SAD VIX days?

Can temperature effect the VIX? How about daylight? CXO has some answers (hat tip Abnormal Returns).

Guy Kaplanski and Haim Levy test the effect of seasonal environmental factors (daylight hours, temperature and fall season) on perceived market risk as indicated by the Chicago Board Options Exchange Volatility Index (VIX). VIX, also known as the Fear Index, is a measure of the risk perceived by traders of S&P 500 index options. Using VIX and actual volatility data and environmental measurements (for latitude 41 degrees north, Chicago and New York) over the period 1990-2007, they conclude that:

• The Fear Index (VIX) increases significantly during the fall and when the number of daylight hours is relatively small.
• The relationship between temperature and the Fear Index is inconsistent, perhaps because temperatures can vary considerably even for cities with the same number of daylight hours.
• On an annualized basis across the sample period:
• An increase of one hour of daylight boosts average stock market return by 1.35%.
• An increase of ten degrees Fahrenheit in temperature depresses average stock market return by 1.16%.
• The onset of the fall season depresses average stock the rate of stock market return by 1.72%.
• Seasonal environmental factors do not strongly affect actual volatility. In other words, options traders may be able to exploit differences between perceived risk and actual risk based on seasonal factors.

OK, not sure it’s “daylight” and not just something else having to do with the time of the year that causes this. Everyone knows that October is volatile for example, so why don’t we say like Pumpkins or wet leaves or the World Series causes VIX spikes.

But truthfully, that last bullet point has some actionable info. The VIX is about perception of what happens to volatility over the next 30 days. But this work suggests that even though perceived risk has lifted, actual risk has not.

Bill at VIX and More has a more intelligent analysis of the low VIX than that which we heard on TV.

• Focus on the relative values of the VIX (i.e., with respect to a recent trading range) instead of absolute values
• Consider the cash VIX in the context of expectations for future volatility
• The more extreme readings give more reliable signals
• History favors mean reversion for the VIX
• Mean reversion does not always happen quickly, so scale in to a position
• If you follow good risk control, VIX signals are one of the few ones for which it is acceptable to add to losing positions (assuming the mean reversion signal is still valid)
• Be sure to start taking profits in no less than 1-2 weeks

So…that is my thinking. A sub-20 VIX? Not really relevant. A VIX more than 10% below the 10 day SMA? Generally tradeable. A better signal? While it is still too early ‘cling tightly’ to the VXV (an index that calculates the 93 day implied volatility for the SPX options), I am bullish on the VIX:VXV ratio – and the chart of that ratio suggests that the market is approaching an overbought condition.

Basically, the VIX mean reverts. It’s a bit stretched to the downside now. That does not mean the market necessarily tops. The VIX can and does decline in up markets, and in fact oversold VIX readings are weaker than overbought VIX readings.

And something important to keep in mind; when you buy options on a stock or index, you made a “good” decision if the stock/index itself is more volatilie than the price you paid. It helps to have option volatility hold up, but it’s not essential.

Take GOOG on Friday as an extreme example. May options declined 10-15 points in volatility terms, roughly 25% overnight. But if you owned May calls or May gamma, you obviously hit a home run based on the stock explosion.

So is this 2001 (in the market) redux? Lots of things different obviously. But some pretty striking similarities.

You had a big bottom in mid March and a jllion calls that the worst was over.

Intel was a psychic tell in 2001 the way GOOG is now. Intel lost roughly about 1/3 of it’s market cap from January into it’s April earnings report. And then they blew the doors off and the stock rallied about 25% in one day.

The gong was ringing “All Clear”. But Intel pretty much topped there. The market itself held strong for another month and a few percent more, but then just drifted into 9/11.

That’s the striking similiarity. There are a couple big differences. Volatility was about a year into a drift off long term cyclical highs, exactly the opposite of right now. And the Fed wasn’t as far along in the rate cut party; in fact they added fuel to the fire that Intel day and popped in a surprise cut.

So yada yada yada, if history repeats, we’ll see GOOG find a home within the next few days and make some feeble attempts to bust through that fail. The market can grind up for a couple more month’s, but ultimately fails under it’s downsloping 200 Day MA.

Volatility remains a dog though. In 2001 it troughed in July.

Those pictures of attractive women? You have all been part of a successful experiment to help your trading. This via a new study, and great find from bzb trader.

The hormone that drives male aggression and sexual interest also seems able to boost short term success at finance. But what seems to start out well can turn bad, with elevated testosterone levels over several days possibly leading to irrational risk-taking, according to researchers at the University of Cambridge in England.

……Coates and Joe Herbert studied male financial traders in London, taking saliva samples in the morning and evening. They found that levels of two hormones, testosterone and cortisol, affected traders.Those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day, the researchers found.Testosterone, best known as the male sex hormone, affects aggression, confidence and risk-taking.

I guess the catch is this works for short term trading. So if you’re a Day Trader, this is Kelly and Kristy. They are sisters. Go make some coin today.. Buy and Hold crew maybe should stick to charts, lol.

And hmmm, testosterone. Do we know any savvy traders that juice?

Coates and Herbert’s study comes less than two weeks after U.S. researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler.

Good thing I read this. I was all set to tone it down and run only pics of Count Chocula and a bunch of school supplies.

But hey, it’s Expiration Day today. But more relevent, it’s GOOG day. And it’s important to remember these earnings moves don’t happen in a vacuum. A high profile miss like GE begat lots of nervousness and put buying in the CAT’s and HON’s (“smart money, eh?) . The GOOG blast off gets the Scare Factor up for upside surprises. And if you believe we are generally in a bear market, upside moonshots are the bigger shocker.

Yada yada yada, it’s been a mediocre earnings season as far as options bidups go. GOOG may change all that.

First off, congrats to the Florida Panthers for doing something the Rangers could not manage; field a squad of Ice Girls. Do they even have rinks there?

(OK, through the magic of IM I have done some research on this subject, and my friend informs me there are actual rinks in South Florida)

Anyway, we often get these one directional mongo trend days on Expiration weeks. When they are to the downside, they become a convenient excuse for the selloff, sort of along the lines of “it wouldn’t have been that bad if those damn options manipulators weren’t slamming everything”. But when they are to the upside, nary a mention that Expiration may have added some juice to the rally.

I honestly could care less why a market does what it does, I mean real (and spectacular) or artificial, doesn’t mean a thing. But the Bobbleheads read all sorts of things into every jig, so it’s worth pointing out that one that occurs on Expiration week is more likely than others to mean absolutely nothing in the longer run.

But that being said, Expiration week rallies (or dips) can feed on themselves. As stocks and indices buzz through strikes, shorts on those strikes have options go from ripups to real shorts (longs) and have to cover, and add more juice to the rally (decline) on the margins.

So I would suggest that while the rally will likely fizzle, as they all have this year, it can take a life of it’s own the next few days. Especially coming off a month of declining volatility, as options premiums will cover less of a move and shorts will have to scramble that much sooner.

….Adding that if this morning decline persists much longer, the “option shorts need to run for cover” argument becomes completely moot.

The VIX got slapped around like the Mets bullpen yesterday, down 9%. We’re at levels now not seen since early December, save for the statistical blip around the holiday’s.

Got asked about playing this with VIX products.

My personal opinion is no, I would sooner buy options on an actual stock or index.

You can’t just buy a *cash* VIX under 21, you have to use futures and/or options. The closest to *cash* is May, yet go to the options board and the best you can create synthetically is the VIX at 23. So in other words, it is already pricing in the next 2 points of rally.

Now of course, if the VIX lifts 2 points, VIX products will rally to some extent, just not nearly those 2 points, probably more like half a point (don’t hold me to that number, just guestimating).

A better idea if you think volatility is too cheap here is to buy straddles or strangles in the SPY or QQQQ.

But I would stress that is just a *better* idea, not saying it’s a great idea in any way shape or form. Buying options volatility is a bet on the actual volatility of the underlying product. And right here, right now, volatility on the underlying products (historical volatility) is imploding. The 10 day volatility of the SPY is only 10 right now. That’s not an encouraging number as far as near-term options trends go.

And keep in mind this reading only considers day to day ranges, it doesn’t factor in that even the bigger intra day market moves are within these same levels for what seems like forever.

Bottom line is that longer term, I believe the volatility trend will remain up. But we’re clearly in a trough right now, and it costs money in the form of time decay to pre-anticipate when the VIX picks up again.