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Burned! The Vix kicks off 2013 down 35%

by James Phillipps on Jan 03, 2013 at 11:13

Burned! The Vix kicks off 2013 down 35%

We are only three days into the year and one index has already plunged by 35%.

The CBOE Volatility Index, or Vix, posted its biggest ever two day loss as the so-called fear gauge fell back as the US fiscal cliff was avoided.

It fell back from over 22 to 14.68 on record volumes for the second consecutive day with 221,323 contracts traded up from 212,800 on December 31.

Given the macro uncertainties lingering over the global economy it is perhaps little surprise trading volatility has been an increasingly popular investment strategy.

The Chicago Board Options Exchange said that average daily volumes for contracts topped 95,000, almost double the 47,730 level seen in 2011.

But it has been a rocky ride. The Vix ended the year down 21.55% but with a maximum drawdown of -52.03% in the early summer. The index peaked at 27.73 in June when a spike in Spanish bond yields necessitated a €100 billion eurozone bailout. European Central Bank president Mario Draghi’s subsequent pledge in July to do ‘whatever it takes’ to save the single currency saw the Vix sink back to 13.3 in mid-August, a low for the year.

Despite the multiple macro threats, 2007 was actually the first year that the Vix did not move into the 30s, so are investors getting blasé?

Adam Warner, an options trader and columnist for Schaeffer’s Investment Research, certainly believes so, pointing to the flattening of the term structure with only 0.5 separating the June futures from the February futures. To play a steepening of the term structure he suggests the UBS E-TRACS Daily Long-Short exchanged traded note (ETN).

‘It goes long one iPath S&P 500 Vix Mid-Term Futures ETN (VXZ) versus shorting two iPath S&P 500 Vix Short-Term Futures ETN (VXX),’ he says. ‘The VXZ proxies four-to-seven month Vix futures, whereas VXX proxies 30-day Vix futures. So the UBS E-TRACS Daily Long-Short ETN is essentially a play on the slope of the VIX futures curve.’

‘If you believe that term structure will steepen again, this is a good way to play it.’

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