Daily Commentary - Posted on Friday, September 12, 2014, 6:19 AM GMT +1
RVX and VXEEM – Gap Closed (Reversion To The Mean)
A couple of weeks ago ( on Juli 11, 2014 – see RVX and VXEEM – Reversion To The Mean ? ) I posted about an arising opportunity in CBOE Russel 2000 Volatility Index® (RVX®) and the CBOE Emerging Markets ETF Volatility Index® (VXEEM®) futures due to the fact that the gap between the CBOE Russel 2000 Volatility Index® (RVX®) and the CBOE Emerging Markets ETF Volatility Index® (VXEEM®) widened to a so-far all-time high.
While the market’s expectation of 30-day volatility implicit in the prices of iShares MSCI Emerging Markets Index near-term options (implied volatility) is regularly (≥ 95% of the time, see Image II) well above the market’s expectation of 30-day volatility implicit in the prices of near-term Russell 2000 options (means RVX – VXEEM is negative most of the time), on July 10, 2011 the former led to something like an ‘inverted volatily curve‘, posting a new all-time high on July 10, 2014.
My comment on July 10, 2014: “If you believed the gap will revert to its mean sooner ar later (better sooner, at least until October 21, 2014), a possible strategy would be to go long CBOE Emerging Markets ETF Volatility Index® (VXEEM®) futures and short the apropriate number of CBOE Russel 2000 Volatility Index® (RVX®) futures (they have different multipliers!). On July 10, 2014 the respective pairs closed (settlement values) for a positive difference of (expiration – difference): AUG’14 – +2.00 , SEP’14 – +1.70 , OCT’14 – +1.45 . The trade would make money if the gap between the CBOE Russel 2000 Volatility Index® (RVX®) and the CBOE Emerging Markets ETF Volatility Index® (VXEEM®) reverts (assumed the respective futures pair bought/sold short follows suit) and closes (and you could get out of the trade) at least below +2.00 | +1.70 | +1.45 at any time until futures expiration.“
Two month later not only the gap between both volatility indexes (and futures) has been completely closed, it posted a 3-month low and may be on its way to another extreme on the opposite site.
The respective pairs (CBOE Russel 2000 Volatility Index® (RVX®) futures vs. CBOE Emerging Markets ETF Volatility Index® (VXEEM®) futures) are now trading for (settlement prices):
SEP’14 : -1.75 (+1.70 on July 10, 2014, a +3.45 gain per futures contract)
OCT’14 -0.85 (+1.45 on July 10, 2014, a +2.30 gain per futures contract)
Have a profitable week,
Disclosure: No positions in the assets mentioned in this post.
Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.
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