The Stock Sleuth

Detecting deep values in turbulent markets

VIX and the VXX May Present a Short-Term Opportunity For a 200-300% Return

During the last few months, we have demonstrated that volatility has predictive properties, and that there exist outstanding tools to capitalize on these tendencies. Today may present another such opportunity.

In our August article, “Fall Volatility Ahead, The Futures, Options and ETPs Are Already Expensive”, it was our belief that multiple events were causing a temporary elevation in the VIX and high premiums in volatility products in anticipation of market events. Subsequently, September did not offer a market sell-off and the Fed implemented a quantitative easing plan that far exceeded market expectations. The VIX tumbled from 18.96 to 13.51 in 8 trading days. VXX puts purchased around this date paid off exceptionally well.

At that point we suggested that volatility was historically low versus its September average and thus presented another opportunity to get long volatility at excellent prices in a September article, “Now That Fear Has Subsided, How to Play Volatility Using VIX Options and ETPs”. In just four trading days, the VIX was back over 17, and the options we suggested rose 50%.  Furthermore, the VXX butterfly trade was closed for a 100% profit.

Our proprietary research is suggesting that the VIX may be elevated relative to historic volatility looking forward in the options expiration cycle. Uncertainty preceding another event, the presidential election, could be causing an elevated volatility structure.

VIX Futures Term Structure:

VX X2-CF S&P 500 VOLATILITY November2012 16:57:16 17.80 0.90 16.95 17.85 16.65
VX Z2-CF S&P 500 VOLATILITY December2012 16:57:17 18.60 0.67 17.90 18.65 17.55
VX F3-CF S&P 500 VOLATILITY January2013 16:57:17 20.00 0.78 19.10 20.10 18.90
VX G3-CF S&P 500 VOLATILITY February2013 16:57:17 20.70 0.68 19.95 20.85 19.68
VX H3-CF S&P 500 VOLATILITY March2013 16:57:17 21.50 0.59 20.85 21.70 20.45
VX J3-CF S&P 500 VOLATILITY April2013 16:57:17 22.45 0.58 21.75 22.60 21.50
VX K3-CF S&P 500 VOLATILITY May2013 16:57:17 23.15 0.63 22.43 23.30 22.20
VX M3-CF S&P 500 VOLATILITY June2013 16:14:34 23.65 0.75 22.94 23.80 22.70
VX N3-CF S&P 500 VOLATILITY July2013 16:13:13 24.20 0.70 23.30 24.25 23.26

VXX, the VIX short-term futures ETN, is holding nearly 50% of each November and December futures. The negative roll is currently 4.5%.

 VXX December Put Option Chain:

28.00 0.55 -0.07 0.45 0.50 343 3704
29.00 0.82 -0.08 0.67 0.74 228 3127
30.00 1.01 -0.28 1.00 1.02 779 8983
31.00 1.36 -0.36 1.29 1.42 213 5788
32.00 1.88 -0.35 1.73 1.82 6330 1145
33.00 2.52 -0.14 2.20 2.35 729 966
34.00 2.90 -0.45 2.71 2.89 798 1846
35.00 3.35 -0.65 3.30 3.40 324 4203
36.00 4.43 -0.22 3.90 4.00 36 464

 

Our proprietary volatility wave indicators are implying another VIX fall dictated by history and time of cycle. The December $30 puts present good value and time horizon for a short VIX futures trade.  A riskier but potentially more lucrative trade can be entered using November puts at the $32 strike for about .47, with a potential return of 3x. Yet, the Decembers have far more going for them over time historically and seasonally as December has volatility anomalies associated with that monthly cycle.

Obviously, this trade can be derailed by any number of events, including a market breakdown below the 200 day moving average, political event in Europe, natural disaster, etc. There are many risk factors, yet as opposed to being short VXX or long XIV, this trade offers terrific leverage with defined risk.

Twitter/Stocktwits followers will receive notification when this trade is closed, and any subsequent new trading opportunities. @VolatilityWiz on Stocktwits and Twitter.

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Ford China is Ramping Big TIme

People are missing the China story. The whole vehicle lineup has been reworked to dovetail with the One Ford Global Platform. The first quarter had virtually no new vehicle launches, and when the new Focus debuted in April, they sold 10k vehicles in 10 days. This caused a 24% bump in sales over 2011. This is merely the beginning, now that Ford is set to launch this and other models worldwide. In the fall, Ford will launch the 3 more new models in China: Kuga, EcoSport (available in 100 global markets soon), and the Explorer.

It is entirely possible that Ford eclipses (no pun intended) 2011 vehicle sales as they now have the capacity to do so. With the dismal first quarter behind them, they are only 10k cars behind last year’s pace. The Chinese auto sales market slows after March and picks up in October and reaches it’s second busiest sales period at year end. Precisely when Ford will be flooding the market with brand new SUV models.

Ford also just opened a new factory in Thailand because they, and remind me if you’ve heard this one before, “The demand is outstanding,” Hinrichs said. “It’s one of those good-bad problems where you can’t make enough.”

From The Detroit News: http://www.detroitnews.com/article/20120509/AUTO0102/205090331#ixzz1uz9pLqRx

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Vix and VXX Have Probably Hit Their Short-Term Peaks

In our prior discussion of the options and volatility cycle, we tried to demonstrate that absent any exogenous shocks, like debt debacles, earthquakes, tsunamis, and spikes in European interest rates, (to name just  a few examples), volatility has a historic cycle, that peaks in the week BEFORE options expiration (OPEX). We have now approached the most volatile day historically in the cycle, day 8 before OPEX. For review of how this works, please see these posts on the topic:

Lowest Volatility in the Monthly Options Cycle Could Be Next Week-April 20th

http://thestocksleuth.wordpress.com/wp-admin/post.php?post=279&action=edit

VIX and the VXX Fall As Expected-April 26th:

http://thestocksleuth.wordpress.com/wp-admin/post.php?post=316&action=edit

Again, as per usual, the pundits in the financial entertainment media are claiming that volatility is here to stay. Of course, it is not. IT NEVER HAS AND NEVER WILL BE. Their typical excuses this month happen to be, “sell in May”, “U.S. is slowing down”, “Europe is heating up again”, etc. Pick one for yourself, it’s pretty easy. This a classic example of reverse engineering a hypothesis for something they don’t understand.

You can hammer this point home over and over again, but some people will just never learn. It is that precise human behavior that explains why Buffett and Munger specifically lay out all their secrets, tell you exactly how to generate their results, because they know that no one wants to believe it-specifically, believe the simplicity of it.

Bill Luby’s blog, VIX and More is outstanding, and provides a plethora of information surrounding volatility products, including options and futures as well as ETF’s/ETNs. It is important to know the difference between ETF’s and ETN’s, as they track the underlying futures differently.

http://vixandmore.blogspot.com/

Furthermore, this outstanding book by Adam Warner explains the volatility cycle and how to use it effectively.

http://www.amazon.com/Options-Volatility-Trading-Strategies-Profiting/dp/0071629653/ref=sr_1_1?ie=UTF8&s=books&qid=1243037037&sr=1-1

So, we can expect hightened volatility for a few more days. As next week comes to a close, the vix should begin to fall, and the week of May 20th has the lowest average volatility in the cycle. This is of course, provided there are no events to disturb historical averages. An excellent strategy is to short the VXX or UVXY around the peak of the cycle, or in the next few days. The VXX will not cost you a ton of margin believe it or not. TD Ameritrade treats it like a large cap margin position. Imagine that, the product based on volatility is not considered necessary of special margin requirements. Hilarious.

Another strategy is to buy VXX or UVXY puts on May 21st. Every month this year, this trade has worked, as several days following OPEX have seen seen declining volatility. That matches the historical pattern perfectly. This will not work all of the time, but this has a series of tailwinds including:

-Contango of vix futures causing negative roll yield

-Historical declines of volatility during that period

-Time decay of vix futures

These all factor into the VXX and UVXY having a long-term value of zero. There are several products out there including leveraged and futures ETFs/ETN’s that have a long-term value of zero. I hope they never go away.

Filed under: Uncategorized

Ford ROE Strong; Debt Goals Have Been Met

While analysts and investors remain gloomy about the prospects for Ford this year, I remain ebullient and frankly downright excited to add at these prices. Ford demonstrated in the first quarter that they will be profitable in difficult environments, continue to build a rock solid balance sheet, generate strong cash flows, have demand that currently outstrips their supply constraints in North America and continue to execute the Ford One Plan which will effect strong global growth over the next few years.

Ford improved its balance sheet by $1.6 billion in the first quarter. On an annual basis that would be a roughly 40% return on equity, not too shabby. If you look at cash flows, you see a negative balance, but the cash essentially ended up in marketable securities: treasuries, government sponsored securities, and corporate debt securities. So they are actually moving cash into investments.

Ford’s debt actually rose by $600mm in the quarter, virtually all of this being government sponsored debt at treasury rates, a program that the Department of Energy sponsors to promote energy-efficient technology developments. If you are not a bank, you can still take advantage of generational low rates.

Ford has about $5B in unsecured notes outstanding in the automotive division. No debt is due until 2018, and is staggered until 2047. The majority of the remaining automotive division debt is composed of the DOE low-rate variety. It has been decades since they have been in a position where they have tremendous control of their balance sheet; they currently have access to over $30B in liquidity. Fitch upgraded Ford to investment grade last month, and when one of the next two rating agencies finally get around to upgrading Ford, their transformation will be complete.

The finance division is essentially a bank, which borrows to lend to retail and business customers, and is secured by receivable payments or leased assets. The finance division is expected to generate $1.5B in lending profits in 2012. Ford has indicated that they actually plan to increase the leverage from 8-1 to 13-1 over the next few years, which will obviously generate additional lease and lending income.

So the next few years is when Ford is going to enjoy the fruits of their hard work. They are releasing new award-winning models later this year over multiple continents, investing massively in Chinese manufacturing platforms, and are done retiring debt, freeing up a lot more cash that used to be paid out in interest. Their manufacturing platforms/supply chain goals in the Ford One Plan are being achieved to the point that they earn 60% more per vehicle sold in the U.S. than GM. The future is very, very bright for Ford.

This is a Buffett special. Understandable business, excellent management, competitive advantage, and reasonable price. Ford will be generating a lot of cash for years to come.

Ford earns 60% more per vehicle than GM;

http://online.wsj.com/article/SB10001424052702304746604577381630912081096.html

Auto profits surge while investors frown:

http://www.bloomberg.com/news/2012-05-04/detroit-big-three-profits-surge-while-shares-decline.html

“We can’t run the business based on what the market does,” said Ford’s Brown. “If we continue to deliver the performance, the market will respond. So we’re just going to keep our heads down and continue to deliver.”

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ADP versus BLS Payrolls

ADP BLS
August           67,000 104,000
September         105,000 210,000
October         142,000 120,000
November         226,000 157,000
December         267,000 223,000
January         182,000 275,000
February         228,000 240,000
March         201,000 120,000 Preliminary
April         119,000


If there is something to conclude here, other than a consistent creation of jobs, then I can’t see it. The ADP report was higher than the BLS survey 4 times since last August and lower 4 times. But this is quite clear:

Total BLS payrolls in blue and total ADP in red.

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BLS Payroll Revisions Get Ignored

2011              Initial Release            Revision           Net Change

August                           0                            104,000            +104,000

September           103,000                       210,000            +107,000

October                  80,000                       120,000              +40,000

November          120,000                       157,000               +37,000

December           200,000                       223,000               +23,000

January               243,000                       275,000               +32,000

February            227,000                       240,000                +13,000 

March                 120,000                                  ????

Do you ever hear anyone mention this when the jobs number comes out? Ever? A kindergartener can figure out this trend, but those that manage billions of dollars on CNBC can’t seem to figure this out. The margin of error in this series is + or – 100,000 jobs, but no one seems to care about statistics, unless they are talking about the mean reversion of gross margins. A great commentary on that nonsense has been broken down by Jeff Miller here:

http://oldprof.typepad.com/a_dash_of_insight/2012/04/dont-like-the-real-data-just-pretend.html

GDP gets similar treatment. Forget about the fact that the 2.2% number that came out last week was due to contraction in government spending, the inefficient use of private sector capital. The private sector grew at 3.4%.

http://www.ftportfolios.com/Blogs/EconBlog/2012/4/27/the-first-estimate-for-q1-real-gdp-growth-is-2.2percent-at-an-annual-rate

Furthermore, the BEA expressly tells you that the average revision is UP! On average, GDP is revised up .2%. That was the GDP revision in the 4th quarter.

A tiny amount of effort to read the release instead of just the headline, and a basic understanding of the process of advance estimates can be enlightening. Don’t expect any enlightenment in financial entertainment television.

Filed under: Uncategorized

Stocktwits

  • @footballfacts Aaron Williams for the Bills should single-handedly knock down the team down on the CHFF intelligence index. 1 year ago
  • VIX and the VXX May Present a Short-Term Opportunity For a 200-300% Return wp.me/p14BO5-5Y 1 year ago
  • People are missing the China story. The whole vehicle lineup has been reworked to dovetail with the One Ford Global… wp.me/s14BO5-358 2 years ago
  • @grassosteve every yr for 33 yrs? Not quite. 08 there was no test, high was Jan 1. 09 yr was down til May. 03 same. 99,96, 95,93 no test. 2 years ago

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Jeff Augen-The Volatility Edge in Options Trading

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