Wealth Manager - the site for professional investment managers

Register to get unlimited access to all of Citywire’s Fund Manager database. Registration is free and only takes a minute.

Burned! The Vix kicks off 2013 down 35%

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.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play JPM’s Negyal: Back divis to temper EM volatility

JPM’s Negyal: Back divis to temper EM volatility

Omar Negyal, co-manager of the JPMorgan Global Emerging Markets Income trust, says a dividend approach to emerging markets reduces the volatility of investing in the asset class.

Play WMR: Why Russia will lose this war

WMR: Why Russia will lose this war

Author and journalist Adam Lebor believes a perfect storm is brewing when it comes to the Russian economy. .

Play WMR: Gerard Lyons warns Asia is the real risk, not Russia & Ukraine

WMR: Gerard Lyons warns Asia is the real risk, not Russia & Ukraine

Chief economic adviser to London mayor Boris Johnson outlines the geo-political risks in Asia and explains why the risk of another eurozone crisis must not be underestimated.

Your Business: Cover Star Club

Profile: The adviser that tempted Robin Minter-Kemp on board

Profile: The adviser that tempted Robin Minter-Kemp on board

It is rare to meet an impassioned individual who is willing to bang the drum for investment advisory right now

Wealth Manager on Twitter