FAS is now XLF
Courtesy of Bill Luby at VIX & MORE
For someone who gets a kick out of volatility, the arrival of triple ETFs has been a little bit like manna from heaven. Of course the launch of the Direxion
triple ETFs back in early November just happened to coincide with the
highest VIX readings in history. There is nothing like record
volatility, except perhaps record volatility times three.
But a lot has changed since November. The VIX traded in the 80s the
month it was launched; today it was as low as 25.02. At the moment the
VIX is exactly 1/3 as high as it was when it peaked in November at
81.38. For those who have been selling options, the ride down the
volatility slide has been an unusually profitable one. In fact, it is
likely that some of the premiums harvested in the last nine months or
so will turn out to be the most bloated we will see in our trading
lifetimes.
My personal interest in the triple ETFs notwithstanding, these
vehicles have received mixed reviews, largely because their suitability
as buy and hold investments degrades rapidly after just one trading
session – with the problems exacerbated by increases in volatility. On
the flip side, the recent decrease in volatility has taken some of the
tracking and compounding errors out of leveraged ETFs. In fact, in the
current environment, the 3x and -3x ETFs are starting to look somewhat
tame relative to their history. The two charts below show the (30 day) historical volatility (purple line) and implied volatility (gold line) of the most popular financial sector ETF, XLF, and the 3x financial sector ETF that has taken the trading world by storm, FAS.
While there are a number of interesting conclusions to be drawn from
these charts, the point I wish to make is that current historical and
implied volatility for FAS (top chart) is hovering around the 100 mark,
which is about where HV and IV were for XLF (bottom chart) in February,
March and April. In other words, the 3x ETF FAS is no more volatile or
has more uncertainty in its stock price now than XLF did during the
period from October through April. Tracking error aside, FAS is now
effectively the ghost of XLF.
[source: iVolatility]
Comment on this post below.
