Facebook Options

Facebook Options listed yesterday on brisk trading and solid volume. There was a lot of interest in 44 and 45 strike in near expirations, but I think this is not from informed trading. Implied volatility remained relatively steady at about 63% level most of the day.

The term structure was downward sloping, as expected (closing vols)
JUN12 - 66%
JUL12 - 61%
AUG12 - 64%
SEP12 - 61%
DEC12 - 58%
JAN13 - 57%
MAR13 - 56%

VXN Futures Listed, CBOE Product Expands To 6

This week CBOE (re-)listed VXN volatility futures bringing the total number of distinct volatility futures to 6. VIX remains the leader in volume, but other products are trading as well: GVZ which I thought was pretty much dead traded 6 contracts, VXEM future - the second most popular CBOE product traded 2955 contracts, VXEW 156 contracts, OVX 416 contracts, and VXN debuted with 39 contracts. 

Volatility ETNs: Curse or Cure?

Carol Alexander and Dimitris Korovilas, both from ICMA Centre published a series of excellent research papers on VIX ETNs: Diversification of Equity with VIX Futures: Personal Views and Skewness Preference, and  Understanding ETNs on VIX Futures. Their latest Volatility Exchange-Traded Notes: Curse or Cure? continues on the topic.

This paper investigates the trading, hedging and performance characteristics of VIX futures exchange-traded notes (ETNs) and discusses their pros and cons from the perspectives of the regulator, the issuer, and the non-speculative investor. Is this direct trading of volatility in very high volumes a major new source of issuer risk and systemic risk? Or – as advertised by the issuers – do these notes provide a unique source of diversification that should be welcomed by investors and regulators alike? To answer these questions we replicate the ETNs daily indicative values from March 2004 – March 2012, showing that the amplitude and frequency of volatility cycles have indeed increased markedly since the introduction of VIX futures ETNs. On the other hand, we explain how long-term investors can build simple ETN portfolios with uniquely attractive performance and diversification characteristics – provided they hold inverse rather than direct short-term tracker ETNs. Then we focus on the ETN issuers’ hedging activities, where the terms and conditions of early redemption provide transparent front-running opportunities for speculators which in turn increases both the hedging error and the volatility of VIX futures. Furthermore the one-day notice period for early redemption presents a moral hazard problem for the issuer. 

My notes: In the section 4.2 Correlation Analysis and its Implications for Roll-Yield Arbitrage Trades the authors show a concrete example of using PCA on vol indexes to create calendar arbitrage portfolios. The first PC explains 95% of variance, which explains the almost-parallel shifts in the term structure, with second component explaining the tilt (3.23% of variance), and third PC explaining the curvature (0.91%) They note that XVIX is historically optimal in return/risk sense, same conclusion that I blogged about when XVIX just launched. Unfortunately XIVX disappointed in its performance.
Perhaps a more interesting application of PCA here would be statistical arbitrage between VIX futures of different maturities, or constructing a combined portfolio with different volatility futures like VXEM, VXEW, or soon to be launched VXN (Nasdaq volatility index) . 

ETRACS planning 6 leveraged ETNs

UBS is planning to launch 6 new leveraged VIX ETNs under their ETRACS brand. The symbols are VXAL, VXBL, VXCL, VXDL, VXEL, and VXFL - they are 2-x leveraged versions of their existing 1 though 6 - month products. At the time of writing their is no information on these products on the ETRACS website, but Bloomberg tickers for the products (VXAL:US, VXBL:US, VXCL:US, VXDL:US, VXEL:US,  VXFL:US) have been reserved. 


iPath - the leading provider of volatility ETNs is launching two new products in Canada - currency-hedged version of US VXX and XVZ ETNs. To confuse things, the tickers for the ETFs will be VIX (for VXX equivalent) and DVX (for XVZ equivalent) The products provide a transparent way for investors to capture volatility curve alpha while minimizing currency risk. While these particular products are not really that important, I hope that iPath will give US-based investors access to currency hedged versions of VSTOXX-based ETFs that currently trade in Europe, or give European investors currency hedged versions VIX-based products.

VIX prospectus, Fact Sheet, product page.
DVX prospectus, Fact Sheet, product page on iPath website.
I have also added the products my Volatility ETFs & ETNs page.

P.S. 3-May-2012 Added VIX:CN Info

Weekly market report

Wall st delivered a mixed bag of news with VIX, VNKY, and VSTOXX and their underlying markets almost unchanged. VXD - volatility index based...