soaring at the sight of relief.
When the road ahead is that uncertain, straddle saves the day. This case study argues for a long straddle in CME’s Micro E-Mini S&P 500 Options to gain from price action and from rising volatility.
Low VIX plus narrow spread between VIX & realised volatility reduces straddle cost. Large price action plus volatility expansion will deliver a compelling 1.25x reward to risk ratio.
DEMYSTIFYING VIX
Volatility Index ("VIX") is also known as the Fear Index. Higher the fear, greater the VIX. Typically, VIX above 30 points to elevated uncertainty. VIX below 20 describes stable markets.
VIX is market’s expectations of S&P 500 Index (SPX) volatility over the next 30 days. It is computed by using the weighted prices of SPX options across a range of strikes expiring within the next 23 to 37 days. It is an annualised quantifiable measure of market uncertainty.
Volatility is inversely proportional to the square root of time. A year comprises of 252 trading days. Dividing VIX by the square root of 252 (~16) provides daily expected moves. Current VIX at 20.7% implies ~1.3% daily move.
IS THE VIX BROKEN?
Several threats loom yet VIX remains subdued. Is it broken?
In a recent FT Alpha Ville column, journalist Robin Wigglesworth postulated that the VIX may not be broken. Instead, it has been diluted by product innovation resulting in risk pricing windows shifting away from VIX’s target expiry range.
Growth in short-dated options (including zero days-to-expiry or 0DTE options) has shrunk the demand for those expiring in 23 to 37 DTE which VIX is based on. Contracting demand while keeping supply same silences the VIX.
THE VIX AND REALISED VOLATILITY
In theory, realised & implied volatility (VIX) should be at similar levels and move in tandem. However, in practice where greed & fear trump rationality, VIX overshoots realised volatility.
Over the last ten years, VIX on average is 307 bps higher than 30-day rolling realised volatility. The spread between the two at 40 bps is narrow as of this writing, making options buying relatively cheap.
MACROFORCES BUT MICRO IMPACT ON VIX AND OUTLOOK FOR 2023
How does VIX respond to rising rates, contracting Fed Balance Sheet, and geo-political shocks?
VIX should be sensitive to rate changes & Fed Balance Sheet shifts given tight interdependencies. However, it turns out that it is not as sensitive to these macro metrics.
The chart below shows that VIX spiked nearly 400% in March 2020 when Fed hammered rates to zero while massively expanding its balance sheet to fend off pandemic-linked economic collapse. A similar trend was observed in 2008.
Notably, VIX did not spike when Fed started to hike rates in 2022. Steady shifts have much lesser impact on it when compared to radical shifts that shocks the system. Chart below highlights key events that sent VIX soaring.
Large VIX moves are driven by shocks. Periods of high volatility as observed last year are caused by market uncertainty over a longer period.
A radical shift in monetary policy – like the one in 2018 – will send VIX higher. Back then, it jumped on fears of Fed hiking rates. Now, a change in the rate regime could push up the index.
A tailwind to VIX is the on-going conflict between Russia and Ukraine. Any escalation could bump it up to levels unseen in the recent past.
TECHNICALS POINT TO A REBOUND IN VIX
Mean-reversion is common in financial markets. It is the tendency of asset prices to revert to its longer-term average.
Since last November, VIX has been trading below its 200-day moving average (200 DMA). It could rise beyond the 200 DMA as it reverts to the mean.
EXPLOITING VIX MEAN-REVERSION WITH CME MICRO E-MINI S&P 500 OPTIONS
Bullish VIX? Long VIX futures? Perhaps not. Why?
Given rising growth in shorter dated options, VIX remains bottled-up. Jumps in extremely shorter-term volatilities fail to show up in it.
Therefore, instead of VIX futures, this case study features a long straddle using CME’s Micro E-Mini S&P 500 Options to deliver a compelling and comprehensive return profile gaining from both volatility expansion and price action.
The long straddle is designed to deliver profits when the index makes a sharp move either up or down while also gaining from volatility expansion.
Straddles are usually considered expensive as it requires two upfront premiums. However, with VIX below its 200 DMA and near the 30-day-rolling historical volatility, these premiums are relatively cheaper.
Leg 1: Long 4150 Call on MESM3 (expiring in June 23); premium of 171.25 index points
Leg 2: Long 4150 Put on MESM3 (expiring in June 23); premium of 185.50 index points
Premium: $1,800 ((171.25 + 185.50) * $5 = 356.75 * 5 = 1,783.75; ~$1,800)
*Note: 1 point move in MESM3 = $5
Break-even points: S&P 500 futures at either 3790 or 4510
Target: S&P 500 futures at either 4600 or 3700
Profit at Target: $450
Stop-loss: At 20% of the drop in options premium
Loss at Stop-loss: $360
A long straddle generates returns when (a) underlying futures trade past break-even points, and (b) volatility expands. As expiry inches closer, the straddle loses value which requires close monitoring.
CME offers a wide range of options on deeply liquid S&P 500 futures. To meet growing demand for shorter-dated expiries, CME is expanding the listing cycle of Micro E-mini Options on Micro E-mini NASDAQ and Micro E-mini S&P with expiries available throughout the week, on every business day.
These ultra-short, or same-day expiries can be used to reduce straddle cost further enriching returns from this strategy.
Also, investors can fine tune their hedging & trading with shorter expiries and smaller notional values. At 1/10th the size of the E-Mini contracts, Micro E-mini Options require less capital to enter the market with more approachable margins for short positions.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
REFERENCES
www.cmegroup.com
www.cmegroup.com
Volatilitytrade
Time To Buy Some New Shorts. VIX To Bounce Upward.VIX trading in a bullish pennant pattern. We have seen two really nice bullish bounces off the support trend line in this pennant pattern. I expect this next support line touch to be nothing different (assuming VIX touches support). VIX targets: 25.41 resistance first, then follow-through to 28.93, eventually reaching the top of the upper bound of the pennant pattern around the 33 area. With that in mind, I am beginning to load up on short positions and closing out some of my higher beta long positions.
This is not trading advice. Good Luck!
XAUUSDWith a 15% volatility move on XAUUSD and a strong demand for the dollar. This is my projected move for XAUUSD.
The idea is based on fundamentals on the dollar and how it could possibly affect Gold price movement then volatility and Fibonacci retracements on the weekly timeframe to forecast price targets.
COPPER Copper has rejected an important level also violated EMA's to show a clear correction. Natural gas following the same path lagging but to follow the similar path I think, Option Volatility in commodity currencies such as AUD,NZD have been of interest the past two weeks.
Selling commodities and Commodity currencies, Buying the Dollar and waiting for and an entry signal to get back in to Equities, My ideal trades till September.
Silver is leading Copper.
KZM A TDEX 6/27/2022 B4.206/27/2022
Balance : 10000 baht
buy 9.40
100 position
cost 940 Baht
CF: 0
Equity : 9060 Baht
Order holding Zone : 9.40
Note : Now we confront on low volatile bear market ( Sideway down ),I have to decrease grid gap to generate cashflow easier. ( From 0.40 to 0.20 )
*In this Thesis I use for paper trading not a real account pls use for education only.
Volatility in Gold and how to play the Vol Premium / DiscountAs you probably know, Implied Volatility in assets like Gold or Silver has the tendency to rise when the price of the commodity rises sharply, unlike equities where IV rises when equity's price declines.
This means in case of Gold (GLD), when V.R.P. rises, and we have a PREMIUM in Implied Volatility, participants Iin the market think price will either continue or decline significantly.
We usually have complacency when V.R.P. is negative and participant in the market feel "nothing will happen" in the near future. In this case, IF WE HAVE A TRENDING MARKET, as we saw at the beginning of April, chances are Gold will rise.
As the market looks now, I expect GLD will continue its bullish trend, and when we'll have again a big PREMIUM in Implied Volatility, to see a sharp (technical) correction, but with no threat to the trend.
p.s. for more details about the Prmium/ Discount in Implied Volatility pease check my indicator o this topic:
VIX-S&P 500 FEAR INDEX-LESS FEAR, MARKETS CORRECTINGThe VIX measures the fear in the S&P 500. Even if you only trade or invest in crypto or stocks watching the VIX is critical in learning how to measure the sentiment of the general market regardless of what you are trading or investing. I use the VIX for even crypto trading and suits me well. It does the complete opposite of the what other stocks or cryptos do. Master understanding this chart and you will be better prepared at making successful trading entries and exits in the market. So despite the Russian Ukranian invasion the markets are correcting slowly and beginning to show promise once again. For details watch this video and give me a thumbs up and please subscribe to show support for my channel.
Thank You
Astreaus otherwise know as Cryptobuzzanalyst
Disclaimer
I’m not a certified financial planner/advisor, a certified financial analyst, an economist, a CPA, an accountant, or a lawyer. I’m not a finance professional through formal education. The contents on this TA,(Technical Analysis) are for informational and educational purposes only and do not constitute financial, investment, trading, accounting, or legal advice. I can’t promise that the information shared on my posts is appropriate for you or anyone else. By using or reading this technical analysis or site, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this analysis, or post.
Trading Price Action in Volatile TimesHey Guys!
The world markets are on a wild ride at the moment. With urgent news being released by the day. Traders around the world are trying to guess the next fundamental news to be released and further guess how the markets will react.
The world markets become a huge guessing game arena.... Now, that's fine if that's your cup of tea. The adrenaline rush or even the pure intellectual rush one gets from contemplation(speculation) is exceedingly addictive.
For me however, what happens in the world really is not of consequence to how I trade. Price action trading reads price and simply acts on its messages on a day to day basis. Whether the markets are in the wild west, or if it's peaceful like a calm lake. It's all the same.
Some say that the world of business is all about people. If you understand people, you'll do fine. In trading, its all about price. If you understand how to read price , you'll do fine.
Trading Price Action takes away the stress that comes from a turbulent and constantly changing world by exponentially diminishing the "guessing" aspect of trading. To me, that's a huge merit in terms of my quality of life.
Just a thought! Have a great day guys!
Ken
$XLE bounce with cheap OTM callsEnergy was the stand out sector today up 3.74% on good volume.. as we mentioned a few days ago it looks to have confirmed a double bottom and being the cheapest sector on a fwd p/e and price/book basis it’s a contrarian and catch up play some major players are getting into.. more to come here.. some upside OTM calls IVs are cheaper than ATM and HV..
Boeing stock analysis. $BA box inception Today I am going to show you implementation of my boxes trading strategy on NYSE:BA stock price movement.
Boeing stock price has been extremely volatile since the COVID crash.
Let's take a look at it's last 6 month price movement.
1. Price bounced from long-term support and found a new demand at 205.
2. Price reached 278 and got rejected from a strong resistance. Thus, big box was formed at respective supply and demand levels.
3. Price dropped and could not get past 258 level during the span of the next 4 months. At the same time demand was found at 220 level, forming anoter box.
4. Breakout of the box downward led to return to the original 205 demand level in the bigger box, which happened to be at the long-term support line as well. That's a strong level.
5. Price soared all the way to 240 and rejected to form another smaller box.
September action will be crucial for determining further stock direction.
Watch for trend line breakouts as they are coming closer.
If the long-term support does not hold - we move lower to the box demand. If that does not hold either, we move lower to another long-term trend line.
If the price breaks through the smaller box supply and resistance trend line, we move higher to the big box supply of 278.
-----------------------------------------------------------------------------------------------------------------
Disclaimer!!!
This is not financial advise.
Bitcoin Very Risky One Shot Trade with Pennies : ShortWe are currently under high volatility. I'll write quickly.
Target : 8161 .4
Stop-Loss : 8737.8
Risk/Reward Ratio : 1/1.99
Risk : Very High
Position Size : Very Small : Under %1
In such cases, positions such as small as pennies are exposed to excessively high leverages.
Leverages can adjustable with Stop-Loss levels equals to Liqudation Point.
"That's just one shot trade."
VIX Double Vertical Spreads for a move higher in VolatilityAfter reaching a low of 11.10 today, the VIX closed at 11.57.
Having been in a low Vol Environment for a while, I believe that this bounce off of the S2 Pivot Point intraday today, can be a potential low for the index.
I have chosen a synthetic long position to play this out, over the next 60 days.
More specifically, I sold the Nov 2018 14/12 put credit spread for $1 per contract and bought the same expiration 15/17 call debit spread for $0.50 per contract, in one order. This gives me a 2R (2 times the risk I assume in potential profit), since I can lose $0.50 for every $1 I can make, as my max profit.
I will close my position when any one of the following conditions come true:
1)My position gets to $0.90 per contract
2)The VIX reaches 20 (as this is a Fib level that will act as a resistance point, or
3)The spread gets cut in half, or $0.25 per contract.
Happy Trading
Lindosskier
Bitcoin - This Chart is Giving the Bears a Reason to Droll!Bitcoin gained +35% in the past 9 days, its best performance since early this February.
At this point, most technical indicators have breached into overbought territories especially in the higher time-frames. Bitcoin may be just about out of rocket fuel for now.
As a trader, I'm always looking out for conditions that can cause a change of trend ahead of time.
To most people, right now the seas seem calm, the skies look clear, and it might even appear as if we should blast straight through 10k or beyond in the coming days.
I do not want bitcoin to go down, however, I can feel a storm brewing and think BTC will see some rough seas ahead.
Check out this current setup in the plot of volatility versus Bollinger bands...
Volatility has fallen outside the bottom band, indicating a very extreme condition. This likely means investors have become complacent and comfortable in their positions, perhaps a little bit too comfortable.
This will likely trigger a broad market sell signal once the indicator comes back within its bands.
Always adapt, be realistic with yourself, control your emotions, and prepare for condition changes ahead of time. It looks like there could be some choppy waters ahead so please be careful!
**Any content of this published idea should not be relied upon as advice or construed as providing recommendations of any kind. It is your responsibility to confirm and decide which trades to make.
Trade only with risk capital; that is, trade with money that, if lost, will not adversely impact your lifestyle and your ability to meet your financial obligations.
Past results are no indication of future performance.
In no event should the content of this correspondence be construed as an express or implied promise or guarantee.
Good luck :)
HODL is a cultic philosophy, rather than strategy!!!
Let's face it: whales, orcas, dolphins, sharks... etc are much more financially educated! period.
Those crypto-economy engineers are playing with the volatility rules of math, while 90% of the TV readers have no clue what does volatility means!
The crypto economy comes from two words: cryptography (APPLIED MATH) and economics (MONEY).
People tend to forget the “economic” part of this equation.
In the world of math&money there is no place for philosophy and classic TA.
This is a data-driven world.
Crypto Data never sleep, data streaming 24/7, data creates a metadata, meta creates the logic, logic establishing intelligence, intelligence & knowledge enabling strategies!
ibb.co
Shown above are annualised 'Sortino Ratios' based on the previous 90 days of log returns calculated from volume weighted average daily prices. See this paper for a more detailed description of the Sortino ratio .
In fact, 2017 will never come back. Do your math! Use the right data in your analysis, crypto related indicators, proper metrics, crypto indices and the computations adopted for the crypto economic reality of 2018!!!
ibb.co
Shown above are daily BTC log returns calculated from volume-weighted average prices. A time-series model is fit to the set of returns and the projection along with 95% confidence interval (orange) is shown. The projection can be thought of as a stochastic process where 95% of the trajectories lie within the orange bars. The time-series model is attempting to fit an autoregressive or moving average model. In other words, the model assumes that past returns are indicative of future returns.
Squeezing Some Alpha Out of VolatilityI don't care about the direction of the general market because the market does not dictate when and where I find sheer outrageous value. However, I do believe the diligent investor can leverage volatility in crazy market swings like these in order to generate some alpha for their portfolio.
My latest blog post discusses this volatility trade in short, as well as my general thoughts on market directions and their impact on investment decisions. You can check it out here: rockvuecapital.wordpress.com
Always trying to improve,
Brandon