Extendo VIX

It’s no secret volatility has sat at extraordinary levels for quite some time now. But is this unique? Not quite yet, according a recent presentation from the man that invented the VIX, Robert Whaley, now a professor at Vanderbilt.

An important way of judging market anxiety is to examine the persistence with which VIX remains above certain extraordinary levels. From Table 1 (in the presentation), we know that the chance of observing a VIX level above 34.22 is 5%. Suppose we re-examine the VIX history to count the number of consecutive days that VIX has remained above a level of 34.22. Four periods last more than 20 days can be identified: October 16 through December 22, 1987 (45 days), August 28 through October 31, 2002 (46 days), September 26 through October 31, 2008 (26 days so far), and January 8 through February 8, 1988 (22 days). So, yes, we are experiencing abnormal behavior, but, no, it is not unprecedented. We just tend to forget.

Now we’re something like 12 more days into it. And not likely close to going below 34.22 any time soon. So 3 weeks after this presentation, it does look like we’ll set records for the amount of time we spend at extremes.

If you look at the VIX futures, it could be a while longer. March trades at about a 46, and April at a 42. Doesn’t mean we will stay elevated out that long, I mean it’s a 50/50 bet and maybe the “under” wins. And if the under doesn’t win, those numbers just represent snapshots and say nothing of whether the VIX dips into the 30’s between now and then.

What it does all suggest is that even though the The Chattering Pundit Class was way early calling these times unprecendented, looks like they may ultimately be correct.

And it all makes sense in a way. We’ve experienced a crash similar to 1987, it’s just played out over such an extended time frame. So it stands to follow that Fear will linger a bit longer.

Interesting product due out soon that is apparently even big in France. Yes, Fixed Rate Options . I’ll let the AMEX do the ‘splainin (.

The American Stock Exchange trades Fixed Return Options (FRO’s) on a number of securities. Fixed Return Options (FROs) are exchange traded binary or “cash or nothing” options based on an underlying security such as a stock or ETF. There are two type of FROs: Finish High FROs and Finish Low FROs. At expiration, an in-the-money FRO pays the holder of the option $100.00 per contract. For example, the holder of the XYZ June 20 Finish High FRO would receive $100.00 at expiration if the Amex FRO Settlement Index(SM) on the last trading day prior to expiration for XYZ was $20.01 or higher. If the Amex FRO Settlement Index(SM) closed at $20.00 or lower, the holder of the XYZ June 20 Finish High FRO would receive $0.00.

Well it sounds from that description they exist already somewhere, though I don’t see any.
Essentially it sounds like the price of the option will approximate the delta of that option. In other words if those regular XYZ 20 calls from above have a 60 delta, the FRO’s should trade for 0.60.

If these catch on, it will definitely have an effect of volatility as arbs will set up. If that effect is higher volatility, expect the bleating to commence as soon as that becomes apparent. I would guess it would add small to volatility right around high open interest strikes and near expiration. Owners of these FRO’s are going to have all or nothing bets that depend on which side of the strike it lands.

I would reemphasize also that ALL significant changes in the marketplace can tug volatility one way or another, and it’s a long way between announcing some new product and seeing whether it even generates enough flow to hit the radar.