This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Do Leveraged ETFs Cause Volatility?

MILLBURN, N.J. ( Stockpickr) -- An active topic of discussion on RealMoney has taken place for some time concerning the impact of leveraged -- long and short -- ETFs, collectively referred to as ultras, upon the broader markets. Jim Cramer, Eric Oberg and I have argued that ultra activities are a proximate cause for market volatility and, in a related way, selloffs.

To a great extent, the algorithmic and high-frequency traders that I've written about before utilize these instruments, along with their derivative securities, to create and profit from market volatility.

I decided to perform some research to determine whether there is a link between ultra activity and market volatility. First, let me describe some of the parameters and assumptions I used in my study.

First, I created a database of of trading volumes for the ProShares Ultra S&P 500 (SSO) and ProShares UltraShort S&P 500 (SDS) and closing prices for the CBOE Volatility Index (VIX). I used data for the period from Jan. 1, 2008, through June 15, 2010. It was in the beginning of 2008 that ultras first became popular trading vehicles.

I then performed a series of regression analyses to determine the relationship of the movement of volatility to transaction volume in ultras as it pertains to the SPX. VIX was my "Y," and ultras were my "X" for the regressions.

I was seeking high levels of R-squared, a statistical measure of how well a regression line approximates the sample data points. The R-squared tells us how much of the return of the Y variable can be explained by the X variable. An R-squared of 1 is a perfect fit.

The regressions were run with a 95% confidence level.

What is the VIX?

The VIX, originally introduced in a paper by Robert Whaley , is a "key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices," according to the CBOE, and is widely considered to be the world's "to be the world's premier barometer of investor sentiment and market volatility."

Be aware that the VIX is a measure of expected or perceived volatility and not realized or actual volatility. Thus, the VIX is what investors are willing to pay for options, not necessarily what the options are worth.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SDS $21.19 1.10%
SSO $130.01 -1.20%
AAPL $126.10 -0.21%
FB $82.85 -0.41%
GOOG $549.83 -0.40%


DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs