Schaeffer's Trading Floor Blog

Ukraine and the 5 Stages of International Crises

The Ukraine/Russia standoff was a nice opportunity for volatility traders, at least

by 3/5/2014 7:27 AM
Stocks quoted in this article:

Well, if you left on Friday's close and went in a cave for a long weekend, then came back Tuesday near the open, you're probably wondering what all the fuss was about. Maybe Ukraine never happened, kind of like Pamela Ewing waking up from her extraordinarily vivid dream on Dallas.

OK, that's an exaggeration. The SPDR S&P 500 ETF (SPY) actually gapped up a bit, as it closed at 186.29 on Friday and opened at 186.75 on Tuesday. So the bull lives on! Forget all the Fear/Greed Index and overbidding in CBOE Volatility Index (VIX) derivatives that we noted in the last couple of days.

These international crises usually take way longer in market time to play out. I think the five stages are: 1) International Crisis percolates; 2) Pundits on TV start wondering why no one cares about International Crisis; 3) Everyone instantly cares about International Crisis, becomes an expert on All Things International and starts to freak out; 4) Business Insider pens a well-written piece on why I should care; and 5) International Crisis takes a turn for the worse, but by this point the market has discounted the "bad" and we start rallying.

Ukraine never really made it to Stage 5. The story obviously isn't over yet, but for now we've apparently discounted it in the markets.

The whole experience left some pretty clear footprints. Thanks to the big ranges Monday and Tuesday, 10-day realized volatility in the SPY spiked up from mid-6's to over 10. And hey, that's a pretty convenient number, as the VIX near 14 is almost perfection in relation to that.

Remember the CBOE Short-Term Volatility Index (VXST)? It's VIX with an underlying duration of nine days. It closed at 13.03 on Friday, indicating weekend event fear was much smaller than I had thought. It then printed as high as 17.74 on Monday (it's a calculation, not a stock, so I use the term "print" loosely). Then on Tuesday it went right back down to 13. Nothing to see here, move along!

In hindsight, it was a nice trading opportunity all around. That, of course, assumes you caught the right side, as there was also a great chance to get whipsawed. The VelocityShares Daily 2x VIX Short-Term ETN (TVIX), the leveraged and far uglier version of the iPath S&P 500 VIX Short-Term Futures ETN (VXX), started trending on StockTwits. It shot up 11% on Monday on its highest volume since early February. It then gapped right back down on Tuesday, and was actually down a few percentage points on the whole round trip. If you held TVIX on Friday into Monday, good for you -- I hope you sold for a profit. And if you did, thank the trading gods profusely and take TVIX off your screen, because an overnight hold here has a severe negative expected gain over time. You should never hold a volatility ETN on spec.

All in all, kind of a strange trip as far as the market goes.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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