miércoles, 16 de septiembre de 2015

miércoles, septiembre 16, 2015

VIX Bets Behaving Badly

Products meant to protect investors from volatility fall victim

By Spencer Jakab

A 400-point intraday swing in the Dow Jones Industrial Average Wednesday was just the latest example of market volatility.
 A 400-point intraday swing in the Dow Jones Industrial Average Wednesday was just the latest example of market volatility. Photo: eric thayer/Reuters

Things that go bump in the night frighten some people, but recent bumps during the trading day have been far scarier.

A 400-point, intraday swing in the Dow Jones Industrial Average Wednesday was just the latest example of market volatility—and that wasn’t necessarily extreme when compared with what transpired in August. For investors, there are several reminders from markets’ continued rumblings.

First, is that hedges are never perfect. Second, is that in tightly connected markets, a malfunction in one area easily and quickly can cause pain elsewhere. And finally, innovative financial products theoretically meant to act as hedges don’t always do as well in practice, especially when they are derivatives of derivatives.

That is why what has happened of late in the market for volatility, not just stocks themselves, deserves attention.

Some traders dubbed the surge in volatility in late August a “VIX-plosion.” Traditionally measured using the CBOE Volatility Index, or VIX, even retail investors have become at least loosely acquainted with the wonky measure also known as the stock market’s “fear gauge.”

The VIX itself isn’t an actual product. It is a calculation based on the volatility implicit in S&P 500 options prices, holding all else equal.

Financial-services firms have developed several ways to profit from and, in theory, protect the rest of a portfolio against a surge in the VIX. Two things make these instruments highly unusual, though.

One is that they track a relatively young futures market for something intangible—a financial calculation. The other is that they can surge or slide with blinding speed. For example, in the opening hours of trade on Aug. 24, one note that delivers twice the return of VIX futures rose by 75% from the previous day’s close.

Underlying that surge, though, was a bloodbath for some people on the other side of the trade or in the VIX derivatives market. The VIX itself has averaged 20 since calculations began in 1990. It has ranged from a little below 10 during very calm times to nearly 80 during a white-knuckle trading session following the collapse of Lehman Brothers. It briefly topped 50 in late August, a level that was remarkable but not unique.

Another measure, dubbed the “volatility of volatility” or “VIX of the VIX” soared to over 200 for the first and so far only time ever on Aug. 24. It had been below 90 the previous week and never broke above 135 during the heat of the financial crisis in 2008.

Its awkward name is an apt description. The so-called VVIX is calculated in the same way as the regular VIX for the same period of time. But instead of using options on the S&P 500, this prices off of options on the VIX itself. So it is a sort of VIX on steroids.

While not an investible asset in and of itself, the surge in the VVIX reflected the confusion in options on the VIX. That was the result of several things.

Trading halts in many stocks caused problems with pricing in options markets. And as with stocks and exchange-traded funds, buyers and sellers became scarce in VIX derivatives when markets went haywire.

That made them far choppier than the VIX itself, which also behaved oddly despite being based on a deeper options market. In other words, ripples in one market led to wider ones in others connected to them.

One group did benefit from all this: Investors who had protection heading into the selloff and took advantage of the dislocation. But those seeking to buy peace of mind in the thick of it were out of luck.

And that led to what is the biggest reminder of all for investors: Liquidity is always there in markets, except when you need it the most.

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