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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Don Green who wrote (18788)	3/8/2017 9:32:02 AM
From: ggersh	Respond to of 33421

Ok so the answer is yes. Cheers, ggersh

To: Don Green who wrote (18788)

3/8/2017 10:11:29 AM

From: The Ox

2 Recommendations

Recommended By
John Pitera
mary-ally-smith

Respond to of 33421

I assume you know that VXX is one of the most shorted tickers being traded. Due to the nature of it's underlying "bets", it will always fade over time. When "massive" short positions are in place, it's going to take some serious fear to change the direction the river is flowing, so to speak.

Trying to trade VXX is all about timing and ranges, IMO. You can play for snap back spikes after the price has fallen (day trade or short term swing moves) or you can play for a "black swan" moment. Otherwise, it's a long term short that will always win if you have enough time to be patient. Large spikes up simply create a new opportunity to place a new short position. Look at the chart below for "intermediate" reference...down, small spike, down, repeat...but always down....

Grabbing a very quick 7% or 15% is not that unusual but, once again, timing is everything. Also, there's a difference between how SPY is moving and the way the S+P500 futures options are being traded. Simply because SPY is up does not mean that the options are "anticipating" more up.

Whether you see the massive trades after hours as manipulation or simply a better view of a large trade that would normally be masked during regular trading hours, is in the eye of the beholder....at least that's how I see it but I'm always open for new views on how "things work"!!

What is interesting is the length of time since the last substantial spike up. I think it's drawn nearly everyone's attention and the current low VIX numbers are constantly being referenced by those who follow TA.

I am curious about your "New Algo" theory in TVIX?

To: Don Green who wrote (18788)	3/12/2017 3:24:59 PM
From: John Pitera	1 Recommendation Recommended By The Ox Read Replies (1) \| Respond to of 33421

Wall Street’s Volatility Pioneer Searches for Latest Fear Trade A researcher whose work foreshadowed the VIX now has his eye on an entirely different barometer of market uncertainty—ambiguity By BEN EISEN March 10, 2017 5:30 a.m. ET Investors these days are puzzling over the lack of volatility on Wall Street. Menachem Brenner hopes they’ll soon be buzzing about a new indicator: *the heightened level of ambiguity.* The most prominent gauge of Wall Street uncertainty, the CBOE Volatility Index, or VIX, is near its lowest level on record, confounding those who believe uncertainty is only growing. Mr. Brenner, a professor at New York University’s Stern School of Business who helped develop the first volatility index, now is focused on what he believes will be an actionable gauge of the kind of fear now pervading the markets. “The VIX is low because it doesn’t measure ambiguity. The uncertainty is much bigger than that,” Mr. Brenner said. *“I believe that’s what ambiguity is going to capture.”* *Ambiguity is a measure of the degree of confidence investors have in the probabilities they use to make decisions. The concept has been around for ages, but Mr. Brenner and Yehuda Izhakian, a professor at Baruch College, are quantifying what has historically been an abstract theory, hoping to better explain the world’s complexities. They intend for it to become a trading tool, like the VIX. Mr. Brenner, a 72-year-old with a full head of gray hair and an Israeli accent, has completed two Ironman events and two races up the stairs of the Empire State Building. He spends 90 minutes or more a day working out at the NYU fitness center, flanked by students. New York University’s Prof. Menachem Brenner, whose work aims to quantify ambiguity in financial markets, shown on the NYU campus in New York City on March 2. PHOTO: MICHAEL BUCHER/THE WALL STREET JOURNAL His work with Mr. Izhakian on ambiguity would be a fitting cap on a long career. Mr. Brenner earned his Ph.D. at Cornell in 1974, the year after publication of the Black-Scholes model for options pricing, which would catapult the options market to prominence. After a stint in academia, Mr. Brenner in 1985 decided to become a pit trader at an options exchange. Black-Scholes had become widely accepted, and a printout of hypothetical prices derived from the model was always handy on the floor. But Mr. Brenner learned that trading prices sometimes have little relationship to what the model spits out. “You start thinking about different problems,” said William Silber, a finance and economics professor at NYU, who recalls working with Mr. Brenner on the trading floor. “When the models go wrong, what do you do? What is it that’s causing the market not to reflect reality?” Mr. Brenner’s eyes light up when he recalls that period, when he says he turned a profit but didn’t get rich. He left the floor for NYU in 1987, one week before the stock market crashed. In 1986, Mr. Brenner and Dan Galai, then a professor at Israel’s Hebrew University of Jerusalem, published a working paper that used options prices to derive an index of stock-market volatility. They called the index Sigma and pitched it to various stock exchanges,* but ran into skepticism among the financial establishment. “We were too early,” Mr. Brenner said. It wasn’t until 1993 that the Chicago Board Options Exchange would roll out the VIX, an index similar to Sigma but based on other academic work. One constant in Mr. Brenner’s career has been the class on derivatives that he has taught for three decades at NYU. The PowerPoint of the history of the VIX that he shows each class has grown longer over the years. “Many of our colleagues, they get tired after 20 years, 25 years, and get less productive,” Mr. Galai said. “Despite the fact that he is a veteran, he’s still going with force.” When describing ambiguity, Mr. Brenner borrows a line from Donald Rumsfeld, the former Defense Secretary: Volatility measures the “known unknowns,” or the uncertainties about which one can measure probability. *Ambiguity reflects the “unknown unknowns,” where the probabilities themselves are a mystery.* Mr. Brenner became interested in the topic when considering the *relationship between risk and return, which hasn’t always been as strong as most people believe.* Taking ambiguity into account, as well as volatility, might demonstrate a stronger risk-return relationship, the thinking went. The economist Frank Knight discussed the difference between what he called risk and uncertainty as early as 1921, drawing a distinction similar to the one Mr. Brenner makes between volatility and ambiguity. But *despite the mountain of research on ambiguity, there’s no widely-used measurement of it.* Mr. Izhakian, whose Ph.D. work focused on the topic of ambiguity, formulated a framework for quantifying it by *analyzing market returns in five-minute increments. In that way, he and Mr. Brenner were able to conclude that risk and ambiguity together have a positive relationship with market returns. The ambiguity measure was intriguing, showing spikes ahead of the U.S. financial crisis and European debt crisis. Now the two are working to turn it into a real-time gauge that offers a market signal to investors. “I hope that it will become standard and this will be a measure that can be quoted in real time,” Mr. Izhakian said. One example of what an ambiguity gauge could turn into is the VIX, which has become so prominent that options, futures, and exchange-traded products are now linked to it. To make that happen for an ambiguity index, the two men have their work cut out. The index is currently calculated on a monthly basis. To make it an intraday gauge, they will need more rapid-fire data and more computing power. Plus, Mr. Brenner thinks they will have to overcome early resistance from the financial industry just as the early volatility index encountered. Colleagues agree that it will be challenging. Mr. Brenner says he doesn’t think ambiguity will gain the mass audience the VIX has amassed. But he hopes eventually to see it in wide use by traders and investors. After all, he said, these times call for it. https://www.wsj.com/articles/wall-streets-volatility-pioneer-searches-forlatest-fear-trade-1489141809 ------------------------------ (19) There are 19 comments. 999 POST COMMENT By posting a comment you are accepting our commenting rules and terms of use, and you agree to the public display of your profile, including your real name, and your commenting history. NewestOldestReader Recommended Donald Ross4 hours ago So with ambiguity high, for example, does one go long or short in the equity markets? Flag ButtonShare Bill Buchanan1 day ago Good Article. If Volatility (VIX) is a measure of the past, let us hope that Ambiguity (STUFF) can predict lightening strikes in a herd of cattle. Flag ButtonShare Dan Baker1 day ago Very interesting article. I'll definitely be looking up Dr. Brenner. I've traded vol for a long time and what he is saying definitely puts words to thoughts and concerns I've had for some time. Keep up the good work WSJ and Mr. Brenner. Flag ButtonShare 2 Richard Blackmon1 day ago Volatility has been low since mid November because corporate earnings are favorable and Trump is aggressively pro growth. However if the latest Q1 GDP estimates are to be believed economic growth is decelerating so volatility should start rising again. Flag ButtonShare JOHN TALLENT2 days ago He trains on the road, I train in the mountains on a far different bike. Prefer the offered stuff though I do have train for the swim in a 25 meter pool. Will be 70 next month and did 1,850 meters this morning plus a half mile run with my weighted camelback. JT Flag ButtonShare 1 Michael Brown2 days ago Nice article, thanks WSJ. Flag ButtonShare Robert Clark2 days ago Taleb I think it is with his book Black Swans is good background to this article. He makes you aware markets largely exclude the extreme parts of the universe of potential outcomes. With this in mind, the individual investor/saver takes resolve to diversify his holdings and adopt a bit of survivor capability. Flag ButtonShare Thomas Hoffman2 days ago "Mr. Brenner earned his Ph.D. at Cornell in 1974" Shouldn't that make him Dr. Brenner? Same with Dr. Izhakian. Just saying . . . Flag ButtonShare 2 Michael Byl2 days ago Nothing ambiguous about bike, swim and run Just go out and do it, with certainty it is fun but for trading portfolios, no solid base exists go long or short ambiguity, and see how it twists Flag ButtonShare 3 Josh Mader2 days ago Prof. Brenner is an inspiration to us all. Surround yourself with interesting people, keep working on those academic models and best of luck on your next Triathlon! Flag ButtonShare 1 Paul Zdanowicz2 days ago "Ambiguity is a measure of the degree of confidence investors have in the probabilities they use to make decisions." Not a horrible definition of the term, but not a word about how this is being quantified - somewhat disappointing. One - of many more - metrics could be the average size of the trade, but what else? Lack of such insights transforms this piece into essentially a human interest story* - may as well tell us about this gentleman's family and pets, along with his passion for fitness ; ). Flag ButtonShare 5 Gerald Gray2 days ago @Paul Zdanowicz try googling his name: people.stern.nyu.edu Flag ButtonShare 1 Steve Wood2 days ago I agree...nice guy and the VIX is truly a marvelous invention that was useful for trading before everyone started using it. I looked at his research work and his latest publication is dated 2010 and followed by "forthcoming". The concept of ambiguity sounds fascinating, however, before we abandon the VIX we may want to harken back to other periods when it lay dormant for months. Much like a pressure cooker that is silent til it blows the VIX reflecting the current market is telling us that there is literally near zero fear of a bear market. While I think we haven't yet seen the typical melt-up, or blowout that accompanies most asset bubbles, woe to those who say "this time is different". Best of luck, Mr. B, on your next triathlon...you're an inspiration to this 66 year old. Flag ButtonShare 1 Paul Zdanowicz2 days ago @Gerald Gray @Paul Zdanowicz Understood - a very accomplished professional - my sarcasm wasn't directed at him, but at the author of the article : ) Flag ButtonShare JONATHAN HELLER2 days ago The burning question we all want to know (or maybe just me) is whether or not it is a waste of time to contemplate the "unknown unknowns." Flag ButtonShare 4 Gerald Gray2 days ago @JONATHAN HELLER The trick is to turn "unknown unknowns' into "known unknowns" and then into knowns. If you don't eat your meat, you can't have any pudding. How can you have any pudding if you don't eat your meat"

To: Don Green who wrote (18788)	3/15/2017 4:28:24 PM
From: John Pitera	1 Recommendation Recommended By The Ox Read Replies (1) \| Respond to of 33421

Hi Don, one of the things to consider when looking at the VIX and maybe a paramount item to consider is that the VIX is comprised of a very narrow series of only 2 strips of options 2 strike prices above and below where the index is currently trading. Intuitively many people think that the VIX would encompass a broader swath of series of puts and calls above and below the current index level. The fact, that it is only 2 strips of strike prices above and below current value creates the VIX number. It would be interesting for some of the heavy quantitative minds to examine how the VIX would be impacted if you were to go 5 or 6 strike prices above and below the current market level in calculating the VIX. I have been meaning to mention this specific aspect to you... John --------------------------------------------------------------- All About VIX How is VIX Calculated? Step-by-StepVIX is a measure of expected volatility calculated as 100 times the square root of the expected 30-day variance (var) of the S&P 500 rate of return. The variance is annualized and VIX expresses volatility in percentage points. where var = (365/30) x Expected 30-day variance. The 30-day variance is the sum of squared standard deviations st ("volatilities") of the S&P 500 rate of return at every point in time t during the 30 days: For any N, the expected value of the N-day variance of the S&P 500 return can be estimated by the forward price P of a strip of options expiring in N days. This is because the forward price of the strip represents the market's risk-neutral expectation of that variance. The forward price is equal to ert times the spot price of the option strip, where t expresses the number of days N as a fraction of a year, i.e. t = N/365. The calculation of VIX is actually based on the number of minutes to expiration, and t therefore expresses the number of minutes to expiration as a fraction of a year. Expected N-day variance = Forward price of strip of options = P = ert Spot price of option strip Since 30-day options are usually not available, a 30-day expected variance is inter- or extrapolated as a weighted average of the forward prices P1 and P2 of two options strips with the two closest nearby expirations T1 and T2, but no closer than eight days from their expiration dates. The option with the near-term expiration is dropped from the calculation on the Monday preceding its expiration (3rd Saturday of the month) and a new far-term option is added. The weights used to average the forward prices P1 and P2 are w = (T2 -30)/(T2-T1) and 1- w: Expected 30-day variance = wP1 + (1-w)P2 The option strips whose prices are used to calculate VIX are portfolios of out-of-the-money SPX puts and calls, with moneyness referenced to the first strike K0 below the forward price F0 of the S&P 500. For example if the date-T1forward price of the S&P 500 is 1011, and the date-T2 forward price is 1016, then the T1 (T2) strip contains puts at strikes at and below 1010 (1015) and calls at strikes at and above 1010 (1015). Each strip includes 2?K/K2 calls or puts, where ?K is the average of the strike intervals adjacent to the strike K. The price of the option strip is adjusted to compensate for the difference between the forward price of the S&P 500 and a listed strike. In summary: or, if 30-day options are available The Theory behind the VIX CalculationVIX is obtained as the square root of the price of variance, and this price is derived as the forward price of a particular strip of SPX options. The justification for this derivation is that variance is replicated by delta-hedging the options in the strip. An intuitive explanation of the mechanics of this replication based on Demeterfi, Derman, Kamal and Zou 2 is: The price of a stock index option varies with the index level and with its total variance to expiration. This suggests using S&P 500 options to design a portfolio that isolates the variance.The *portfolio which isolates variance is centered around two strips of out-of the money S&P 500 calls and puts.* Its exposure to the risk of stock index variations is eliminated by delta hedging with a forward position in the S&P 500.A clean exposure to volatility risk independent of the value of the stock index is obtained by calibrating the options to yield a constant sensitivity to variance. If each option is weighed by the inverse of the square of its strike price times a small strike interval centered around its strike price, the sensitivity of the portfolio to total variance is equal to one. Holding the portfolio to expiration therefore replicates the total variance.Arbitrage implies that the forward price of variance must be equal to the forward price of the portfolio which replicates it. Observing that the S&P 500 forward positions in the portfolio contribute nothing to its value, the forward price of variance reduces to the forward price of the strips of options. VIX Volatility versus Black-Scholes VolatilityThe formula for VIX is very different from the Black-Scholes implied volatility familiar to option traders, as is its derivation. VIX is *based on a weighted sum of option prices, while a Black-Scholes implied volatility is backed out of an option price. This raises two questions: First, why use VIX rather than a Black Scholes volatility to measure expected volatility.* Second, what is the relationship between VIX and a Black Scholes implied volatility? Why Use VIX?The Black-Scholes derivation is justified when the instantaneous return of the index is normally distributed with a constant volatility until expiration. Given these assumptions, implied volatilities should be the same at every strike price. However, *a notorious pattern called the skew emerged after the stock market crash of October 1987. Since then, Black-Scholes implied volatilities of stock index options have decreased with the strike price. One prominent explanation of the skew in option prices is that the market marks up the prices of out-of-the-money puts to reflect the impact of stochastic variations in volatility on the distribution of equity returns, such as its skew and fatter than normal tails 3 . The skew of stock index implied volatilities signals that the Black-Scholes model mis-specifies the underlying return, and that random volatility matters a great deal. This suggests using a more consistent and robust measure of expected volatility, one which will not depend on the strike and will not be model-dependent. VIX is such a measure 4 as it does not constrain volatility to be constant. VIX pools the information from options with different strike prices and extracts the full information conveyed by the skew to reconstitute expected volatility. There is a secondary benefit to using VIX: its construction clearly lays out the portfolio of stock index options and futures that replicates total variance 5. The possibility of replication facilitates hedging and arbitrage of VIX contracts, and this ensures that the VIX futures price can converge to the special opening quotation of VBI at expiration. Relationship between VIX and Black-Scholes Implied VolatilitiesDupire and Hagan 6 characterize Black-Scholes implied volatilities when the underlying volatility is not constant. The Black-Scholes implied volatility of an option with strike price K is approximately equal to the expected volatility over the most probable price path whose ending value at expiration is K. This is in contrast to VIX which is the square root of expected variance over all possible volatility paths. Carr and Lee 7 find that a Black-Scholes implied volatility comes closest to expected volatility when the strike is at-the-money. Mathematical Derivation of VIXVIX is the square root of the .annualized forward price of the 30-day variance of the S&P 500 return This forward price is based on the replication of total variance by a portfolio of options delta-hedged with stock index futures. The construction of the replicating portfolio and the determination of its forward price from listed S&P 500 option prices is described below in greater detail. Replication of Total VarianceThe construction of the portfolio which replicates total variance is based on two observations: (1) (1) The total variance of the instantaneous rate of return of the S&P 500 over a period T is equal to:(2) A Taylor expansion of the logarithmic term ln(FT/F0) shows that it can be replicated by trading stock index futures and a continuum of out-of-the-money optionsCombining (1) and (2), the total variance is The first term of the variance isthe return to a position in index futures dynamically rebalanced to maintain a constant dollar exposure to the stock indexthe second term is the return to a static position of F0 index futures held to the date of maturity, and the last term is the return to a static portfolio of out-of-the-money puts and calls, with moneyness defined relative to the forward price F0. This portfolio contains dK/K2 puts with strike price K where K is smaller than or equal to F0, and dK/K2 calls with strike price K, where K is greater than or equal to F0. At expiration, the return to a put at strike K is ( K- FT)+ and the return to a call at strike K is (FT - K)+. The replicating portfolio for total variance assumes continuous trading, a continuum of listed strike prices, and a listed strike at-the-money. Two discrete approximations are needed to assemble and trade this portfolio. First, the dynamic component of the futures position is rebalanced at discrete intervals ?ti, second the strip of options consists of all listed puts with strikes at or below K0 , and all listed calls with strikes at or above K0, where K0 is the closest listed strike below F0. This leads to the discrete approximation: ?Fi is the change in the futures position over ?ti, ?K is half the distance between the two strikes adjacent to K,* or the distance to the adjacent strike for the initial and final strikes in the put and call series. The last term of the approximation is an adjustment compensating for the fact that the strip is not centered around a strike exactly at-the-money. This term drops out if there is a listed strike at-the-money, i.e. K0 = F0. Forward Pricing of Total VarianceThe forward price P of total variance is determined from the discrete approximation to this variance. Specifically, the forward price of total variance is the expected value of this approximation, with the expectation taken under the risk-neutral distribution. Next taking into account the fact that the expected value of the futures positions is zero 8, the forward price of total variance simplifies to the forward price of the strip of options plus the adjustment term where r is the money market rate, and ert PutK and ert CallK are the forward prices of out-of-the-money put and calls. The forward price of a 30-calendar day variance is interpolated from the forward prices P1 and P2 of variances over the terms T1 and T2 of nearby and second-nearby listed options, with the nearby option at least a week from expiration. This price is annualized and VIX is the square root. * The methodology of the CBOE Volatility Index is owned by CBOE and may be covered by one or more patents or pending patent applications. Page 5: Historical Performance cfe.cboe.com