Insolvent Cyprus banks were the talking-head points today, in what was a comical display of ignorance and ineptitude by TV pundits and political leaders. CNBC actually had the google map app out, because I bet 4.7% of Americans have heard of Cyprus and 1.3% know where it is. This news story doesn’t matter and will be forgotten. People are having difficulty with the concept that the American economy and financial system have moved on from Europe, are building houses and finding jobs again, and that the major problems for the Eurozone have passed.
As soon as you do a shred of homework on the situation, you realize that a bunch of wealthy Russians are holding large deposits in a tax haven, and the battle is really about who is going to pay the price for the idiots there who over-invested in Greek bonds. Essentially, the country is battling the balance between hitting the banking business (rich Russians who would leave) or ordinary citizens that don’t hide money for sport.
The deal will be probably be amended to lessen the blow on those with smaller deposits, the parliament will approve it, and the world will move on after Cyprus has its 5 minutes of fame, not even 15.
So the VIX futures awoke from their slumber and natural hedging at low prices in SPX options raised the both to reasonable levels. A rise in the VIX of 18% to 13 from 11.3 is not really news worthy, but since most in the media don’t understand the VIX, they will make it seem like news. 13 was a five year low a few weeks back, now it represents a significant shift in fear. Nonsense.
The real game is in futures expiration. Only one day of roll left in the VXX and the April contract will be front and center. Every tick in the front month will move the VXX. It’s actually a good time to hold VXX if you believe that the market is heading lower over the next few days.
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX H3-CF | S&P 500 VOLATILITY | March2013 | 16:39:36 | 13.70 | 1.13 | 13.35 | 14.10 | 12.93 |
| VX J3-CF | S&P 500 VOLATILITY | April2013 | 16:39:36 | 15.40 | 0.68 | 15.25 | 15.60 | 14.65 |
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 16:39:36 | 16.35 | 0.49 | 16.32 | 16.60 | 15.82 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:39:35 | 16.95 | 0.28 | 17.30 | 17.36 |
The April contract moved 4.7% higher, and the VXX-IV moved 5.08%, with the couple bps difference owed to the two days of March futures left in the fund that rose in lockstep with the VIX. This is no man’s land for the futures. They are too high to spot VIX, yet not high enough to sell.
Trade/Action:
Still long the VIX and VXX calendars and the April VXX puts, so high, low or flat vol works. Our VIX model shows a modest rise in volatility early this cycle than lower vol later this week into next week. If the futures spike to 17 or so, we will look to add VXX puts.
In the meantime, once our calendar March legs expire, we may sell April calls to shave off even more of our VIX option cost. It will all depend on what happens after Wednesday’s settlement. The weekly put position is going to need a market rally to work. If the VIX April future retraces to 14.4, the VXX will be 20 and we may get out unscathed. This is not a crazy scenario, but probably is about a 30% probability.
Outlook:
We will post our proprietary VIX model chart later this week. Tomorrow housing starts and permits, and the Fed meeting to say nothing but more of the same may put Cyprus in the rear view mirror shortly.
