How Can the VIX Be 14 and Lower than VIN and VIF?
Guest post by Vix and more.
Many novice and advanced VIX followers are scratching their heads today, wondering why the VIX is down more than 5%, hovering around the 14.00 level, when the SPX is down 0.4% and all the major market averages are deeply in the red. More serious students of the VIX will also note that this drop in the VIX comes on a Monday, when the typical VIX “calendar reversion” is generally responsible for about a 1% pop in the volatility index.
The answer to most of these questions lies in yet another idiosyncrasy of the VIX: the roll. Quoting directly from the source, the CBOE Volatility Index (VIX) White Paper, we find these two important nuggets from pages 4 and 9, which I have presented here sequentially for easier consumption:
“The components of VIX are near- and next-term put and call options, usually in the first and second SPX contract months. ‘Near-term options must have at least one week to expiration; a requirement intended to minimize pricing anomalies that might occur close to expiration. When the near-term options have less than a week to expiration, VIX ‘rolls’ to the second and third SPX contract months. For example, on the second Friday in June, VIX would be calculated using SPX options expiring in June and July. On the following Monday, July would replace June as the ‘near-term’ and August would replace July as the ‘next-term.’”
“At the time of the VIX ‘roll,’ both the near-term and next-term options have more than 30 days to expiration. The same formula is used to calculate the 30-day weighted average, but the result is an extrapolation of σ2 1 and σ2 2; i.e., the sum of the weights is still 1, but the near-term weight is greater than 1 and the next-term weight is negative (e.g., 1.25 and – 0.25).” [Emphasis added]
Renter Nation
Guest post by Peter Tchir.
Buy and hold is dead. We “rent” stocks. We “rent” bonds. We “rent” commodities, and now we “rent” homes.
There are the obvious, negative reasons that homeownership is not increasing. Not enough jobs, loan availability is still difficult, a separation between where you can afford to live and where you are willing to live, etc.
Some of the other reasons, while possibly rooted in negativity are just different.
People have realized that buying and selling homes costs money. Not just the brokerage fees (how they get 6% is beyond me) but all the little work that has to be done to mold the home into what you want. This isn’t new it is just something we seemed to forget during the heyday of the housing bubble.
HFT Pro
By now every investor has heard of HFT Algos running the markets. The Trader has covered the topic in depth over the past year. Nanex has been the company that has provided most of the information and charts with regards to the professional HFT crowd. Below is an excerpt from the must listen to interview published a few weeks ago on HFT, Algo, market microstructure and the FB event wort reviewing, with Eric Hunsander of Nanex. Via Erik Townsend of Financial Sense.
The full interview click here.
ERIK: Now, before we dive into the gory details of what happened that fateful day with the Facebook IPO, I want to start by giving our listeners a sense of some of the background issues that came into play that day. Now years ago, a given stock say IBM stock was only traded on one and only one stock exchange. So IBM’s listed on the New York Stock Exchange, so that means the New York Stock Exchange is the only place that you could go to trade IBM shares, but that all changed a few years ago. Please explain to our listeners how and why it changed; what is Regulation NMS and how things work today. [3:45]
ERIC HUNSADER: Regulation NMS is what was debated by the industry in 2005, 2006 and was finally implemented and rolled out in the first, second quarter of 2007. At the core of Reg NMS is this concept called the national best bid or offer, which each exchange trading a specific stock would submit their bids and offers; this information would be aggregated by what they called a SIP — there’s a lot of acronyms coming up here. SIP stands for Security Information Processor. And one of the formal names or actually implementation of the SIP you might hear is CQS, the Consolidated Quote System. That’s the same thing as the SIPs for a specific group of stocks. But anyways, so those SIPs would accumulate the bids and offers from all the exchanges, find the highest bid and the lowest offer and that would become the national best bid or offer so that an order from a customer coming to any exchange would have to trade at the best bid or offer before it could trade at a next lower price. That was called trade through price protection. And that is the core of what Reg NMS is all about. [4:58]
Is the Next Great Bull Market Already Here?
Guest post via Dough Short.
In my article Get Ready for the Next Great Bull Market I showed that when the spread between the 50- and 200-month moving average of the S&P forms a trough, it identifies beginnings of major bull markets. Accordingly a new bull market should start at the end of this year. My further analysis, using an adjusted normalized price to earnings ratio, indicates that a major bull market has already started in 2009.
Most of us are familiar with the Shiller cyclically adjusted price to earnings ratio of the S&P. It is the real price of the S&P divided by the average of the real earnings over the preceding 10 years and is identified as P/E10 in Shiller’s S&P data series. The 10 year period seems to have been arbitrarily chosen so as to minimize the effects of business cycles. I am using P/E5 for my analysis, which is the real price of the S&P divided by the average of the real earnings over the preceding 5 years.
From the Shiller data I have calculated the real values of the S&P composite with dividends reinvested (S&P-real), which is shown together with P/E5 in figure 1 below. I did this in order to have all the data in real values, not only P/E5, and since I wanted to compare recent market action with that of the past. One can see that $100 invested in 1873 would have grown over 139 years to about $740,000 by 2012 for a real average annual return of 6.62%.
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