volatility


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Oil hasn’t been at the forefront of market discussion for a little while now. It may be soon. Oil is falling once again.

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With it, now, are the energy stocks who’s fortunes are tied to the oil price. Oil supply is plentiful and no-one on the producer side seems willing to cut or halt production. Therefore, you would expect further pressure on the price of oil.

Will the overall market follow oil and oil stocks lower?

Who really knows. But the overall market as measured by SPY, DIA, QQQ, hasn’t really moved anywhere in the last month or so. Earnings reports that beat, go nowhere.

Cheaper oil for me is great if it brings down petrol prices, and good for manufacturers/producers that use oil somewhere in their product.

But the overall market just doesn’t seem to like lower oil prices. If oil continues lower to retest the previous lows, the overall market may just follow again.

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U.K. property funds with about 18 billion pounds ($23.4 billion) of assets froze withdrawals as investors sought to dump real estate holdings in the aftermath of Britain’s vote to leave the European Union.

“It’s reminiscent of Bear Stearns’ subprime funds before the Lehman debacle,” Bill Gross, a fund manager at Janus Capital Group Inc., said on Bloomberg TV. “The system doesn’t allow liquidity to flow into the proper places. If these property funds are just one indication, perhaps there will be others to follow. I think it’s something to worry about.”

Henderson Global Investors, Columbia Threadneedle Investments and Canada Life suspended trading in at least 5.7 billion pounds of funds on Wednesday. Aberdeen Fund Managers Ltd. cut the value of a property fund by 17 percent and suspended redemptions so that investors who asked for their money back have time to reconsider. Legal & General Group Plc said Thursday it is adjusting the value of its 2.3 billion-pound property fund by an additional 10 percent.

Investors are pulling money from U.K. property funds as analysts warn that London office values could fall by as much as 20 percent within three years of the country leaving the EU. During the financial crisis of 2007 and 2008, real estate funds were similarly hit by redemptions and forced to halt withdrawals, contributing to a slump in property prices of more than 40 percent from their peak in Britain.

Wednesday’s moves brings the number of U.K. firms curbing redemptions to seven since the June 23 vote. Henderson said Wednesday it had temporarily halted its 3.9 billion-pound U.K. Property PAIF fund along with feeder funds due to “exceptional liquidity pressures” and the recent suspension of other funds. Columbia Threadneedle halted its 1.39 billion-pound PAIF and feeder funds and Canada Life froze four funds totaling 450 million pounds.

“The problem with open-ended funds is you do start to have panic selling, so you really have no choice but to suspend the fund,” said Jason Hollands, managing director at investment firm Tilney Bestinvest. “There’s an inevitability to this now.”

‘Penal Consequences’

Aberdeen, which marked down the value of its 3.2 billion-pound U.K. property fund, said it was halting withdrawals for 24 hours as of noon Wednesday so clients who asked for their money back have time to reconsider their orders.

“Shareholders wishing to redeem will do so at a price which is subject to the above dilution adjustment in order to reflect the current market environment and the fact that short-term trading in the property market has relatively penal consequences,” the firm said.

With the real estate tremors echoing the last financial crisis, the growing fear is that failure to control aftershocks from the Brexit vote will propel the economy into recession. The pound sank to a fresh 31-year low as the fallout continued to reverberate through financial markets.

“We can’t ignore what’s happening from a redemption request perspective or the closing perspective,” Wayne Bowers, chief executive officer of the international asset management arm of Northern Trust Corp., which manages about $900 billion of assets, said in an interview in Sydney. “You can’t brush that under the carpet. Then you’re looking at other assets that are under, or are potentially under, similar pressure.”

Cash Levels

Investors pulled money from real estate funds in the lead up to the vote, depleting cash levels. Standard Life Investments was the first money manager to halt withdrawals on Monday, followed by Aviva Investors and M&G Investments. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.

There’s “a loss of confidence in the valuations being used” by fund managers, said John Forbes, an independent real estate consultant and former tax partner at PricewaterhouseCoopers LLP who specializes in property funds. “The retail funds had cash and balances in liquid shares” to manage normal levels of outflows, he said.

Aberdeen said its funds had invested in 79 U.K. properties across sectors including retail and industrial.

“The portfolio was positioned defensively prior to the referendum with one of the highest levels of liquidity of all similar funds and having sold all its quoted property companies investments in the week prior to the referendum and holding this as cash,” the firm said.

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US stocks are more or less, back to their starting point prior to Brexit.

Clearly, no-one actually has any idea what will happen and what effect that will eventually have. So stocks are probably going to fluctuate in a sideways range until some form of consensus is formed.

This, if correct, opens up a number of trading strategies that are effective in sideways markets. The increased volatility, if it remains, is obviously going to be an issue, but is potentially manageable.

Obviously in this market, one needs to remain extremely flexible, as positions are likely to be very vulnerable to news flow over the next few days certainly and likely couple of weeks.

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There has been and still is the idea that ‘diversification’ is a risk management tool, and to a certain extent, it is. However, diversification linked to leverage, changes that assumption into something very different.

Diversification, of uncorrelated markets, or securities, say Nike common stock and London mortgage securities, would seem prima facie, unrelated or uncorrelated. However a trader who holds these same securities as another trader, now correlates those securities as any trader who holds them becomes linked to every other trader who holds those securities.

When leverage forces you to sell, you sell what you can, not what you should.

Now when selling what you can, that may very well be Nike, and now you have a rush for the exits in Nike, of every trader on margin, who holds London mortgages [or whatever]. In times of stress, all markets and securities are correlated by the traders who hold them. Diversification is a chimera.

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Well I didn’t think it would actually happen, but the UK did actually vote to leave. Of course this is what should have been allowed to happen when the Confederacy wanted to leave the Union.

A referendum is not legally binding, but it would be political suicide not to secede now that it has been put to the vote.

Markets are in turmoil, but, they will settle. There is a buying opportunity here. Maybe not today, but somewhere in the next few days/weeks.

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SRPT options are sitting at 400%+ IV. There must be an earnings [or some other announcement] that is pending.

I still have 327 shares. So I sold 3 options at $19 strike at $6.oo each option! I also sold 3 Puts at $10.oo for $2.15, as at that price, I’ll buy 300 shares of the stock. For June, this position looks to be very profitable already.

Therefore, if the stock were to drop to $10.oo [or below] I would actually purchase 300 shares at $1.75/share [less any loss below $10.oo].

While this is a very volatile stock, there is opportunity here regardless of whether you actually hold stock. Even opening a new position in the stock is feasible here with IV so incredibly high.

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This is being held in Auckland on 15 May.

Topics: Easy Volatility Investing

Tony is an Auckland Quantitative Analyst who specialises in market volatility. In 2010 he won the US National Association of Active Investment Managers (NAAIM, http://naaim.org) Wagner Award (a prize of $10,000) with his paper Alpha Generation and Risk Smoothing Using Managed Volatility (download from http://ssrn.com/abstract=1664823).

This year, 2013, he achieved second prize in the same competition with his paper Easy Volatility Investing (download from http://ssrn.com/abstract=2255327). It is this second paper that he will talk about at tonight’s meeting.

Market volatility is easier to predict than sharemarket returns and the returns from volatility can have a low correlation with sharemarkets. This makes volatility attractive as an investment asset.

For many decades the only way to invest in volatility has been through trading options, futures, or variance swaps. But now volatility-related Exchange Traded Notes (ETNs) exist which make volatility trading easy for the retail investor. The ETNs to be discussed are those with US tickers XIV, VXX, ZIV, and VXZ.

This presentation discusses these ETNs and shows how they work and how they can be traded to earn returns as high as 100% per year.

Topics to be discussed will be Futures pricing, Volatility Risk Premium, Roll yield, Momentum, and Steamrollers and the presentation will be aimed at beginners. No technical knowledge is required to follow the presentation and no mathematical formulas will be required.

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CRASH

Light weight baby!

flippe-floppe-flye – does he have any clue with regards to VIX and his VXX trade?

The ETNs Broke the Game
Let’s look at some other examples first.

We have $TZA. This is the Diorexion Daily Small Cap Bear 3x index.

If they want to create more shares, they can simply go out and pick up more swaps, which are fully arbitrageable in the market.

You can easily hedge against this position using TF futures or by trading a basket of stocks.

You can’t do that with VIX instruments.

I’ve said this damn near 400 times: the VIX is not tradeable.

It’s a statistic.

The statistic is based off a basket of SPX options that changes every time.

It’s impossible to create a grouping of options to arb against any vehicle creation. There’s no easy arb when creating index instruments.

On top of that, VX futures don’t track spot VIX, although they converge over time.

The Problem Child
And we also have this $TVIX. It’s the Daily 2x VIX Short Term ETN.

What happens with short term volatility ETNs?

They get into short term VX futures.

And then they have to roll them.

If the mid term future is priced higher than the near term, there is a cost to this roll.

And just recently, the volume has come in:

Obvious in historical terms, that the current volatility is a walk in the park when compared to 2008/2009 and the volatility associated with the 1929-1932 market. Sit back, take nibbles, remain calm. The news-flow and exogenous events will run their course. That may well result in significantly lower prices yet.

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