JLN Options: Third Steepest First-Second Month VIX Futures Contango Ever (TVIX, VXX, VXZ, ZIV, XIV)

Mar 16, 2012

Lead Stories

Third Steepest First-Second Month VIX Futures Contango Ever (TVIX, VXX, VXZ, ZIV, XIV)
By Bill Luby, ETF Daily News
For a variety of reasons, investors seem unwilling to embrace the current rally and with each day the market rises, I see a scramble in the indicator forest to find some sort of proof that stocks are finally, inevitably going to correct…and soon. I need to give this phenomenon a name, so I am going to call it indicator hunting and define it as a companion to confirmation bias…
One of the current targets of indicator hunting is the huge contango in the VIX futures term structure. Some are saying it is steeper than it has ever been before (it isn’t) and others are convinced that this means the presumably omniscient SPX options traders are foretelling something between a steep selloff and a market crash just around the corner.
http://jlne.ws/wc039W

Cheap equity options lure hedgers, speculators
By Francesco Canepa, Reuters
The cost of protecting against swings in European share prices fell to a five-year low on Friday, luring both cautious investors keen to lock in recent equity gains and speculators willing to make complex bets on the derivatives market.
The Euro STOXX 50 volatility index, which measures sell and buy options to gauge expected – or ‘implied’ – share volatility, dropped to 17.26 points, a level not seen since 2007, having more than halved in value since November.
http://jlne.ws/zwPuT0

Strategy

Critical VIX Level Nobody Talks About
By Tyler Craig, MoneyShow
Before embarking into the wonky world of VIX analysis, traders ought to arm themselves with a proper perspective on price levels. Of particular importance is the fine line that exists between attributing some significance to a specific price level and treating said price level as a magic barrier which, when breached, signifies some cosmic shift in the financial markets.
For example, some bow at the altar of the 30 level and swear off bullish trades when the VIX sits above 30 and bearish trades when it rests below. The crossing of the critical 30 threshold is heralded as an epic event worthy of a full-fledged reversal in one’s outlook. Sadly, however, such an assertion is misguided.
http://jlne.ws/wsSq7E

Volatility bets can lead to scary losses
Reuters (via FP Investing)
In the past 12 months, investors worried about big market shocks have been rushing into esoteric products they think will cushion their portfolios against wild gyrations. The only problem: In doing so they have often massively raised their investment risk.
The money is being invested in exchange-traded funds and notes that bet on or hedge against volatility – once the almost exclusive trading domain of professional traders, such as hedge funds, but now attracting interest from less-sophisticated investors.
Most investors use these products for short-term trading, but some are holding them to hedge against the impact of a major event that could send oil prices soaring, such as the possibility of an Israeli attack on Iran’s nuclear facilities.
http://jlne.ws/FOjnUB

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