While doing simulations on volatility and the square root of time, I started thinking about how options experience time—is it calendar time, market time, or something in-between? The CBOE’s VIX® calculations use calendar time, a 365 day year, but most option gurus recommend using a 252 day year for volatility calculations—the typical number of trading days per year in the USA markets. When it comes to …
Update: On June 18, 2015 the CBOE announced that they would be discontinuing VXST futures and options. These products have not achieved significant volumes so this wasn’t a surprising outcome. As an alternative solution to the desire for options better tracking the VIX the CBOE has added weekly expirations of futures and options to the already hugely popular 30 day VIX futures. This approach has …
Previously I’ve done simulations, based on VIX futures, of volatility Exchange Traded Products (ETPs) back to 2004. In these simulations, I only generated the closing values, but since then I’ve had requests for open/high/low (OHL) values. I’ve extended my backtests to generate ETP opening and intraday highs and lows for many of the short and medium-term volatility funds—specifically VXX, VIXY, TVIX, UVXY (1.5X & 2X), …
It’s expensive to buy securities that track volatility. Their holding costs are so high that your timing has to be exquisite in order to end up with a profit. However, if you’re hedging a short volatility position, or poised to jump into the general market at a possible transition point a long volatility position might make sense. Consider this chart: Will the S&P 500 bounce …
The Cboe did not create the VIX® as an academic exercise, or as a service to stock market prognosticators everywhere. They created it because they wanted to make money on volatility. It took them two tries, but the Cboe succeeded in developing a volatility index that forms the backbone of a host of volatility products. The Cboe offers some of these products, but other companies have …
