Volatility Trading Myths!

The VIX volatility index is supposed to be a proxy for volatility. However, when it comes to the VIX, nothing trades quite like you think it should. 

Don’t Believe All the So-Called VIX Experts. According to an article by Adam Warner in Investor’s Place - "Ten years ago, most people hadn’t even heard of the CBOE Volatility Index, or VIX. These days, the “fear index” is covered by the mainstream financial media, and you can’t throw a stick without hitting someone who fancies themselves a VIX expert."

The problem is that half of these people don’t have any clue what they’re talking about. So there is a lot of misinformation out there surrounding the VIX and VIX trading products, including futures and ETNs. When it comes to trading the VIX, nothing moves quite like you think it should.

To clear things up a bit, here are eight VIX trading myths you don’t want to fall for.

VIX Myth #1 – You Can Buy and Sell the VIX

Reality: You cannot buy and sell the actual VIX. You can buy and sell VIX futures, but that is a very different thing. VIX futures can trade at premiums or discounts to the VIX. In fact, they almost always trade at premiums to the VIX.

VIX Myth #2 – You Can Own the VIX Via Futures

Reality: VIX futures cash out when they expire based on a VIX settlement price. So unless you roll out, your position will vanish.

VIX Myth #3 – A Rolled Position Will Track VIX Moves

Reality: VIX futures price based on where the market expects to see the VIX on a given date in the future, i.e, the day the VIX expires. That estimate may or may not move on a given day with a move in the VIX. The further out in time the future is, the less it will track VIX moves.

VIX Myth #4 – VXX Tracks the VIX Better Than Futures

Reality: The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) is an exchange-traded note that is based on a hypothetical rolling 30-day VIX future and trades like a regular stock. However, it does not track VIX moves particularly well. In fact, it underperforms over time so long as VIX futures trade in an upwardly sloped term structure. And VIX futures virtually always trade that way.

VIX Myth #5 – You Can Chart VXX Like a Stock

Reality: Since VXX trades like a stock, you may think you can chart it like a stock. Wrong. Run, don’t walk, from anyone who tells you about a key chart point on VXX. The VIX is a statistic, and VIX futures trade based on estimates on a forward price for that statistic. VXX creates a hypothetical constant duration 30-day VIX future and, therefore, loses money each day simply rolling from the nearest month future to the next month out if the next month out trades at a premium. Hence VXX is really just a number relative to itself the day before. It’s the tail of a tail of a tail of a dog.

VIX Myth #6 – Holding VXX Can Protect a Portfolio

Reality: VXX works fine as a short-term trading vehicle. On a day-to-day basis, it will track about 50% of the VIX move. However, it is terrible as a portfolio hedge for the reasons listed before, namely that it loses money over time in an upward sloping VIX term structure. Owning and rolling two- to three-month VIX futures works better.

VIX Myth #7 – VXZ is a Good Portfolio Hedge

Reality: The iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ) is similar to VXX, but it tracks four- to seven-month VIX futures instead of 30-day VIX futures. VXZ has done relatively well since its inception and has outperformed VXX by a wide margin. But while it doesn’t have the contango trouble of VXX, the VIX curve gets pretty flat out that far. I would also caution that VXX and VXZ only listed in January 2009, and thus, neither has had to show its mettle through a VIX storm. Four- to seven-month VIX futures almost always hold their premium to the VIX, but would move to a significant discount in a serious VIX explosion. In 2008, they lagged by 20-30 points. So I suspect VXZ would not provide great protection when you wanted it most. It’s a fine volatility proxy in a quiet market, but if the goal is insurance, it may disappoint.

VIX Myth #8 – High VIX, VIX Call Buying is a Signal to Get Out or Get Short

Reality: I don’t agree with the above, but I can’t actually prove it wrong. I will say this though, the VIX is a mean-reverting statistic. A high VIX and excessive VIX call buying (and actual SPX put buying) represent extreme nervousness and/or bearish sentiment. In theory, that’s a time you want to buy, not sell. But take that with a grain of salt, because trends do take on a life of their own, like the VIX explosion and market implosion of 2008.

If you really want to trade volatility you’ve got  to trade VIX products. Email me for details.

S&P downgrades US debt to AA+ - FT.com

S&P downgrades US debt to AA+ - FT.com

Wow!!! This has to be the most stupid decision made by any Rating Agency.

Reminds me of the time when rating agencies gave a country with a population of more than a billion, an army of more than two million, the world's largest producer of gold, the world's factory with one of the most entrepreneurial societies in the world - a risk rating significantly lower than for a country with a population of around 300,000 and whose only export was fish.... I'm sure we all remember Iceland!

Using Whisper Numbers for Earnings Trades

There are a number of factors that affect post earnings price movement. Some are quantitative, some qualitative, some tangible, some intangible, some technical, and some fundamental. We consider 'investor expectations' to be the most influential and critical factor to understanding and anticipating post earnings price moves.

Let us first define what we mean by 'investor expectations'. Investors (professional, institutional, and individual) determine market direction. Some have more influence than others, but collectively, their expectations of stock price, stock direction, revenue, sales, etc. define the market. If investor expectations (real or perceived) of a company's future were bleak, the company stock price may suffer. If investor expectations (real or perceived) of a company's future were strong, the company stock price may surge.

It is the same with corporate earnings. When a company reports earnings that exceed investor expectations, the stock is rewarded. When a company reports earnings that fall short of investor expectations, the stock is punished. The simple fact is that expectations create surprises, surprises create volatility, and volatility creates opportunity.

How To Best Utilize Whisper Numbers: A number of investors have asked how to best utilize our data. First, in order to make the best trades investors need to be aware of as many factors as possible that can affect market moves. So aside from doing your own 'homework', it also means understanding investor expectations (whisper numbers). We'll restate something from a recent report: 'What we do know for sure is that company stock prices continue to react to beating or missing individual investor earnings expectations (whisper numbers) on a more consistent basis than analysts estimates.'

More often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a one to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a one to thirty day period after earnings are released. It is a simple process that should not be over thought.

Let's take a look at Research in Motion (RIMM) from the recent second quarter of 2009. They reported on April 3rd. Analysts expected 84 cents, investors had a whisper of 81 cents. If you expected (or hoped or guessed) that they would beat the low whisper you may have entered a long position prior to the release. You may just as well have expected (or hoped or guessed) that they would miss the expectations and enter a short position. Therein lies the 'risk'. You don't know whether or not they will beat or miss the expectations.

So how do you eliminate the additional risk of guessing or hoping the company will beat or miss the expectations? Simple, just wait until after earnings are released. RIMM reported earnings of 90 cents, topping both the analysts estimate and whisper number. Our data indicated that within thirty trading days following earnings, Research in Motion averages gains of 13% when they beat the whisper. If you waited until after the report you entered the market around 59. Within thirty trading days the stock was up 19% exceeding our expectation.

In fact, companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

Does it always work this way? Absolutely not. But historically the data has proven itself more accurate in predicting stock movement than analysts estimates (which shows no definitive cause and effect).

Obviously knowing which companies are most likely to react to beating or missing the whisper number has added value. Having a target timeline, target price move, and advanced knowledge of this data with email alerts adds even more value.

You could spend years collecting and analyzing your own data, and coming up with an analysis of best 'whisper reactor' companies. (Anticipating price movement is not easy, and there can be no guesswork involved.)

An interesting website - WhisperNumber.com does this analysis and puts together those companies most likely to see price volatility according to whether or not they beat or miss the whisper in a service called the Whisper Reactors.

Of course members of Richman's International Millionaire's Clubs may get the real inside scoop from corporate insiders who are also club members...

How to Market Luxury Brands to New Millionaires! By Steve Coipa

“Marketing luxury brands to the rich is complex enough. But it could be a real challenge marketing to the new rich?”

It’s official. The luxury industry is back after a short rest. According to an article in Forbes referring to the global consulting firm, Bain & Company's 2012 Luxury Market Update, the luxury goods industry is poised for full recovery in 2011. The report is authored by Claudia D'Arpizio, a partner based in the firm's Milan office.

The study covered some 220 luxury brands, which includes leather goods, fashion, jewelry, alcohol and cosmetics companies that serve high net worth customers, or those with assets of US$1 million or above and concluded that spending on luxury is expected to pick up to around $230 billion per annum by 2012. New millionaire from countries like China, India etc. will be leading the charge.

Rules of the game: While some golden rules of marketing remain, there are a few new ones that need to be recognized. The new rich seem to believe in the maxim - “If you’ve got it, you’ve got to be able to show it...or else you ain’t really got it”

There are those who think that, because of the current poor economy, the wealthy now want to be understated and subtle about their wealth. Well, as far as the new rich are concerned this idea is completely wrong.

Why Luxury Brands?: The rich patronize luxury brands for a variety of reasons. Although most would just prefer to say they buy for the quality of the product, the real reasons are more at the subconscious level – like peer recognition and approval, status, the admiration (envy) of the not so rich i.e. the aspiring rich etc.

Luxury Brands Marketing: Luxury goods brands deploy a wide variety of techniques to keep their brands within the mindset of their customers... both current and in particular future customers. While public relations and advertising in selected media has been the mainstay, savvy marketers have also used event sponsorship for decades... but mostly in name only.

However, in the last few years, a down economy has forced many luxury goods marketers to become more creative in reaching their target audiences.

Historically, marketers of luxury brands such as liquor, fragrances, timepieces, fashion and cosmetics have consistently pursued a luxury pricing strategy in order to maintain an impression of exclusivity. That strategy meant limiting the availability of products, price mar-ups etc. The thinking was, that their brands had to be guarded against brand devaluation.

But with luxury brands facing stiffer competition from new entrants and in an economy that’s presenting additional challenges, the risk of becoming irrelevant or God forbid! Being considered ordinary is very real, Luxury brands are now reinventing themselves to a whole new generation of potential customers. They are moving above advertising, that’s available to all with a budget, to considering unique, limited availability sponsorship of events and activities that are easily identified with the rich and famous, for differentiating their products.

Building Brand Image through Sponsorship: It takes a lot to build and a lot more to maintain a brand’s upscale image active in the minds of customers. And this is vital to the success of any luxury brand. There is no better and more cost effective way to build and secure that image than by regularly aligning with luxury events organized by equally luxury oriented organizations.

Take for example Richman’s International Millionaire Clubs. Its Charter Corporate Platinum Memberships is limited to just 100 globally, and is reportedly the world’s most expensive private club memberships. This particular class of exclusive membership offers much more that just one club membership with worldwide benefits not offered by any other club in the world. These memberships offer its holders exclusive rights to thirty years of corporate sponsorship rights to horse racing and other international millionaire events, at no additional cost - a value probably far in excess of the cost of membership. Of course the club probably has other classes of members who don’t necessarily enjoy these free sponsorship rights.

Luxury brands could sponsor both international and country specific events like the Richman’s Inter-World Horse Racing, Polo, Motor Racing, Golf etc. Challenges. In addition to on site attendance, these events indirectly reach a huge world wide audience of both the rich and rich wannbes through extensive television and Internet coverage of the event - thus prividing sponsors with media coverage at no extra cost. It would cost a substantial fortune to purchase this amount of media coverage through advertisements.

The point is that apart from just media coverage, sponsorship is a unique platform that has exclusive, specific and strong traits and personalities in identifying with and influencing both directly and subliminally with the wealthy and the rich wannabes. Selecting events with qualities most similar to a brand provides a very powerful vehicle for drawing attention to, and sustaining the image of the brand. Additionally, the lifestyles of these events’ patrons – i.e. expensive, exclusive with limited access etc. will greatly reinforce related qualities of the luxury brand over time.

Innovative Brand Building Relationships: Luxury brands must seek to stand out among their competitors. Therefore, the atmosphere in which luxury brands engage their most committed customers must match the exclusivity of the brand and the lifestyle it seeks to represent. Properly planned and activated hospitality programs leave a more lasting impact on the biggest customers than image-laden ads in high-gloss limited-distribution lifestyle magazines - a medium that lifestyle brands have traditionally leaned on for years. In using lifestyle magazines, it’s probably more cost effective to pitch them on co-sponsoring events or subsidizing hospitality programs rather than straight advertising in them.

The New Rich. Are they different?: Old money is just that – it’s OLD. It has it’s established habits and favored brands. It’s entrenched and less concerned with peer pressure or living up to the Joneses. Sad but true...Old money is a dieing breed and worst of all it’s buying less and less. “To survive and grow, luxury brands need to market to the new rich.”

Unfortunately the very people who are responsible for marketing and maintaining the image of many established luxury brands have grown old with their brands. Old – but not necessarily in biological age terms... but in philosophical and mind set terms. What worked well before may not work as well anymore...and the lean and hungry competition is just around the corner

In general, luxury brand purchasers are accustomed to being pampered, but they are also used to having access to the hottest parties, entertainment events and sports venues. Their experience threshold is much higher than the average fan. The new rich want all of this and more...and on more terms relevant to them.

For instance, a great view from a luxury hotel suite would be a truly memorable experience for most. For many consumers of luxury brands, it's an average experience. But for the new rich it’s more. They want the whole world to know that they can afford to stay at the luxury suite. The view is an added bonus.

Event Sponsorship provides a unique, non competitive, really exclusive platform for bringing truly memorable experiences to the new luxury consumer... and in a way he or she wants it. Perhaps the experience needs to be a bit over-the-top and maybe the average investment per invitee is going to be higher than the usual customer entertainment event but when you’re selling luxury to the new rich, coddling the customer just that much more is well worth the investment.

For more information on Luxury Brand sponsorship opportunities at Richman’s IMC organized events, please contact the author.