In 2012 we discussed methods of trading the CBOE Volatility Index (VIX) futures contract at CBOE Futures Exchange, LLC (CFE). In this article, we will review the previously discussed trading methods and how to apply them to the current market environment.

Liquidity is an important factor for trading. Several times during 2012 VIX futures volume reached record levels including a record high of 2,734,248 contracts in November, Which was a 233% increase from November 2011’s 822,017 contracts and which broke the prior trading volume record set in October by 12%. In November the Average Daily Volume for VIX futures was 130,202, an increase of 233% from November 2011. To date, the November VIX futures total volume is 86% higher than it was in 2011 and year-to-date trading volume is 21,344,285 contracts versus 11,455,871 in 2011.i

In past articles we discussed the use of four VIX futures trading strategies: 1) utilizing support and resistance to seek contrarian changes at range bound extremes; 2) crossing of moving averages; 3) utilizing the Aroon Oscillator; and 4) using the True Range to trade VIX futures. In this article the parameters have been set to the same level as they were set in previous articles.

We begin discussing the support and resistance methodology. We originally discussed this in the September 2012 article “VIX Trading Strategies”. The VIX futures contract historically tends to find major price support between 10 and 15 and it finds major price resistance around 40 (with the exception of the financial crisis). As you will notice in the monthly chart below VIX futures tend to rally after forming a floor at or near a price of 15. This most recently occurred in 2010 and 2011. During the last several months, the VIX contract has once again found the price of 15 to be major price support area. Could this be the foundation of a floor for a rally in 2013?

Chart 1: Monthly Nearest VIX Futures Chart with Support and Resistance
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Copyright ©2012 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com

Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance.

Past performance is not necessarily indicative of future results.  There is risk of loss when investing in futures and options.  Always review a complete CTA disclosure document before investing in any Managed Futures program.  Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone.  The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

In case you’re wondering why none of your trades are going through on the floor of the Merc or the CBOE, it may be because no one is on the floor….

Preet Bharara, the United States Attorney for the Southern District of New York, had a simple message for the hedge fund professionals assembled at the Metropolitan Club yesterday in New York for HedgeWorld’s Spring Fund Services Conference: If you’re going to act like a horse’s ass, then be prepared for prosecutors and regulators to come after you. And then he implored them not to act like horse’s asses.

Bharara, a professional in numerous contexts, including politically, although he has not yet sought an elected office, never used the term “horse’s ass.” He is too smooth for that. But his message was clear. Shenanigans in the financial industry have led to a deep mistrust of that industry by the public. That mistrust hurts the same capital markets that bankers, financiers and investment professionals claim to love.

Each time his office brings a case against someone in the investment industry—Raj Rajaratnam, for example—it confirms a deep suspicion among the broad population that the investing game is rigged.

“There is boiling over anger that hedge funds and financial institutions have not done enough to police themselves and regulators haven’t, either,” he said.

This is why Bharara’s office continues to bring cases, he said. “It is my feeling that our work is far from finished.”

Misdeeds also bring on scrutiny from politicians in state legislatures and in Congress. As if on cue, hours after Bharara spoke at the HedgeWorld conference, the Senate passed a financial reform bill. We can debate the merits of the bill, and whether it is overly stringent or not tough enough, but in this case the action is the message.

Speaking much more eloquently than I write, but still managing to seem blunt, Bharara urged everyone in the room to foster a culture of ethics at their firms. He told them not to wait until trouble strikes—someone from the SEC or his office shows up at the door—to educate people in the firm about how to behave properly and follow the law.

He called for a renewed focus on ethics and integrity.

And he made a distinction between “technical compliance” with the law, exploiting loopholes in the law or coming as close to the line as possible without crossing it, and actually following the letter and intent of the law.

When people in finance, investment banking and the hedge fund industry show up in the news portrayed as crooks, it reinforces an already negative image and creates a “genuine crisis of confidence in the system.”

“The larger victim is the general public,” Bharara said, “who vote and also invest in markets. Corrupt corporate leaders can turn off the investing public. That’s not good for the economy or democracy.”

Bharara got in some good one-liners—the stuff of good political speeches. He said the size and scale of the fraud schemes his office has exposed “would make Mr. Ponzi blush.”

Returning to his central message, Bharara closed with a call for personal responsibility.

“My resources are not without limits,” he said. At the end of the day, prosecutions are a “blunt tool” to enforce ethics and rules.

“People in this room can play a role in fighting off the creep of corruption that’s keeping my office so busy,” Bharara said. “There is nothing wrong with making money. Everyone in this room wants the public to have faith and confidence in this industry. At the end of the day, we are in this business, I believe, because we believe in markets. People who cheat cheat not just the markets, but you individually.”

News headline: “Major U.S. banks masked risk levels”.

Wait while I feign surprise … there, did you see it?

The Wall Street Journal has this story today, but by the time you get to this you may well have to pay to read it. It’s pretty easy to grasp what’s going on here. According to the Journal:

“A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.”

Confronted with this data, what say the banks?

“Though some banks privately confirm that they temporarily reduce their borrowings at quarter’s end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm’s financial filings include language saying borrowing levels can fluctuate during the quarter.

“‘The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements,’ a Bank of America spokesman said.’”

What a ringing endorsement of the policy. “Hey, it’s legal.” Right. And therein perhaps lies part of the problem.

“The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.

“The repo market played a role in recent accusations leveled by an examiner in Lehman’s bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.”

Oh, so if you take steps to hide the debt, that’s bad. Just moving it around as part of the normal course of business - you know, at the end of every quarter - that’s OK. I think I get it now.

The Journal story also details a trade at Bank of America at the end of the first quarter in 2009. According to a bank spokesperson: “… the team was aware of and worked within its risk limits.”

Last fall I was on a conference call with several prime brokers. After the introductions were through, the conversation among the assembled prime brokers turned to business. Specifically, how business was.

One of the brokers spoke of business in 2009 in terms of business in 2008. “A year ago it felt like the world was ending,” he said. “This year I sense people are feeling a lot more confident.”

Seems like a simple observation, and it was. The other prime broker representatives on the call all concurred, and offered anecdotal evidence from their own experiences. But that was last year, and as good and relieved as everyone on that call was I found it hard to muster any enthusiasm of my own for 2010. (more…)

I kid, my hedge fund friends, I kid.

Still, here’s something you don’t see every day: an individual ripping off an investment firm. Bernie Madoff obviously perfected the routine … well, up until the point he was arrested. But Rabbi Milton Balkany has made a good effort. He told the New York Daily News that the charges were “ridiculous.”

Regardless, Balkany has his own Wikipedia page, and in the true spirit of the medium, it’s already been updated, complete with footnotes, with information about the alleged extortion.

Thus far the hedge fund has remained unnamed, although Clusterstock, citing market chatter, suggested it was … wait for it … SAC. Who else? If there’s a hedge fund story that even mentions “insider” and “trading” within a couple of paragraphs, everyone suspects it’s SAC.

Fresh off its failed attempt yesterday to host a coherent debate on the merits and drawbacks of a carried interest tax, CNBC gave it another go today. This one didn’t go much better than yesterday’s, although at least today the guests allowed one another to finish their thoughts. It devolved pretty quickly at the end, though, with the standard TV reminder that “this is TV” and we can’t spend all day on this stuff. There’s just no point to these segments, other than to fill time.

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For What It’s Worth
Transparency and valuation are hot topics right now. HedgeWorld will be devoting the June issue of Accredited Investor to the topic, and Martin de Sa’Pinto recently wrote about SuperDerivatives’ take on the matter.

Today, the New York Times carried a story from a conference Thursday put on by Standard & Poor’s. It’s not the most in-depth piece on valuation, but it clearly illustrates the divide between bankers and some economists when it comes to valuing hard-to-price or long-term securities on balance sheets.
(more…)