Day1 Session3 Cole

Christopher Cole, CFA
Artemis Capital Management LLC

Artemis Vega Fund LP

520 Broadway, Suite 350
Santa Monica, CA 90401
(310) 496-4526 phone
(310) 496-4527 fax
info@artemiscm.com

VOLATILITY PARADIGM AND PARADOX
CBOE RI SK MANAGEMENT CONFERENCE - MARCH 3, 2013
For Investment Professional Use. Not for Distribution
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What is Volatility?
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Volatility at Worlds End Deflation
Imagine the world economy as an armada of ships passing through a narrow and
dangerous strait between the waterfall of deflation and hellfire of inflation
Our resolution to avoid one fate may damn us to the other
Like Odysseus in the epic poem the global economy is trapped between
the monsters of Scylla (fire of inflation) and Charybdis (the waterfall of deflation)
Illustration by Brendan Wuiff based on concept by Christopher Cole
Volatility at Worlds End Deflation
Imagine the world economy as an armada of ships passing through a
narrow and dangerous strait leading to the sea of prosperity. Navigating
the channel is treacherous for to err too far to one side and your ship
plunges off the waterfall of deflation but too close to the other and it
burns in the hellfire of inflation
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Volatility at World's End Deflation
Dow Jones Industrial Index (RHS) vs. 1-month Realized Volatility of DJIA (LHS)
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Volatility in Worlds End Deflation
3
Volatility shocks are rightfully associated with deflationary crashes
Financial media pundits called the 2008 crash an
unprecedented period of volatility
VIX index reached 20+ year high of 80.86
on November 20
th
, 2008
2008 was only unprecedented if you assume data
from the inception of the VIX index in 1990
Historical DJIA realized volatility data
going back to 1929 shows volatility
climbed to similar levels or higher a total
of 6 times in the past 80 years! VXO,
precursor to VIX, hit 150.19 on Oct 19,
1987 / 2008 was rare but not
unprecedented!

Weimar Germany would have experienced over 2000% monthly
realized volatility
$1mm variance swap struck in 1919 at 17.5% (average vol for
period) would payoff $417 billion by 1923 (hypothetical)
Germany in 1920-21 had no surface inflation, a booming
stock market, and briefly the strongest currency in the world

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Volatility in Hellfire of Inflation
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Source: Economics of Inflation; A Study of Currency Depreciation in Post-War Germany" by Constantino Bresciani-Turroni Out of Print / 1968
(1) Based upon monthly realized variance from available stock price data.
Vol is a statistic indifferent to price direction increasing when assets
decline only because prices fall faster than they rise
How would volatility markets respond to an inflationary shock? (e.g.
20%+ inflation a year for 3 years)
Extreme inflation could turn variance markets backwards literally
as volatility could rise in conjunction with stocks
Impacts in how risk is spread between right and left tails of probability
distributions

Extreme volatility can also occur in hyperinflation
Volatility historically spikes when markets decline and vice versa but this is a rule and
not a law extreme volatility can also occur in hyperinflation
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Performance of German Stock Market
during Weimar Republic Hyperinflaton
Adj. according to USD exchange rate
Adj. according to wholesale index numbers
In paper marks, Weimar
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Weimar VIX?
(1)
Realized Volatility of German Stock Market during Weimar Republic Hyperinflation
(monthly volatility data annualized)
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Volatility of an Impossible Object
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Impossible Object
Illustration highlighting the limits of human perception challenging whether our awareness of nave reality is
relevant to our understanding of truth vast importance to mathematics, art, philosophy, and modern risk
Modern financial markets are an impossible object
Illustration by Brendan Wiuff based on concept by Christopher Cole
When global central banks manipulate the cost of risk the
mechanics of price discovery break down resulting in paradoxical
expressions of value that should not exist according to efficient
market theory
Fear and safety are now interchangeable in a speculative and high-stakes
game of perception. The efficient frontier is now contorted to such a degree
that traditional empirical views are no longer relevant.
Modern financial markets are an impossible object
Volatility of an impossible object is our changing perception of risk
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Flash Crash
(Black Monday 1987, Flash Crash)
Slowly building crash with slow recovery
End of leveraging cycle
High volatility, but relatively muted VOV

Great Depression
Global Recession
Flash Crash

Hyper-speed crash with fast recovery
Market Fragmentation & Self-Reflexity
Extreme Volatility of Volatility

Predictable (in retrospect) Unpredictable (even In retrospect)
Market fragmentation and self-reflexity
High volatility of volatility

Common sense says do not trust your common sense
Volatility itself is now a paradox
(both in time and space)
Temporal Paradox

Low Spot-VIX but steep VIX Futures
term structure
Power law distortions in daily
volatility moves
Steep Volatility-of-Volatility term
structure & Skew but low-spot VOV

Spatial Paradox

Low volatility-of-volatility (realized)
but higher potential for volatility-of-
volatility (implied)
Historically expensive gamma on tails
of probability distribution
Steeper volatility-of-volatility skew
Volatility is Global Macro

Bull Market in Fear is Defined by

1. Volatility Kindling / Higher Potential Vol of VIX
2. VIX Futures are less effective hedging tools
3. Unbalanced VIX Option Shadow Gamma
4. Shadow VIX Theta
5. Skew shift
6. Volatility of VIX futures increasingly driven by
short squeeze rather than VIX itself

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Unknown Unknowns Known Unknowns
Volatility of Volatility Volatility
Everything you need to know about trading volatility
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Debt Ceiling Crisis
China hard landing
War with Iran

European Crisis
Global Recession
Fiscal Austerity

There are known knowns; there are things we know that we know. There are known unknowns;
that is to say there are things that, we now know we don't know. But there are also unknown
unknowns there are things we do not know, we don't know.
Donald Rumsfeld, United States Secretary of Defense
?

Modern volatility markets can put a price on unknown
unknowns via the volatility-of-volatility
Episodes of elevated implied vol-of-vol are associated with
lower equity returns
SPX periods of high realized volatility-of-VIX
underperform low by 13% annually
Individual stocks with high implied vol-of-vol
underperform low VOV stocks by 10% annually
(1)

Today everyone is afraid of the next 2008 but I am afraid of the next 1987. in stocks but more likely bonds
Regimes of Volatility-of-Volatility (2007 to 2012)
Period Average
Volatility Regime Vol of VIX VIX index
SPX Return
(annual)
Total
(2007 to Sep 2012)
87.5 24.8 +1%
Bull Market
(2006 to July 2007)
81.7 13.8 +5%
Credit Crisis Onset
(Aug 2007 to Aug
2008)
82.7 23.0 -11%
Market Crash
(Sep 2008 to Feb
2009)
95.7 49.6 -71%
Recovery to Flash
Crash
(Mar 2009 to May
80.8 26.7 +35%
Post-Flash Crash
Steepening
(May 2010 to Oct
90.5 23.2 +10%
LTRO Steepening
(Nov 2011 to Sep
2012)
97.7 20.3 +16% Vanilla Options
VIX Index

Implied Volatility
Vol Term Structure

Forward Volatility
Convexity

Tail Risk Hedging
Vol Curve Trades

Many investors who trade volatility (VIX ETNs,
VIX futures) dont realize they are actually
trading a market expectation of future
uncertainty (volatility-of-volatility) not
volatility itself there is a big difference

Episodes of elevated uncertainty (volatility-of-
volatility) are associated with lower equity returns
but they are hard to predict
Many people who trade volatility do not realize they
are only trading a market expectation of future
uncertainty not volatility itself

Risks that you
know and can
quantity
Risks that you
know but cant
quantify
Risks that you
dont know but
could quantify
Risks that you
dont know and
cant quantify
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Bull Market in Fear
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1. Abnormally Steep Volatility Term-Structure

2. Distortions in Volatility from Monetary Policy

3. Expensive Portfolio Insurance

4. Violent Volatility Spikes and Hyper-Correlation

The new volatility regime is a reflection of investor neurosis generated by forced
participation in risk assets by the financial oppression of global central banks
What is the Bull Market in Fear?
New paradigm for pricing risk that emerged after the 2008 financial crisis as
related to our collective fear of the next deflationary crash
Bull Market in Fear is not about where volatility is today as so much as it is
about where markets think volatility will be tomorrow

I. Emotional
Post-traumatic Deflation Disorder
Desire for safety and security at any cost

II. Monetary
Forced participation in risk assets drives desire for hedging
Unspoken feeling that gains in financial assets are artificial

III. Macro-Risks
Debtor-developed economies face structural headwinds
Unrest in Middle East, Iran, Japan & China Tensions

IV. Regulatory
Government regulation (Dodd-Frank, Volcker rule) has
constrained risk appetite for banks to supply volatility
Lower demand for structured products by investors

Structural imbalances in supply-demand dynamics of volatility markets
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Bull Market in Fear
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The new volatility regime is a reflection of investor neurosis generated by forced participation in risk
assets by the financial oppression of global central banks
Greater
Demand for
Volatility
Less Supply
of Volatility

I. Emotional
Post-traumatic Deflation Disorder
Memories of deflationary collapse create visceral and
primitive desire to avoid that pain again
Desire for safety and security at any cost

II. Monetary
Forced participation in risk assets by the financial
oppression of global central banks results in greater
demand for hedging
Unspoken feeling that broad based gains in financial assets
are artificial

III. Geopolitical Risk Factors
Debtor-developed economies face demographic and
structural headwinds
Unrest in Middle East

IV. Structural and Regulatory
Greater government regulation (Dodd-Frank, Volcker rule)
has constrained risk appetite for banks to supply volatility
to the market
Lower demand for structured products by investors (which
sell vol)

TEMPORAL PARADOX - Abnormally Steep VIX Futures Term Structure
10
BULL MARKET IN FEAR
"There is no terror in the bang, only in the anticipation of it." Alfred Hitchcock
The most extreme term-structure for forward volatility in two decades reflects continued anticipation of a
deflationary collapse and structural imbalance in risk

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Bull Market in Fear / VIX Futures Curve
2004 to Present
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Low Volatility? Really?
VIX Futures Curve Comparison
August 2012 vs. September 2008
August 17, 2012 / Lowest VIX in 5 years at time
September 15, 2008 / Day after Lehman Bros. Bankruptcy
February 19, 2013
TEMPORAL PARADOX - Abnormally Steep VIX Futures Term Structure
11
Low VIX index does not mean cheap volatility
On August 17
th
2012 spot VIX touched a 5 year low at 13.45
however
It was more expensive to buy forward volatility at 6-12 months
with the VIX at 13.45 in 2012 than it was one day after Lehman
went bankrupt in 2008 when the VIX was at 31
Volatility hedge executed at the August 2012 low in spot-VIX
would have already lost -12% of its value even while VIX
increased by +15%
Successful hedging requires going beyond simplistic heuristics
based on the absolute price of the VIX

!
Volatility is more than the VIX index
Overt focus on VIX is analytical equivalent using the 1yr UST to explain the entire bond market!
Volatility is more than the VIX index
Overt focus on VIX is analytical equivalent using the 1yr UST to explain the entire bond market!
Low VIX index does not mean cheap volatility
Forward volatility more expensive in August 2012 at the 5 year
low in the VIX than it was the day after Lehman went bankrupt
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No Fed Action
QEI
QEII
Op. Twist+LTRO(ECB)
QEIII
VIX
TEMPORAL PARADOX - VIX Regimes Defined by Central Banking
12
Since 2008 global central banks have expanded their balance sheets by $9 trillion - enough fiat
money to buy every person on earth a 55'' wide-screen 3D television
VIX spikes consistently occur after the end of central bank balance sheet expansion
Orwellian financial repression as central banks
define the risk premium in markets
16 central banks have eased since the fourth
quarter of last year
Fed and ECB pledged unlimited purchases of
bonds to support the system
If Fed follows through on promise to buy $40bn
MBS it will own the entire market in a decade

Risk and Vol Returns in Fed BS Regimes
Crisis and Recovery (September 2008 to September 2012)
Period Average Weekly Change
SPX VIX 21d SV Fed BS
Fed Balance Sheet 0.6% -1.7% 0.0% 1.5%
Fed Balance Sheet > +1 3.2% -7.4% 0.0% 8.1%
Fed Balance Sheet 0.0% 1.3% -2.0% -0.9%
Fed Balance Sheet < -1 1.2% 2.7% -1.9% -4.7%
Post-Crisis Recovery Period (Mar 2009 to Sep 2012)
Period Average Weekly Change
SPX VIX 21d SV Fed BS
QEI con't (March09-Jun 09) 1.4% -2.6% -2.5% 0.6%
Post QEI (Jun09-Oct10) 0.2% -0.2% -0.8% 0.2%
QEII (Sep10-June11)
(1)
0.5% -1.0% 0.0% 0.5%
Post-QEII (July11-Nov11) -0.2% 2.2% 2.3% -0.1%
LTRO (Dec11 to Sep 0.3% -1.5% -2.7% 0.0%
(1) period f ollowing announcement of QEII at Jackson Hole August 2010.
Sources: Federal Reserve Bank, ECB, Bloomberg
Flash Crash
Aug 2011 Crash
QEII
LTRO (ECB)
Fed Balance Sheet Expansion and VIX index
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Implied 12m %G/L
in S&P 500 index
S&P 500 Index 12-month % Contribution to Model-Free Variance by Expected Returns
(1995 to March 2012)
40%-50%
30%-40%
20%-30%
10%-20%
0%-10%
SPATIAL PARADOX - High Cost of Tail Risk Insurance
13
Fat Left Tails have Dominated the Distribution of S&P 500 index Variance
You are not smart for hedging what everyone else already knows!
Since the 2008-crash strips of OTM SPX options show 21% contribution to a -50% or more crash
(1)
Realized probability of a 50% log drop in markets is only 2.93% (using DJIA data to 1928)

1995 to 2012
Fear of deflation is not MISPLACED but it is MISPRICED
You are not smart for hedging what everyone else already knows!
Tail risk insurance is now priced at multiple times the eight decade probability of those declines being realized
representing irrational exuberance for fear
What happens when everyone sells their portfolio insurance at the same time!?

Note: Artemis calculates the implied probability distribution using interpolated weights from variance swap pricing. This methodology may occasionally give higher weightings to tails in down markets than other
methods like taking the second derivative of call prices, fitting mixture of normal PDFs to recover prices, or fitting vol models (SVI,SABR).

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6%
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12%
14%
1
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3
Y
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(
%
)
Volatility Yield (%) vs UST Bond Yields (%)
1990 - 2013
-25% from SPX Strike Rate Breached
Volatility Yield (sell 1yr SPX put / -25% discount)
10yr UST Yield
30yr UST Yield
SPATIAL PARADOX VOLATILITY and BONDS
14
For the first time in history the annualized short volatility yield (OTM SPX Put) is
competitive with the yield on long dated UST Bonds!
WOW!
I find it funny when academics claim the US government will never default because it can just print money
that is like saying my house will never be burglarized because if someone tried I could just light it on fire
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1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
-65% -55% -45% -35% -25% -15% -5%
SPATIAL PARADOX VOLATILITY and BONDS
15
When the Bull Market in Fear meets a Bubble in Safety a short equity option
position and risk-free UST bond have similar risk-to-reward payoffs!
0.00x
0.20x
0.40x
0.60x
0.80x
May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12
TLT 20+ US Treasury Bond ETF - 5% OTM Vol Skew
Yield to Risk / UST Bond vs. "Volatility Bond" (Collateralized Short Put on S&P 500 index)
Investment Stress Test #1 Stress Test #2 Stress Test #3 Stress Test #4
Volatility Bond / Short SPX Put + Collateral SPX -9% SPX -14% SPX -25% SPX -50%
Yield Maturity
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
SPX Put (Strike @-25%) 2.69% 1 year -2% 68% 1.373x -4% 39% 0.616x -11% 13% 0.242x -33% 2% 0.081x
SPX Put (Strike @2009 lows) 0.51% 1 year -0.4% 68% 1.319x -0.9% 39% 0.588x -3% 13% 0.176x -15% 2% 0.034x
US Treasury Bond UST Rates 100bps UST Rate 200bps UST Rate 325bps UST Rate 600bps
Yield Maturity
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
Est. MTM
Loss
Historic Prob.
%
Risk to
Reward
US Treasury Bond / 10-year 1.87% 10 years -9% 68% 0.214x -17% 39% 0.113x -25% 13% 0.074x -41% 2% 0.045x
US Treasury Bond /30-year 3.09% 30 years -18% 68% 0.176x -31% 39% 0.099x -44% 13% 0.070x -62% 2% 0.050x
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
-65% -55% -45% -35% -25% -15% -5%
1yr Volatility Bond (short OTM SPX Put Option Collateralized)
Lond Dated UST Bonds
Risk (Loss in Stress Test)
Efficient Frontier / Long Dated UST Bond vs. 1yr OTM Short Puts (collateralized)
10yr UST
Bond
30yr UST Bond SPX Put (Strike
@ 2009 lows)
SPX Put (Strike @-25% OTM)
Risk / Unrealized Loss in Stress Test Scenario
SPX -9% to -14%
68% to 33% probability
SPX -50%
2% probability
10yr UST
Bond
30yr UST
Bond
SPX Short Put
(Strike @-25% OTM)
Rates 320bps to 600bps
Rates 100bps to 200bps
Note: All data as of February 17, 2013. Estimated unrealized loss on position given stress test scenario. Historic probability data based on period of 1960 - 2012 for the UST bonds and 1950 to 2012 for the S&P 500 index.
Option pricing based on estimated local volatility shifts, however actual shifts may differ from estimates during a real crash depending. All stress tests are assumed to occur close to the purchase period of the
instrument. Unrealized losses may differ closer to maturity.
Higher rate volatility can be realized in deflation and inflation
When risk-free is risky it is time to buy volatility on safety itself
Look to buy long-dated forward rate volatility (10yr straddles fwd
starting) to exploit this mispricing in risk

SPX -25%
13% chance
SPX Put
Stress Test
UST Bond
Stress Test
Risk / Unrealized Loss in Stress Test Scenario
Efficient Frontier / Risk to Reward Comparison
Long Dated UST Bond vs. 1yr OTM Short Puts (collateralized)
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Risk Free Assets are Risky
We all know shorting volatility is very dangerous
So which is riskier right now?
1. Short collateralized far OTM S&P 500 index put (-25% or -50% OTM for 1yr)
2. Long a risk-free US treasury bond (10-30 yrs)
For the first time in history the volatility yield is competitive with the yield long dated UST Bonds
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20%
-50% -43% -35% -28% -20% -13% -5% +3% +10% +18% +25% +33% +40% +48%
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One Year Gain/Loss % in S&P 500 index
Mirror Reflection: Deflation vs. Hyperinflation
S&P 500 Probability Distributions in different Regimes of Risk
1-year Gain-Loss%
Implied from March 2012 SPX options
Simulated from in 2013-2022 Hyperinflationary Model (1 scenario of 10k)
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The more people fear the LEFT TAIL the more you should buy the RIGHT
16
Maybe it is correct to buy tail risk insurance ... but is everyone just hedging the
wrong tail?
Volatility in the Mirror:
Right tails dominate left tails
Volatility driven by increases in stock
prices
SPX calls at premium to puts
Volatility term structure would invert with
higher asset prices

Note: Artemis created a model to simulate the behavior of the S&P 500 index and volatility during an inflationary shock. The model is not intended to be a prediction of the future but is merely a rudimentary stochastic-
based method to understand what modern markets may look like in rampant inflation. The simulation runs 10,000 price scenarios for the S&P 500 index over 10 years modeling daily stock price behavior using a
generalized Wiener process (Wiener.. not Weimar) and a drift rate that assumes linkages between annual CPI and equity performance. We assume inflation rises sharply from current levels of 2.87% in 2012 to 26% by
2015 and stays elevated at that level until 2017 (20% a year overall). The average volatility shifts are based upon assumptions regarding equity return to variance parameters observed in prior inflationary episodes
(1970s US & 1920s Germany). The simulation shows annualized SPX returns for the decade at +9.94% but adjusted for inflation this drops to -9.8%.
No precedent for how modern derivatives market would perform
in the hell of destructive inflation
but it is a valuable exercise to theorize! Volatility markets turn
backwards literally
Double Convexity
Far-OTM long-dated equity call options
cheap form of inflation protection
Double convexity as prices influenced
by rising volatility and interest rates
Volatility and rates are self-reinforcing
in inflation crisis

0%
5%
10%
20.0%
30.0%
40.0%
0
500
1,000
1,500
2,000
2,500
15%
20%
25%
30%
35%
40%
45%
50%
5yr UST Yield
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5yr implied vol
Double Convexity in Inflation Boom
SPX 10yr OTM Call - 10K Strike
5 yrs to expiry/ SPX @ 3,000 (16% annual gain)
Future?
PARADOX IS FUNDAMETNAL
17

VIX index
Fire Danger is High greater potential for Vol-of-VIX

VIX Derivatives
1. Unbalanced Shadow Delta
2. Unbalanced Shadow Gamma
3. Shadow Theta

VIX Structured Product
Inconsistent hedging ratios
Vol-of-VIX derivatives driven by structured product flow rather than VIX

Effects of Volatility Paradox

I. VIX index
Fire danger (VOV) is higher despite low spot-Vol
Higher potential for Volatility-of-Volatility (kindling)
Skew Realization

II. VIX Futures & Options
Loss of hedging effectiveness
Roll-Yield Deception

III. VIX Structured Products & ETNs
To many players shorting the front of the curve
Shadow Risk in dynamic VIX structured products
Roll Yield Short Squeeze?

Inconsistent Deltas
Shadow Gamma
Shadow Theta
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(
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HIGHER CORRELATIONS lead to...
S&P 500 Sector Correlation (60 day)
2000 to 2012
0
0.2
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0.6
0.8
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(
0
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1
)
HIGHER CORRELATIONS lead to...
S&P 500 Sector Correlation (60 day)
2000 to 2012
45
65
85
105
125
145
165
185
205
2
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(
%
)
More VIOLENT VOLATILITY SPIKES
Volatility of VIX index (60 day)
2000 to 2012
(0.80)
(0.60)
(0.40)
(0.20)
-
0.20
0.40
0.60
0.80
1.00
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Hedge Fund Strategies 12m Correlation to
ATM Short Straddle on SPX
(HFRX Absolute Return, Equity Nuetral, Hedge Index, Merger Arb, RV Arb,
Convertible Arb / Monthly)
18

Hyper-Correlation Drift

Bull Market in Fear has registered the highest
cross-asset correlation readings between stocks,
sectors, countries, and different asset classes in
history
Massive headache for diversification
Fire Risk can be high when the forest is calm
Higher correlations are kindling for violent VIX fires (spike)
Volatility-of-VIX has reached new highs every year since 2008 in concurrence with higher correlation drift
Implied volatility of an index is more sensitive when average correlations are higher
Hence volatility-of-volatility as a second derivative is sensitive to changes in both correlations and
average volatility of index components (see left chart)
Higher correlations (e.g. >0.75) imply higher Vol-of-VIX (100+ vs. 90 historic average)

Relationship between Correlation and Volatility

Volatility of an index is more sensitive when average
correlations are higher (higher volatility of volatility)

Hence Volatility-of-VIX has reached new highs every
year since 2008 in concurrence with correlation drift
Volatility of Volatility WILDFIRE - Correlations
We are all volatility traders now!

In correlated markets asset selection is negated and
alpha becomes increasingly driven by rising and
falling volatility

Many hedge fund strategies converge to simple
synthetic short (or long) volatility trades
Modern volatility markets can put a price on unknown unknowns
via the volatility-of-volatility
Episodes of elevated implied vol-of-vol are associated with lower
equity returns
SPX periods of high realized volatility-of-VIX
underperform low by 13% annually
Individual stocks with high implied vol-of-vol
underperform low VOV stocks by 10% annually
(1)

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Volatility of Volatility WILDFIRE - Correlations
Today the difference between high implied and falling realized correlations
makes hedging single stock names cheaper than buying index vol
Volatility-of-volatility microstructure is calmer than at any point
over the past six years of data (below)
The VIX index registered the lowest intra-day movement in history
on January 11
th
(1.14%)
S&P 500 index had biggest yearly reduction in daily moves in eight
decades (since FDR 1934 USD devalue)

Source: Barlcays GlobalVol
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Volatility-of-VIX microstructure is calmer in 2012 however the last 30 minutes of
the trading day have become increasingly more violent than previous periods
19
S&P 500 Implied Correlation (12m)
S&P 500 Realized Correlation (12m)
BSM Put-Call Parity Relationship is consistent when VIX options are priced using
VIX futures as the underlying

When the VIX futures curve is in contango deep in-the-money VIX puts will trade at a discount
to intrinsic value when evaluated against spot VIX
Likewise deep in-the-money calls will trade at a discount during backwardization
Most commercial options programs do not make this adjustment, erroneously pricing implied
vol from the spot VI

5
.

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VIX options widely misunderstood
VIX options are priced off VIX Futures, NOT the VIX Index

20
Violation of BSM put-call parity when vol
calculated on spot VIX index
BSM Put-Call parity holds when vol is calculated
based on the VIX futures (accurate method)
Expiration
Type Strike Jun-11 Jul-11 Aug-11 Sep-11 Oct-11
Put 16 60% 43% 35% 26% 23%
Put 17 65% 43% 35% 24% 22%
Put 18 72% 45% 36% 22% 20%
Call 18 103% 119% 127% 130% 65%
Call 19 103% 115% 123% 126% 67%
Call 20 110% 116% 118% 124% 66%
Vix Index 17.88 17.88 17.88 17.88 17.88
Expiration
Type Strike Jun-11 Jul-11 Aug-11 Sep-11 Oct-11
Put 16 69% 63% 58% 51% 44%
Put 17 75% 66% 62% 53% 47%
Put 18 84% 73% 67% 56% 58%
Call 18 87% 72% 66% 51% 65%
Call 19 90% 73% 68% 56% 67%
Call 20 98% 79% 69% 61% 66%
VIX Future 18.40 20.00 21.05 22.40 22.30
Understanding VIX Options
Understanding VIX options
21
Dimensions of VIX optionality
VOV Term Structure (z-axis) & VIX Skew (x-axis)
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40%
60%
80%
100%
120%
140%
160%
-1.0
0.5
2.0
3.5
5.0
Maturity
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Moneyness (Sigma)
VIX Volatility Surface
65
75
85
95
105
115
125
135
8 18 28 38 48 58 68 78
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VIX index
New Regimes of Fear
VIX index vs. Vol of VIX / SKew of the VIX (Smoothed)
Bull Market (Jan 2006 to Jul 2007)
Credit Crisis Onset (Aug 2007 to Aug 2008)
Market Crash (Sep 2008 to Feb 2009)
Recovery to Flash Crash (Mar 2009 to May 2010)
Post-Flash Crash Steepening (May 10 to Sep 11)
LTRO Steepening Regime (Nov 11 to Mar 12)
QEIII Regime (Sep 12 to Feb 13)
SPATIAL PARADOX Volatility of Volatility Skew
22
Vol of VIX skew has built in a higher probability of volatility spikes to account for
this wildfire effect
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45
55
65
75
85
95
0.08 0.17 0.25 0.33 0.42 0.50
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(
%
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Expiration / Terms
New Regimes of Fear
Volatility of VIX Futures Term Structure / 2006 to 2013
Bull Market Jan 2007 to July 2007)
Post-Flash Crash Steepening (May 2010 to Oct 2011)
LTRO Steepening (Nov 2011 to Aug 2012)
QEIII (Sep2012-Feb2013)
Temporal PARADOX Volatility of Volatility Term Structure
23
Steepening VIX VOL Term Structure
Volatility of VIX Term Structure has steepened in the bull market for fear
implying greater futures delta sensitivity to spot-VIX movement
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a
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-
1
0
M
a
y
-
1
0
J
u
l
-
1
0
S
e
p
-
1
0
N
o
v
-
1
0
J
a
n
-
1
1
M
a
r
-
1
1
M
a
y
-
1
1
J
u
l
-
1
1
S
e
p
-
1
1
N
o
v
-
1
1
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
N
o
v
-
1
2
J
a
n
-
1
3
V
o
l

o
f

V
I
X
(
%
)
Volatility of Volatility Drift
TEMPORAL PARADOX VOV is falling from highs
24
Nonetheless VVIX has continued to drift lower tempered by the bull market in
equities and QEIII volatility cant fight the Fed
VIX Future Log-Contract Prediction Success/Failure %
Volatility Regime
Within
Prediction
Bound
Greater than
Upper Bound
Less than
Lower Bound
Total
(2006 to Mar 2012)
72% 10% 19%
Bull Market
(2006 to July 2007)
89% 6% 5%
Credit Crisis Onset (Aug 2007
to Aug 2008)
72% 14% 14%
Market Crash
(Sep 2008 to Feb 2009)
66% 23% 10%
Recovery to Flash Crash
(Mar 2009 to May 2010)
71% 8% 21%
Post-Flash Crash Steepening
(May 2010 to Oct 2011)
70% 10% 20%
LTRO Steepening
(Nov 2011 to Mar 2012)
41% 0% 59%
8
18
28
38
48
58
68
78
A
u
g
-
0
6
N
o
v
-
0
6
F
e
b
-
0
7
M
a
y
-
0
7
A
u
g
-
0
7
N
o
v
-
0
7
F
e
b
-
0
8
M
a
y
-
0
8
A
u
g
-
0
8
N
o
v
-
0
8
F
e
b
-
0
9
M
a
y
-
0
9
A
u
g
-
0
9
N
o
v
-
0
9
F
e
b
-
1
0
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
F
u
t
u
r
e

V
I
X

i
n
d
e
x

v
s
.

V
O
V

R
a
n
g
e
VIX 1-month Range Implied by VIX Log Contract vs Actual Future VIX
2006 to March 2012
30%
40%
50%
60%
70%
80%
90%
100%
110%
A
u
g
-
0
6
O
c
t
-
0
6
D
e
c
-
0
6
F
e
b
-
0
7
A
p
r
-
0
7
J
u
n
-
0
7
A
u
g
-
0
7
O
c
t
-
0
7
D
e
c
-
0
7
F
e
b
-
0
8
A
p
r
-
0
8
J
u
n
-
0
8
A
u
g
-
0
8
O
c
t
-
0
8
D
e
c
-
0
8
F
e
b
-
0
9
A
p
r
-
0
9
J
u
n
-
0
9
A
u
g
-
0
9
O
c
t
-
0
9
D
e
c
-
0
9
F
e
b
-
1
0
A
p
r
-
1
0
J
u
n
-
1
0
A
u
g
-
1
0
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
u
n
-
1
1
A
u
g
-
1
1
O
c
t
-
1
1
D
e
c
-
1
1
F
e
b
-
1
2
V
O
V

R
a
n
g
e

a
s

%

o
f

S
p
o
t

V
I
X
High-Low Range of 1m VIX Implied by VIX Log Contract/ Spot VIX
2006 to March 2012
45
95
145
195
245
295
J
a
n
-
0
0
A
p
r
-
0
0
J
u
l
-
0
0
O
c
t
-
0
0
J
a
n
-
0
1
A
p
r
-
0
1
J
u
l
-
0
1
O
c
t
-
0
1
J
a
n
-
0
2
A
p
r
-
0
2
J
u
l
-
0
2
O
c
t
-
0
2
J
a
n
-
0
3
A
p
r
-
0
3
J
u
l
-
0
3
O
c
t
-
0
3
J
a
n
-
0
4
A
p
r
-
0
4
J
u
l
-
0
4
O
c
t
-
0
4
J
a
n
-
0
5
A
p
r
-
0
5
J
u
l
-
0
5
O
c
t
-
0
5
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
V
o
l

o
f

V
o
l

(
%
)
Volatility of Volatility Drift
Realized Vol-of-SPX Realized Vol
Realized Volatility of VIX
Implied Vol-of-VIX (VVIX)
V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

65
75
85
95
105
115
125
135
8 18 28 38 48 58 68 78
V
o
l
a
t
i
l
i
t
y

o
f

t
h
e

V
I
X

(
1
m

O
p
t
i
o
n
s
)
VIX index
New Regimes of Fear
VIX index vs. Vol of VIX / SKew of the VIX (Smoothed)
Bull Market (Jan 2006 to Jul 2007)
Post-Flash Crash Steepening (May 10 to Sep 11)
LTRO Steepening Regime (Nov 11 to Mar 12)
QEIII Regime (Sep 12 to Feb 13)
VIX Exchange Traded Products vs. Traditional Volatility Strategies
25
VIX ETPs gain in popularity despite muddled performance in comparison to classic
volatility strategies
VIX options are priced from VIX futures (not the VIX) hence their
volatility increases exponentially as a function of time to expiration
and SPX forward skew
Systematic VIX ETN strategies that rely on constant hedging
relationships will not track back-tests during changing SPX forward
skew regimes due to shadow delta drift

V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
D
e
c
-
1
0
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
J
u
l
-
1
1
A
u
g
-
1
1
S
e
p
-
1
1
O
c
t
-
1
1
N
o
v
-
1
1
D
e
c
-
1
1
J
a
n
-
1
2
F
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
J
u
l
-
1
2
G
r
o
w
t
h

o
f

$
1
VIX ETPs vs. Traditional SPX Volatility Trades
Dec 2010 to July 2012
Traditional Volatility Trading Volatility ETNs
ATM Long
Straddle
ATM Short
Straddle
10% OTM Put VXX VXZ XIV XVIX
Vol Bias Long Vol Short Vol Long Vol Long Vol Long Vol Short Vol Short Vol
Annualized Return -28.62% 31.31% -15.36% -52.35% -26.98% 12.13% -3.61%
Sortino Ratio -1.77x 0.79x -0.61x -1.94x -1.53x 0.18x -0.45x
Sharpe Ratio -1.20x 0.85x -0.45x -1.05x -0.87x 0.16x -0.30x
Return to Drawdown -0.57x 1.10x -0.36x -0.65x -0.58x 0.15x -0.20x
Max Drawdown -50.16% -28.39% -42.87% -80.38% -46.50% -79.53% -18.06%

Note: Prior to 1990 there was not VIX index. We have substituted the CBOE VXO index, the precursor to the VIX, which was available starting in 1986.
26

When the shoeshine boy is shorting VIX ETNs maybe it is time to be cautious
Front-month VIX futures are increasingly influenced by short squeezes due to rising popularity
of short selling strategies
Shorting the front of the Vol Curve
Central Banks are fighting a World War for the right to unseat the
Japanese Yen as next carry trade king
QE lowers currency volatility (see EUR,GBP,JPY) and increases the
correlation between currency strength and risk asset volatility (see
USD vs. VIX)
May 2012 VIX
spike to 25
Ratio of 1m VIX Future Volatility vs. VIX Volatility
(2007 to 2012)
Late 2011 VIX
rebound to 30
V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

2
0
1
2

(
V
I
X

F
u
t
)
2
0
1
2

(
V
i
x
)
2
0
1
1

(
V
i
x
)
2
0
1
0

(
V
i
x
)
2
0
0
9

(
V
i
x
)
2
0
0
8

(
V
i
x
)
20
30
40
50
60
70
80
90
100
9
:
3
1

A
M
9
:
4
7

A
M
1
0
:
0
3

A
M
1
0
:
1
9

A
M
1
0
:
3
5

A
M
1
0
:
5
1

A
M
1
1
:
0
7

A
M
1
1
:
2
3

A
M
1
1
:
3
9

A
M
1
1
:
5
5

A
M
1
2
:
1
1

P
M
1
2
:
2
7

P
M
1
2
:
4
3

P
M
1
2
:
5
9

P
M
1
:
1
5

P
M
1
:
3
1

P
M
1
:
4
7

P
M
2
:
0
3

P
M
2
:
1
9

P
M
2
:
3
5

P
M
2
:
5
1

P
M
3
:
0
7

P
M
3
:
2
3

P
M
3
:
3
9

P
M
3
:
5
5

P
M
4
:
1
1

P
M
V
o
l
a
t
i
l
i
t
y

o
f

V
I
X

b
y

M
i
n
u
t
e

(
%

a
n
n
u
a
l
i
z
e
d
)
Volatility of VIX Index vs 1m Vix Future (2012) by Trading Minute
Averages by Year (annualized)
2012 (VIX Fut) 2012 (Vix) 2011 (Vix) 2010 (Vix) 2009 (Vix) 2008 (Vix)
Volatility-of-VIX futures in the last 15 minutes is substantially higher than that of
the VIX index itself demonstrating the power of structural flows
on January 11
th
(1.14%)

Source: Calculations executed by Artemis Capital Management LLC with data from CQG data factory. Average executed trades by minute.
V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

27
VORTEX WISHING WELL
Great Vega Short could work if these conditions are always met

1. Asset prices do not crash too far again and;
2. Other debtor-developed nations do not copy the strategy;
3. Taxpayer funded margin or government borrowing is unlimited

28
Short Roll Yield
Vol-of-Vol Timing
Leverage

If these conditions are not met before self-sustaining growth is revived
the asymmetrical return distribution of the strategy will result in ruin

Traders call this a Martingale process, similar to constantly doubling
down your bet while gambling It works only if your bankroll is
unlimited . so the real question is whether the debtor-developed
world has unlimited borrowing capability?

Despite higher asset prices little evidence experimental monetary policy
is helping the middle and lower class who do not own stocks and do not
have access to credit
Flash Crash
(Black Monday 1987, Flash Crash)
Mega-Cycle Crash
(2008 Crash, Great Depression)
Slowly building crash with slow recovery
End of leveraging cycle
High volatility, but relatively muted VOV

Great Depression
Global Recession
Flash Crash

Market Fragmentation & Self-Reflexity
Extreme Volatility of Volatility

Predictable (in retrospect) Unpredictable (even In retrospect)
Market fragmentation and self-reflexity
High volatility of volatility

Evolution of a Volatility Flash Crash
(aka Killer Rabbit)
Artificially Low Vol from Monetary Expansion
+
Higher potential for Volatility-of-Volatility
+
Dangerous Global Macro catalysts
+
VIX Derivatives Short Squeeze
=

? ?
Short Vol Squeeze
Hyper Vol-of-Vol
Self-Reflexivity

V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

12
13
14
15
16
17
18
19
20
VIX Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
VIX Futures Curve following Largest VIX %
Spikes (VIX < 20 to start)
2004-2013
February 27, 2007 / 50% Vix Log Move
February 25, 2013 / 29% Vix Log Move
March 30, 2006 / 27% Vix Log Move
March 13, 2007 / 26% Vix Log Move
13
14
15
16
17
18
19
20
9
:
3
1

A
M
9
:
4
9

A
M
1
0
:
0
7

A
M
1
0
:
2
5

A
M
1
0
:
4
3

A
M
1
1
:
0
1

A
M
1
1
:
1
9

A
M
1
1
:
3
7

A
M
1
1
:
5
5

A
M
1
2
:
1
3

P
M
1
2
:
3
1

P
M
1
2
:
4
9

P
M
1
:
0
7

P
M
1
:
2
5

P
M
1
:
4
3

P
M
2
:
0
1

P
M
2
:
1
9

P
M
2
:
3
7

P
M
2
:
5
5

P
M
3
:
1
3

P
M
3
:
3
1

P
M
3
:
4
9

P
M
4
:
0
7

P
M
Minute by Minute Performance of VIX and
Front Month Future
VIX Jumps 29% (log) on February 25th, 2013
VIX Index
March VIX Future
February 25
th
2013 - Volatility Killer Rabbit
on January 11
th
(1.14%)

Source: Calculations executed by Artemis Capital Management LLC with data from CQG data factory. Average executed trades by minute.
V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

29
10% of future
volume in last
minute of trading!
The Next Volatility Regime
30

VIX index
Fire Danger is High greater potential for Vol-of-VIX

VIX Derivatives
1. Unbalanced Shadow Delta
2. Unbalanced Shadow Gamma
3. Shadow Theta

VIX Structured Product
Vol-of-VIX derivatives driven by structured product flow rather than VIX

Three Possible Macro-VIX regimes for the next decade

I. Bull Market in Fear = New Normal
Post-2008 vol environment of steep term-structure is here to stay
Traders short the front and buy the back but with violent corrections
High Implied Correlations, Volatility of Volatility, but low spot-vol

V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

II. Bear Market in Fear = Japanization of US Volatility
Positive real rates lead to volatility as fixed income alternative
Long-term volatility and skew collapse as investors short rich vol
Rise of volatility short sellers builds systemic risk

III. Inflationary Volatility Spiral (Japan moving to this regime)
Runaway inflation actually drives higher volatility
Options skew flips to compensate (OTM Calls Vol)
OTM calls re-priced as we all have been hedging the wrong tail

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
A
l
l
o
c
a
t
i
o
n

f
o
r

3
%

R
e
a
l

R
e
t
u
r
n
Nominal Expected Return on Stocks
Optimal Portfolio with Positive Real Rates
(Stocks, Bonds, Cash & Vol) / Portfolio Target = 3% real return
Inflation = 3%
Long Volatility (-3% nominal return, -6% real return)
Cash (3.5% nominal return, 0.5% real return)
Stocks (SPX, 3-15% nominal return, 0-9% real return)
Bonds (10yr UST / 6% nominal return, 3% real return)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
A
l
l
o
c
a
t
i
o
n

f
o
r

3
%

R
e
a
l

R
e
t
u
r
n
Nominal Expected Return on Stocks
Optimal Portfolio in Financial Repression
(Stocks, Bonds, Cash & Vol) / Portfolio Target = 3% real return
Inflation = 3%
Long Volatility (-3% nominal return, -6% real)
Cash (0% nominal return, -3% real)
Stocks (SPX, 3-10% nominal return, 0-7% real)
Bonds (10yr UST / 2% nominal return, -1% real)
Bull Market in Fear and Modern Portfolio Theory
Bull Market in Fear is Explained by Markowitz Portfolio Theory
Long volatility exposure extremely valuable to portfolio optimization in financial repression despite
substantial negative carry because it hedges forced over-allocation to equity
5-12% is optimal volatility portfolio exposure in negative real interest rate environment!

V
O
L
A
T
I
L
I
T
Y

P
A
R
A
D
I
G
M

A
N
D

P
A
R
A
D
O
X

31
Equity %
Long Volatility %
Fixed Income %
Fixed Income %
Cash %
Cash %
Cash %
Post-Modern Volatility can be more than just FEAR
32
Volatility is the ultimate post-modern asset for our existential economic future
because it protects you from the fracture of the abstraction
Forward
Variance
Volatility of
Volatility
Volatility
V
O
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A
T
I
L
I
T
Y

P
A
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A
D
I
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M

A
N
D

P
A
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A
D
O
X

Visualizing Volatility
33
Volatility at Worlds End: Two Decades of Movement in Markets is a depiction of real stock
market variance using trading data from 1990 to 2011. The visuals are designed from S&P 500
index option data replicating the implied volatility wave (or variance swap curve) extending to
an expiration of one year. The front of the volatility wave contains the same data used to
calculate the CBOE VIX index. The movement of this wave demonstrates changing trader
expectations of future stock market volatility. As the wave moves through time the expected
(or implied) volatility surface transforms into a realized volatility surface derived from
historical S&P 500 index movement. The transition represents what professional traders call
volatility arbitrage. The color variation in the volatility waves show the volatility-of-volatility
or internal movement of the wave. The track underneath the volatility wave represents
underlying S&P 500 index prices.

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Christopher Cole, CFA General Partner and Founder Contact Information
Reference Material & Acknowledgements
34
Artemis Research:
Volatility of an Impossible Object: Risk, Fear, and Safety in Games of Perception
Volatility at Worlds End: Deflation, Hyperinflation and the Alchemy of Risk, March 30, 2012
Fighting Greek Fire with Fire: Volatility Correlation, and Truth, September 30, 2011
Is Volatility Broken? Normalcy Bias and Abnormal Variance, March 30, 2011
The Great Vega Short- volatility, tail risk, and sleeping elephants, January 4, 2011
Unified Risk Theory - Correlation, Vol, M3 and Pineapples, September 30, 2010

Artwork:
"Volatility of an Impossible Object" by Brendan Wiuff / Concept by Christopher Cole 2012 / copyright owned by Artemis Capital Management LLC
Jack-o-Lantern Istock photo / used based on purchase of rights
Ocean Waves Istock photo / used based on purchase of rights
"Odysseus facing the choice between Scylla and Chrybdis" by Henry Fuseli 1794 / public domain
"Penrose Triangle, Devils Turning Fork & Neckers Cube Derrick Coetzee / Public Domain

Reference Material:
Kritzman, M. and Y. Li. Skulls, Financial Turbulence, and Risk Management. The Financial Analysts Journal, May/June 2010
Simulacra and Simulation by Jean Baudrillard / University of Michigan / 1994
"A Tale of Two Indices" by Peter Carr & Liuren Wu December 22, 2005
VIX Derivatives: A Poor Practitioners Model Maneesh Deshpande / May 19 2011
Understanding VIX Futures and Options Dennis Dzekounoff; Futures Magazine/ August 2010
The Volatility Surface: A Practitioners Guide. Jim Gatheral / John Wiley and Sons, Hoboken, NJ, 2006
"Think Fast and Slow" by Daniel Kahneman / Farrar, Staus and Giroux 2012
Options, Futures, and Other Derivatives John C. Hull, Fifth Edition; Prentice Hall 2003
"Lifetime Odds of Death for Selected Causes, United States, 2007" / National Safety Council 2011 Edition
Volatility Trading Evan Sinclair, Wiley Trading 2008
"Dying of Money: Lessons of the Great German and American Inflations" by Jens O. Parsson / Wellspring Press 1974
"Economics of Inflation; A Study of Currency Depreciation in Post-War Germany" by Constantino Bresciani-Turroni Out of Print / 1968
Variance Swaps Peter Allen, Stephen Einchcomb, Nicolas Granger; JP Morgan Securities / November 2006
"Laughter in the Dark - The Problem of the Volatility Smile" by Emanuel Derman May 26, 2003
Robust Hedging of Volatility Derivatives Roger Lee & Peter Carr; Columbia Financial Engineering Seminar / September 2004
More than you Ever Wanted to Know About Volatility Swaps Kresimir Demeterfi, Emanual Derman, Michael Kamal & Joseph Zou; Goldman Sachs / March 1999
The Performance of VIX Option Pricing Models: Empirical Evidence Beyond Simulation Zhiguang Wang; Florida International University / April 2009
Recent Developments in VIX Exchange Traded Products Maneesh Deshpande/ April 3, 2012
"Deflation: making sure 'it' doesn't happen here" by Ben S. Bernanke (speech) / US Federal Reserve November 2002
"US Options Strategy TVIX Explosion Drives Vol-of-Vol Higher" Deutsche Bank February 23, 2012
"Unknown Unknowns: Vol-of-Vol and the Cross Section of Stock Returns" Guido Baltussen, Sjoerd Van Bekkum and Bart Van Der Grient / Erasmus School of Economics & Robeco Quantitative
Strategies/ July 30, 2012
Definition of "Impossible Object" / Wikipedia / http://en.wikipedia.org/wiki/Impossible_object

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Christopher Cole, CFA General Partner and Founder
Artemis Vega Fund L.P.
Artemis Capital Management, L.L.C.
520 Broadway, Suite 350
Santa Monica, CA 90401
info@artemiscm.com
www.artemiscm.com

Managing Partner & Portfolio Manager
(310) 496-4526 phone
(310) 496-4527 fax
c.cole@artemiscm.com

Contact Information
Artemis Capital Management Contact Information
35

Managing Partner & Portfolio Manager / Artemis Capital Management LLC
Christopher R. Cole, CFA is the founder of Artemis Capital Management LLC and the portfolio manager of the
Artemis Vega Fund LP. Mr. Coles core focus is systematic, quantitative, and behavioral based trading of
exchange-traded volatility futures and options. His decision to form a fund came after achieving significant
proprietary returns during the 2008 financial crash trading volatility futures. His research letters and
volatility commentaries have been widely quoted including by publications such as the Financial Times,
Bloomberg, International Financing Review, CFA Magazine, and Forbes. He previously worked in capital
markets and investment banking at Merrill Lynch. During his career in investment banking and pension
consulting he structured over $10 billion in derivatives and debt transactions for many high profile issuers.
Mr. Cole holds the Chartered Financial Analyst designation, is an associate member of the NFA, and
graduated Magna Cum Laude from the University of Southern California.
Key Information/ Biography
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Legal Disclaimer
THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN ARTEMIS VEGA FUND,
L.P. (THE FUND). ANY SUCH OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS
OF A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THE MEMORANDUM) AND ONLY IN THOSE
JURISDICTIONS WHERE PERMITTED BY LAW. AN INVESTMENT SHOULD ONLY BE MADE AFTER CAREFUL REVIEW OF
THE FUNDS MEMORANDUM. THE INFORMATION HEREIN IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION IN
THE MEMORANDUM.
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR
WITHDRAWAL, REDEMPTION AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE
ACCESS TO CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS
EXPECTED TO DEVELOP. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR
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CERTAIN DATA CONTAINED HEREIN IS BASED ON INFORMATION OBTAINED FROM SOURCES BELIEVED TO BE
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