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Evil Speculator

Evil Speculator

Created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious market schemes at various social media waterholes (e.g. youtube, facebook, twitter, stocktwits) and of course on evilspeculator.com.

Articles by Evil Speculator

Systematic Trading – Unwrapping the Onion

March 16, 2017

Lumpy but Robust
 
[ed note: this article has originally appeared at the Evil Speculator and was written by trader and ES contributor Scott. We provide a link to Scott’s past articles below this post for readers who want to get more familiar with his ideas and/or any unusual terminology used in this article]
 
One continual theme in my trading is that every time I think I have it figured out, I get punched in the face by an unexpected problem. The tendency is to go more complicated, but often the solution is a degree of acceptance with respect to the nature of the game. Sometimes my edges work, sometimes they don’t. Sometimes they stop working for long periods of six months or more.
 
Financial markets – multi-layered like onions
 

That’s actually fine for me, but it isn’t for many other people. The systems one ultimate chooses have to suit one’s personality. If one cannot handle extended periods of working hard without making money (I can) one has to retool one’s trading systems to avoid such situations.
My opinion is that the best edges are robust. Robust edges tend not to disappear, but don’t post objectively high results either (in terms of SQN, Sharpe or expectancy).

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The Futility of Predictions

January 27, 2017
The Futility of Predictions

Awesome Forecasts and the Unknowable Future
Back in late 2013 I wrote a piece on human nature which was in part inspired by the bullish exuberance exhibited by a MarketWatch article predicting the DJIA at 20,000 in the near term future. Yesterday afternoon, a bit over three years later, that prediction actually became reality and I’m sure the author of that article as well as many other like minded traders popped some champagne in celebration of their awesome ability to predict the future.
 
A trader from the (near) future.
Image via tumblr.com
 

Now don’t get me wrong, I’m happy for those guys and for the Dow Jones. Assuming of course that everyone involved actually put their money where their mouth was back then – which ever few do. And that in essence was the underlying message of my post.
In yesterday’s update I briefly touched on hindsight bias and how we all have a knack for bending the past in our respective favor. Nobody wants to look stupid after all. And in hindsight, all of us would have liked to have bought the S&P 500 at 667 in 2008 and then traded it all the way up to just below 2300 today.
Except of course that we didn’t (please raise your hand if you did). And that is quite a humbling lesson to learn in our ongoing quest to obtain riches from market participants who happen to disagree with us.

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Return of the Loonie

October 28, 2016

Holding Pattern
When it comes to interesting charts or marginally promising setups I’m pretty much scraping the bottom of the barrel right now. Not surprising really, given that the few remaining market participants (bots! cough cough) are firmly set in a holding pattern after a one year sideways churn and an impending Presidential election on November 8th which is thought to have the potential to be the catalyst for changes in the financial arena. I for one hold very little hopes on that end, no matter which of the two candidates will be sworn in come January.
 
There’s always the loonie though…
Photo credit: Fantasy Films
 

Some folks complained to me about politics being discussed in the comment section, but quite frankly compared with the insanity I’m seeing over at Zero Hedge and other watering holes I think our crew here has remained incredibly focused throughout all this. Which speaks to the quality of the people on this board I am proud to say. Nevertheless I for one cannot wait for all the craziness to finally die down – at least a little – so that we can go back to business and bank us some coin!
 
An Opportunity in the Making?
Speaking of crazy, I have been watching the ‘Loonie’ (i.e. USD/CAD) with increasing interest lately as it is displaying signs of a break out pattern.

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British Pounding

October 7, 2016

Flash-Crashed
Earlier this morning the British Pound suddenly found itself on the receiving end of a 6% flash crash during Asian trading hours. Some of the losses have been recouped since then, but that will be of little consolation to anyone who may have been long the GBP overnight.
 
Oops.
Photo credit: Time & Life Pictures / Getty Images
 

Now before you strike this up to some ‘fat finger’ or bot driven irregularity let me remind you that cable is the third most liquid currency pair after the EUR and JPY crosses, representing roughly 15% of the daily trading forex volume of US$5 Trillion.
We are not talking gold or even the S&P here – this is (supposed to be) an extremely liquid market. Which means that this type kind of dislocation should not be happening assuming a semi efficient market. And as such it either reeks of manipulation or worse – an early sign that things are becoming unglued on the currency front.
 
GBP-USD, 60 minute and daily chart. Overnight currency murder – click to enlarge.
 
What surprised me the most however was the complete lack of response on the equities side. There wasn’t as much as a twitch and it appears that the E-Mini has been dropped off at long term parking near lot number 2148.

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An Old Friend Returns

August 11, 2016

A Rare Apparition
An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here.
 
Hello, old friend. Professor X and Magneto staring each other down in the plastic prison.
 

As a matter of fact it’s been so long that I actually had to and google my own blog in order to find it. Turns out the last time I reported a rare sighting such as this was on March 15th 2012 AD.
If I recall my history correctly that was right after Napoleon pushed the Romans out of Vienna at the battle of Dunkirk. Give or take a century – historical records are vague, as they have been corrected to satisfy political correctness and to protect the feelings of innocent snowflakes. After all we wouldn’t want the terrorists to win.
 
A rare sight in recent years: a genuine VIX sell signal (its anatomy is explained further below). With systematic strategies having huge equity exposure, and record net long options and futures positioning by speculators in several stock market indexes, such a signal should give everyone pause – click to enlarge.

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Fractal Monger Reloaded

August 2, 2016

Fractal Geometry of the Markets
You probably wouldn’t know it but I have actually been extremely busy over the past few months resurrecting a previous creation of mine. It all started about two years ago, in early summer of 2014, when I wound up diving head first into more advanced topics such as machine learning, artificial neural networks, support vector machines (SVMs), as well as fractal geometry of financial time series.
 
A fractal Zen moment.
Image via hdstockphoto.com
 

If you’re not familiar with most or any of these subjects then I wouldn’t be surprised as it’s pretty dry material, especially if you aren’t naturally blessed with a mind for advanced mathematics. For the record – I clearly am not. Which is why my absorption rate was rather slow and painful.
But in the end brute determination and a stubborn disposition once again trumped my humble intellectual abilities and I was able to wrap my mind around the basic concepts.
Unfortunately however I was unable to reproduce the results of any of the most promising white papers I had collected. Perhaps I was missing critical information, but most likely I had simply screwed up or misinterpreted some essential detail.
Which is what happens when mere mortals aspire to soar toward the sun with nothing but a contraption made of wax and feathers.

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Mid Summer Momo Update

July 25, 2016

Mid Summer Momo Update
It is hot and it is humid over here in Valencia. You want to know how hot? The other day a poodle’s tail caught fire just waiting in the sun. The more frantically he was wiggling his tail the brighter it burned.
 
A time for quiet contemplation of the bright blue sea… while next door, the poodle burns!
Photo via piktpool.com
 

Fortunately his master was nearby and was sweating so much (overweight Brit) that he was able to put the fire out with his bare hands. True story!
Well, maybe not – but that’s definitely how it feels over here. Fortunately the evil lair is equipped with an industrial strength A/C unit which will continuously run on its polar bear setting until late August. If the power goes down I’m dead meat as I have a high tolerance for heat but a very low one for humidity.
Alright, so I don’t really feel like putting up setups today, in particular since most of you guys are either on vacation or too lazy to actually pull the trigger. Let’s do a mid summer momo update instead – we’ve got interesting developments on all fronts and if you’re holding long here then you may want to pay attention.
Simple stuff first – realized volatility. Take a look at the blue squares I highlighted on the chart above.

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Long Term Market Perspectives

July 12, 2016

Methuselah Tree
When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.
 
Ye olde bristlecone
Photo credit: Kosta Konstantinidis
 

You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White Mountains. It’s a lovely drive and you will start seeing more and more of them as you reach an altitude of 8,000 to 10,000 feet which is far beyond the official tree line.
These trees are ancient and by that I mean the average tree you’ll find is most likely several thousand years old. The oldest living specimen is aptly called ‘Methuselah’ and thought to be over 5,000 years old. Its exact location is a well kept secret among a small number of forest rangers in order to keep you monkeys from carving your sweetheart’s initials on it. You know who you are…
Now about that featured image. It’s actually one of mine I took many years ago when I was visiting the White Mountains. I had totally forgotten about it and the Panoramio account I created about a decade ago apparently has been disabled. So I was pretty surprised to see it being featured all over the place when googling for ‘bristlecone’ today.

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Market Update for Purists

July 5, 2016

Net Lines
It’s that dreaded day after Independence Day. The weather is gorgeous and I don’t really feel like trading either. The thought of just phoning it in had occurred to me, but as the new month just rolled over I thought I may as well take another peek at our monthly charts. Which uncovered quite some interesting perspectives that I’m eager to share.
But no worries – we’re keeping it light and easy today. Consider this a purist’s approach to market analysis as we’re going to ignore everything but Net-Lines.
 
The picture for today’s Zen moment.
Photo credit: istock
 

So what are Net-Lines? Before we get into the thick of it let’s quickly cover the concept of Net-Lines, which is purely price based and as such I don’t consider them ‘indicators’ in the traditional sense. There are in fact two types of Net-Lines, one for the buy and one for the sell side. The rules are pretty trivial:
Net-Line Buy Level (NLBL): Wait for three consecutive lower lows, then take the high of the first candle as your NLBL. The push above that high is your signal to go long.
Net-Line Sell Level (NLSL): Wait for three consecutive higher highs, then take the low of the first candle as your NLSL. A breach below that low is your signal to go short.

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Rule Britannia

June 24, 2016

A Glorious Day
What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.
 
Waving good-bye to Brussels!
 

 
It goes without saying that this historic vote will have long term implications all across the rest of Europe, as resistance to a increasingly authoritarian, wasteful, and bureaucratic European Union has steadily been growing across the Euro zone over the past few years. The dominos are just now starting to fall. Minutes ago David Cameron announced that he will step down as Prime Minister , stating that the country requires fresh leadership
South of the border we already are hearing calls for a Frexit referendum from Marine Le Pen, leader of the conservative EU-skeptic Front National party. In light of this unexpected victory other nationalist leaders across Europe will certainly now be considering their options. Without doubt it is going to be a very hot summer in Brussels.
 
Cameron resigned just now… said he wanted to have a few quiet days with his pig to mull things over.

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The Wall Must Fall

June 8, 2016

Do or Die
I think I speak for everyone involved if I say that it’s way past high time for this market to either breach the wall ahead of SPX 2150 or finally accept defeat and relieve itself to the downside. It’s become a war of attrition at this point as we have been suffering through this deadlock of a market for more than a year. And may I say – it’s getting not just boring but increasingly annoying.
 
The Wall…
Image credit: Home Box Office (HBO)
 

I’m fine with a sell off – I’m also fine with a ramp – just let’s get this show on the road, thank you very much.
Alright, I am feigning being a bit of a drama queen here as things are actually looking pretty productive now. Note how last night’s complementary stop run found a quick bid exactly where I had drawn support at 2106.
I trust many of you will find yourselves magically relieved of what looked like perfectly positioned long campaigns yesterday afternoon. Frustrating – perhaps – but all that thrashing around is producing more and more context, which is what we need in order to establish a firm base camp near 2100.
 
SPX E-Mini futures, 60 min. and daily – click to enlarge.
 
We tried a long position in soybean oil futures yesterday but it was taken to the woodshed overnight. Not being easily discouraged I’m trying this one more time with a stop beneath 32.1.

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Trouble in Paradise

June 3, 2016

Dismal Number Bombardment
The May NFP jobs just dropped half an hour ago and the numbers were was so dismal that it left a smoking impact crater across equity futures. Apparently we added 38k jobs which was several standard deviations below the median forecast of 160k.
 
Someone just threw a hand grenade M33 into the trench – and as is well known, that grenade can have a strong effect on morale
Photo credit: AP
 

The number was the lowest since September 2010 and adds insult to injury after the April report was already revised downward from 160k to 123k. Smoking!!! Let’s do a quick review of the damage inflicted thus far.
The E-Mini futures – couldn’t have happened at a better time. The tape literally flipped on a dime here and I don’t recommend stepping underneath that falling sword.
 
Mini spoos (ES), 60 min. and daily – click to enlarge.
 
Bonds – sometimes I’m getting tired of being right all the time (no – I’m not). Recall how I mused that a rate hike may still drive t-bonds higher? Well until about an hour ago that was the expectation and now that it’s probably off the table bonds are literally exploding higher. I’ve said it before and I’ll say it again: There’s no stopping bonds – it’ll be the most profitable vertical in the months/years to come.
 
Meet the Unstoppables: ZB hourly and daily – click to enlarge.

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A Few Charts for the Road

May 27, 2016

Yellen Looms
We’ve got a bit of a double whammy going on today in that it’s the last session before the long weekend plus Yellen is scheduled to speak late in the day. So it’s probably fair to say that few of us are going to be doing much on the trading front and I wouldn’t be surprised if most of you are already on the way out.
 
Off we go…
 

Best to call it a week – quite frankly I could use a few days off myself as I have been working hard behind the scenes over the past few few weeks. However it’s become a long standing tradition here at the evil lair to send you guys off with a few charts of interest and I would hate to disappoint. In no particular order:
Stocks:
 
Spoos (ES) hourly and daily – click to enlarge.
 
Equities are of course in everyone’s mind as the pre-holiday/ Yellen spike higher now left the bears in a pretty tenuous position. The short term panel is looking as bullish as they come but I don’t think we’re going to see much movement here ahead of 5:15pm – thus the session is pretty much a tosser. Two considerations I’d like to offer however:
 
 

If Yellen maintains her general stance of ambivalence then it’s quite possible we’ll see a EOD spike higher leaving any remaining bears (are there any?) in the lurch over the long weekend (especially if you’re holding puts for the next three days losing theta).

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Second Quarter Long Term Update – US Stocks and Euro

May 26, 2016

Cold Spells
My favorite quarter of the year is slowly drawing to a close, with Memorial Day in the U.S. marking the beginning of the long awaited vacation season. It’s been a long winter and we haven’t really seen much of a spring over here in the Mediterranean to be honest.
 
The spring, as it is supposed to be…
Photo credit: Achim Thomae
 

The past three months brought us only a few warm days as the general theme was dominated by rainy weather, cold spells, and even a patch of frost in late April that damaged a good number of vine crops up North in Southern France.
Fortunately Spain was mostly spared and perhaps 2016 will finally be remembered as the year when the excellent wine produced down here in the Peninsula finally received the international recognition it deserved. Then again, I very much do enjoy buying a bottle of red bliss for under €10 that often challenges some of the most renowned French labels selling for three or four times that much over in the U.S. You may want to start studying up on the various classifications and labels – they’re quite a bit more easy to grasp than the pretentious mess over in France.
 
The Long Term Picture in Equities
With the Memorial Day weekend only days away I expect few of you to be trading after today, especially after we saw some significant moves over the past week.

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Precious Metals – Short Term Trading Update

May 17, 2016

Not Easy, But There Remains Potential
As equities continue to gyrate over respective medium term support levels I do not feel particularly tempted to get sucked into placing any haphazard directional plays.
 
The King of Bling
Photo via picsofcelebrities.com
 

Precious metals are not making it easy for us either but appear to be more promising as there remains significant upside potential.
 
Gold (GC), hourly and daily – click to enlarge.
 
I’m still in both my gold campaign but as you can see yesterday’s paper gains have been unceremoniously eroded overnight. What works in our favor here is the increasing accumulation of short and medium term context above the 1270 mark – which is where I would try another long position if my current campaign is stopped out. More long term a key level to keep an eye on is near 1260 (June contract) which absolutely needs to be held.
 
Silver (SI), daily and weekly – click to enlarge.
 
Silver is a bit more complicated as we don’t enjoy a particularly clean formation on either the daily or weekly panels. What the latter has going for itself however is the 100-week SMA which has settled near the 16 mark.
A reversal to that point seems like a natural LKGB opportunity to me and thus worth dipping into a few long positions with stops below 15.5.

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Two for the Price of One

May 10, 2016

Another Vega Crush Target
Macy’s (M) may not be anyone’s favorite place to shop these days, but its volatility curve is set up nicely for a vega crush campaign.  We’re going to look at two different ways to take advantage of M’s volatility term structure ahead of earnings (tomorrow morning before open).
 
Macy’s store of yore
Image via Frank Leslie’s Illustrated Newspaper
 

Macy’s
Symbol: M
Strategy: Double Calendar
Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/11 earnings announcement in the morning.
When To Exit: After earnings announcement OR we hold through expiration if there is little IV movement.
 

Click to enlarge.
 
Strategy Details:
 
Trades to open position         No.      Price    Total
buy      3rd June $35 Put     1×100    $0.72  -$72.00
sell      13th May $35 Put    1×100    $0.41    $41.00
sell      13th May $40 Call    1×100    $0.34   $34.00
buy      3rd June $40 Call    1×100    $0.59  -$59.00
Total    $-56.00
 
Initial outlay: $56 (net debit)
Maximum risk: $58 at a price of $25 at expiry
Maximum return: $114 at a price of $40 at expiry
Break/evens at expiry: $43, $32.80
 
Macy’s historical vs. implied IV – click to enlarge.
 
Considerations:
Macy’s front month is running at close to 40% implied volatility, compared to around 20% for the 30-day historical volatility.

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BABA and MBLY Campaign Debrief

May 9, 2016

Operation Vega Crush Part II – Post Mortem
Before we get to the specifics of last week’s option campaigns, I wanted to cover a few interesting observations we made from our strategies this past week. In an effort to show how little risk is associated with these types of vega strategies, I actually believe we were too conservative this past week. While we made money on both campaigns we could have certainly done better had we decided to be just a bit more aggressive.
 
Debriefing time
Photo via harringtonmuseum.org.uk
 

Generally speaking, I’d rather give up some return potential in order to increase the probability of success. However, in this case, we could have easily increased our returns without a very noticeable difference in our risk profile. Let’s review:
 

We could have gone three weeks out on our back month longs instead of two. That extra week of extrinsic value does make a difference when vega gets crushed. Moving forward, I believe it makes sense to go back out to three weeks for our back month longs. As a reminder, the closer you get to the present, the cheaper the option will be, so the less you’ll need for the initial outlay. The key is to find a balance between how much you have to spend and how much extrinsic value is lost during the vega crush.
We went entirely with Limping Condors (usually referred to as Double Diagonals) this time.

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Vega Crush Candidates

May 4, 2016

Second Helping
The first round of our IV crush earnings plays was a resounding success and as there’s about a week’s worth of announcements left in this quarter we are pumped and ready for a second helping.
 
The next round of Operation Vega Crush begins
Photo via artcarcentral.com
 

If you are new to options then I suggest you point your browser to to the first three posts in our ongoing tutorial series on option theory. Once you develop a basic understanding of what we are doing and how, selling volatility ahead of earnings announcements may become another profitable tool in your trading arsenal.
If you are a noob to options but want to shadow our campaigns with real coin then we recommend that you only take out one single position so as to keep your exposure as small as possible. This way, if you somehow screw something up, e.g. place the wrong strikes or the wrong months, the damage should be minimal.
When in doubt ask away in the comment section [over at Evil Speculator, ed] – both Jay the Option Executioner as well as yours truly will be happy to answer any questions you may have.
 
New Victims
Alright, so let’s introduce our latest victims – starting with Alibaba.
 
Alibaba, Symbol: BABA
Strategy: Limping Condor
Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/5 earnings announcement.

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Making it Rain During Earnings Season

May 3, 2016

Operation Volatility Crush – Post Mortem
[ed note: this is a follow-up to “Let’s Crush Some Volatility”, penned by the aptly named Ray the Options Executioner for the Evil Speculator]
Our introduction to earnings-based options strategies has started off with a bang. Actually, it’s hard to imagine a much better results for our first option campaigns. Granted, we’ve been doing this stuff behind the scenes for a while, and we expected the options strategies in FB and FSLR to succeed. Still, you gotta love when what happens is pretty much exactly what you predicted.
 
The rainman
Photo credit: musictory.de
 

Let’s start with the results for the FB Double Calendar at expiration:
 
Results of the FB trade
 
So we spent $149 to make this campaign happen and finished up with $121 in profits. Keep in mind, the max risk on this was only $154, and we were never close to losing money at any point after earnings hit. In fact, even with the huge earnings beat, FB shares would have had to move another $10 before this strategy would have started to lose money.
Just a reminder, you can let short strikes expire worthless in this case and collect 100% of the premium. To sum this up, you basically made 80% on your initial investment in the course of two days, with almost no risk of losing money.

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Let’s Crush Some Volatility

April 26, 2016

Searching for Victims
If like me you were a Monty Python addict back in the days then you are probably familiar with the phrase ‘And now for something completely different’. As you probably know we’re in the midst of Q2 earnings season right now, and Jay The Executioner in collaboration with yours truly has been on the hunt for potential IV crush victims.
 
A tragic victim of Operation Volatility Crush.
Photo via gdefon.ru
 

To a seasoned option trader earnings season is tantamount to Christmas, but four times a year. Because just like moths are invariably drawn to the flickering lights of a burning flame, retail traders can’t help themselves but accumulate overpriced options in hopes of guessing the resolution of earnings reports.
And they mostly think of options in a 1-dimensional way – and that is limited to only price variation: up or down. However, options happen to be multi-dimensional derivatives which require multi-dimensional thinking.
 
There’s more than one dimension to options
Image via dreamstime.com
 
Sure, that all sounds really easy Mole. Let me check back with you once I get my PhD in quantum physics then, alright? No worries – we’ll get you there one step at a time. For starters if you haven’t already then I suggest you catch up on the first three installments of our option tutorial series.

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Softs and Grains on the Move

April 21, 2016

Big Moves in Markets No-One is Paying Attention to
A lot of attention has been on equities and precious metals in the past week but the biggest movers right now are the softs [e.g. commodities like grains, oils, sugar, etc.).
 
We actually are in Kansas now, Dorothy!
Photo via agriculture.ks.gov
 

I’m seeing large moves in wheat pushing the June contract above weekly and even monthly resistance. The daily (panel on the very left below) is now crossing the upper 100-day BB and although this looks like a tasty short candidate I would caution you against trying anything silly.
 
Wheat detail – this market is not for the faint of heart – click to enlarge.
 
Futures and especially those smaller commodities contracts do not act like stocks and they can keep running way beyond anyone’s expectations. IF you want to play here then wait for signs of profit taking – at minimum a spike high or something on the hourly. Also keep in mind trading hours they are closed much of the afternoon (relative to EST).
 
Wheat daily (July contract): pulling back now after the big spike higher, but there are clearly defined lateral support levels on the daily chart. Recently the fundamentals of ag commodities have turned more bullish, as the El Nino/ El Nina combo effects begin to impact their prospects – click to enlarge.
 
Corn is also on the move and boy it is a beauty.

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A Look at Market Volatility

April 15, 2016

Volatility over the Long Term
No matter if you are a hard nosed trader or a casual investor, every once in a while it’s advisable to detach yourself from the daily grind, sit back, grab a hot beverage, and parse through some long term charts. Although the don’t affect our daily entries here at Evil Speculator, they do give us a better view of what type of market we are navigating and thus how we may have to adjust our trading patterns.
 
Image credit: Walt Disney Pictures
 

After all – context is everything. What may have worked very well in 2012 most likely hasn’t worked in the past year or so. When markets change traders have to change with them or they will find themselves on an extended losing streak.
 
The VIX vs. SPX since 2008 – click to enlarge.
 

I have been talking quite a bit about volatility as of late, the research of which has become a personal past time or even fascination of mine. So not surprisingly I will start our little journey with implied volatility which most commonly is expressed by the VIX. The first thing that really should be appreciated is the fact that we are experiencing more volatility of volatility. Yes, you read that correctly – actually what I should have said is that realized volatility (i.e. amplitude) of implied volatility (IV) is on the increase.

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