Back to Insights

The dark side of volatility

March 1, 2018 | Commentary

  • The sudden spike in volatility in the first week in February should have reminded everyone that market risks never leave the stage permanently. With the rapid rise in trading products based on VIX, an additional dynamic has been introduced. Rapid trades in one area like volatility-backed ETNs are quickly translated back to VIX futures and options contracts and then back to the S&P 500 options and ultimately the stock market. This seems to be a case where the volatility tail wagged the stock market dog.
  • Exchange-traded options on individual stocks began in 1973 at the Chicago Board Options Exchange (CBOE). A decade later the first index futures began trading on U.S. stocks with index options following shortly thereafter. These simple tools continue to be effective in managing risks inside equity portfolios, but they have spawned activities that have little to do with anything but short-term trading.
  • The VIX is the most popular measure of stock market volatility, being based on the implied volatility of S&P 500 Index options. Once it was simply used as an indicator of market conditions, like temperature or wind speed. In 2004, VIX futures were introduced by CBOE and two years later options were introduced. These products made it easy to trade volatility directly. They also allowed the creation of Exchange-Traded Notes (ETNs) and structured products that are sold to the public.
  • Most investors don’t understand the basics of options and how they translate into VIX. That has not stopped billions of dollars from being invested into VIX-based products, betting on either increases or declines in market volatility. From the perspective of long-term investors, these products have always been fundamentally deficient. Market events in early February brought these flaws into focus. Sadly the tuition paid by the owners of these instruments to learn about them was quite steep.
  • Volatility should be managed through proper portfolio construction. Attempts to enhance returns by selling volatility and collecting implicit option premiums often disappointment. Retail-oriented products on either side of the volatility trade always come with careful disclaimers about how they might behave. It is time investors start taking those cautions seriously.

To continue reading and to learn more about Offit Capital, login or contact us.

Connect Now

Privacy Notice

Provided in accordance with the Securities and Exchange Commission's rule regarding the privacy of consumer financial information (Regulation S-P).

Information We Collect

Offit Capital must collect certain personally identifiable financial information about its clients to ensure that it offers the highest quality financial services and products. The personally identifiable financial information which we gather during the normal course of doing business with you may include:

Information We Disclose

We do not disclose any nonpublic personal information about our clients or former clients to anyone, except as permitted by law. Nonpublic personal information means personally identifiable financial information and any list, description or other grouping of clients that is derived using any personally identifiable financial information that is not publicly available.

In accordance with Section 248.13 of Regulation S-P, we may disclose all of the information we collect, as described above, to certain nonaffiliated third parties such as attorneys, accountants, auditors and persons or entities that are assessing our compliance with industry standards. We enter into contractual agreements with all nonaffiliated third parties that prohibit such third parties from disclosing or using the information other than to carry out the purposes for which we disclose the information.

Confidentiality & Security

We restrict access to nonpublic personal information about you to those employees who need to know that information to provide financial products or services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information.

Legal Disclosure

The information contained herein is for illustrative and discussion purposes only, subject to revision, modification and updating and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or an offer to sell, or a solicitation of any offer to buy, an interest in any securities or other instruments in any jurisdictions. Each prospective client should make their own investigation and evaluation of any investment or investment strategy described herein, should evaluate possible tax consequences and should have the financial ability and willingness to accept any associated risks. No assurance can be given that investment objectives will be achieved. Registration with the SEC does not imply a certain level of skill or training. Past performance does not guarantee and may not be indicative of future results. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

This website may contain "forward-looking statements" which are based on Offit Capital’s beliefs, as well as on a number of assumptions concerning future events, based on information currently available to Offit Capital. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of future performance, and are subject to a number of uncertainties and other factors, many of which are outside Offit Capital’s control, which could cause actual results to differ materially from such statements.

Users of this website: (i) agree to respect and protect Offit Capital’s proprietary rights during and after the time they use the site and shall promptly notify Offit Capital if they become aware of any infringement of these rights; (ii) may not publish, broadcast, retransmit, reproduce, repackage, scrape, frame, commercially exploit, create any derivative of or otherwise re-sell, license, transmit or redistribute all or any portion of the information contained herein except as explicitly permitted by Offit Capital. Offit Capital makes reasonable efforts to ensure that the website is secure, but does not guarantee the security of the website.

Commentary documents are intended for informational purposes only and contains the opinions of Offit Capital. Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. This presentation is subject to revision, modification and updating. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. This presentation is confidential, and is intended only for the person to whom it has been delivered. Under no circumstance may a copy be shown, copied, transmitted, or otherwise given to any person other than the authorized recipient (unless required by applicable law). © 2019 Offit Capital
Forgot your password? No Account? Request Access.

Request Access

Note: You will be emailed an access link upon submitting this form.