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Swiss Franc Futures Volatility Forecast (17/10/2010)

The decision to introduce the Swiss Franc in weekly analysis that HyperVolatility proposes is correlated to the importance that such a currency has in determining the good health of global economy. Specifically, during financial crises or politically troubled periods investors are rather risk-reluctant and tend to prefer old school investment strategies and secure commodities. Switzerland is well known in the world for the stability of its banking system and historical data shows increasing cash flows getting into this country when political or financial downturns happened. Consequently, when investors put money in Swiss bank accounts they are effectively buying swiss franc and therefore the greater is the fear in the market the higher the swiss franc will go.

As we can see the TGARCH volatility is ridiculously low and the highest level does not even reach 1%. Such a volatility plot clearly confirms the steady, robust and constant uptrend that the Swiss Franc Futures market is currently experiencing.  The next weeks will be very interesting because if volatility manages to break through 1% a sharp movement will be likely to happen in the market. We are still bullish on Swiss Franc but short-term retracements could happen at any time.

EUR/USD Futures Volatility Forecast (17/10/2010)

The recent fluctuations that the Euro FX market had in Chicago seems to suggest a sudden change of direction.

The TGARCH volatility is not in a steady downtrend anymore but it started to jump up and down and it appears that a movement towards the 1 % level is on the way. An augment in volatility will  probably signify a downward movement of the market which will inevitably lead to an appreciation of the US dollar against the euro.

However, the next weeks will surely show a great battle between bears and bulls. Particularly interesting is the intervention of the Chinese government which is trying to buy more US dollars in order to keep its export competitive and therefore caution is needed in this market which is tremendously extended and likely to experience a retracement.

Long Volatility = Shorting the Underlying

Trading Volatility is considered to be an extremely risky business by the average investor because of its complexity.
I have read many articles and opinions written by sham experts and disguised traders about trading options and volatility. Funnily enough, I found out that most of them complain about the fact that volatility trading does not work and therefore you should be using other strategies in order to have consistent profits.
Obviously, this is not true and the majority of traders and investors don’t understand the great advantage that an accurate forecasting of volatility can give. Let’s break it down.
Over the last 10 years many academic researches about volatility presented a multitude of models and every “inventor” had to fight in order to promote the reliability of his/her model against its competitors. However, put aside the debates about which model is the best, it is evident that all of them had to agree about the fact that volatility increases much more when the market drops!!!

In technical jargon, options traders use the sentence “I am long volatility” when they think that in that moment volatility is cheap and it is worth buying; but what they really mean by saying that?
In practice, buying volatility means selling the underlying asset. What? Are you crazy?

Let me be more precise. If you are an options trader and you think that volatility is cheap you are probably assuming that the estimation of volatility that you are getting is rather low (regardless if you are using the VIX, stochastic volatility models or technical volatility indicators). Since volatility is mean-reverting you are probably expecting a sharp market movement either up or down. However, since an increase in volatility usually drives the market down and an augment of its value during an up movement is more often than not a “fake head” it is easy to understand that: buying volatility is effectively shorting the underlying.

For the sake of precision, it must be said that this is not always the case and that a rise in volatility could initially welcome even a steady and robust upward movement.

Nevertheless,the last time analysts, econometricians and quantitative traders said that volatility was too cheap was before the credit crunch occurred and since then the volatility decreased to a level which is even lower than what it was during the great bull market which lately faded out.
What are you going to do then?
Will you buy volatility or short the underlying? Ooops, sorry !!!

EUR/USD Futures Volatility Forecast (13/10/2010)

The Euro vs Dollar Futures traded in Chicago provide investors and traders with information regarding the future fluctuation of the EUR/USD spot market.                     The TGARCH volatility chart plots a “curious” development of the conditional standard deviation. Clearly, the average volatility experienced by this market is around 0.6% and it remained stable over the last 5 months although in June there was a sharp drop which happened to coincide with the lowest value of the Euro against the Dollar (around 1,22). It is important to notice that a decline in volatility estimation should usually drive the market down but this was not the case and such a signal should have been interpreted as a warning. In fact, since then the price dispersion was quite limited within narrow boundaries backing the bulls ,however, a rise in conditional variance is probable to occur. Consequently, a depreciation of the Euro against the Dollar should be expected in the near future.

Volatility Trading : Why ?

Over the last 10 years financial markets went through several changes and, as a consequence, many different trading techniques that were considered to be extremely efficient and profitable are now generating increasing losses.

The financial downturn completely twisted the way investors and traders look at markets and many analysts, mathematicians, econometricians and portfolio managers are talking about a new market paradigm.

In other words, nothing will be like it used to.

In my opinion, we will get back to “normal” trading conditions in terms of psychological approach to risk  in a 3-5 years time.

The reality is that the markets are not going to trend as fluently as they used to. Retracements, pull backs and temporary drops will occur more frequently and more violently. The old strategies cannot cope with that any more because the sub-structure of the market is not the same anymore.

Think of it. It’s like driving a car. Let’s assume we have 2 cars: the 1st one designed and constructed in the 1920 and the second one in the 2010.  Are they similar?  Breaks, gears and the steering wheel are still going to be there but the way you drive itwill be different. You can measure the speed more accurately, you can drive faster , you have much more technology there and the same thing happens in the market. You cannot win the competition with an old car. You can try but you will be inevitably left behind.

Volatility is the answer to the modern investment ‘s needs. As time goes by financial markets become more and more volatile so why not trading volatility considering it as an asset?

Financial press continuously states that volatility is increasing in the markets. So, why not taking advantage of it ?

As a matter of fact, just a restricted and well educated elite of traders know how to expertly profit from volatility changes over time. The truth is that volatility trading is DIFFICULT !!! It is not as easy as it might seem and many readings and lots of effort is required in order to gain an edge over the crowd.

The good side of it is that VOLATILITY TRADING IS PROFITABLE !!!

Markets will experience wider swings and sharper retracements which old-fashion techniques will not be able to capture anymore and therefore we have to update our knowledge to surf  those waves rather than being overcome by events.

There are many ways to trade volatility and, if correctly  interpreted, some volatility technical indicators can prove quite useful. However,  many researches demonstrated that when measuring volatility some mathematical models and econometric techniques outperform all the others in terms of accuracy.

Consequently, the more we know the better because more accurate forecasts will inevitably lead to more profitable trades.

So, Why would anyone trade volatility?   the answer is simple: IT WORKS !!!

Vito Turitto’s presentation at the London Traders & Investors Club (5 part)

[youtube=http://www.youtube.com/watch?v=RRyDBmFQDRY&feature=related]

Vito Turitto’s presentation at the London Traders & Investors Club (4 part)

[youtube=http://www.youtube.com/watch?v=jZyB8ZOHmBI&feature=related]

Vito Turitto’s presentation at the London Traders & Investors Club (3 part)

[youtube=http://www.youtube.com/watch?v=SneClIbCLG4&feature=related]

« Vito Turitto’s presentation at the London Traders & Investors Club (2 part)

[youtube=http://www.youtube.com/watch?v=M1y3BChfW1I&feature=related]

Vito Turitto’s presentation at the London Traders & Investors Club

[youtube=http://www.youtube.com/watch?v=5Jci_9eL9x4]

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