We were there, clanging bells and hooting our hearts out. Here is winner Levi Leipheimer readying for the time trial that put him in yellow. The peloton left Avon here for Steamboat, and Levi is visible midway in yellow. At the finish, some 250,000 jammed downtown Denver for the epic, lapping conclusion. We are proud of American cycling and our state’s awesome organizational effort.

Speaking of peloton, Wall Street Journal reporter John Jannarone wrote Monday in the Heard column called “Traders Seek Salvation from Correlation” about how stocks race in formation. It’s among the best pieces we’ve seen on modern trading. Jannarone says that S&P 500 stocks show 80% correlation in the past month, meaning eight in ten move synchronously.

This is a source of distress for IR folks trying to distinguish a strong company story from the herd. We’d argue that rather than slamming the collective IR noggin into the burgeoning brick wall of macro-focus investing that you instead track program trading and establish what level is acceptable – and use it as an IR success measure. We wrote about this last week, so we won’t retrace the trodden path.

Why a mirror image across so much of the market? One driver Jannarone posits is Exchange-Traded Fund investing. According to Credit Suisse, these drive some 30% of daily stock volume. Jannarone also notes that trading in S&P 500 E-mini futures contracts is more than four times the combined daily volume of the two biggest S&P 500 ETFs, the SPDR, and iShares S&P 500 Index ETF.

It’s a reasonable hypothesis. If institutions trade ETFs and indexes, and hedge them with futures and options, and try to increase yield by leveraging assets with yet more futures or options in, say, currencies and Treasuries, stocks will correlate in models, and markets will reflect high volatility due to continual adjustments to these layers of equities and derivatives.

We see it, measuring speculative and program-driven trading for clients. These two dominating behaviors are also increasingly correlated. More money is pursing short-term “investment” horizons designed to produce returns in days.

Jannarone worries as do many investors that correlation is likely to last because of currency concerns. We agree. So IR should quantify market activity and report on it regularly to management. Otherwise, we’re bystanders. It’s better turning lemons to lemonade than sourly wondering when rational investment will return.

We suggest you hop on that bike and ride it.

It’s the trading symbol for the iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN. We saw the circular from Direct Edge, where it began trading today. It’s not some cheese ball confection lofted by off-shore subsidiaries of Boca Raton broker-dealers. It was created by Standard & Poor’s. It’s underwritten by Barclays.

VZZB is an exchange-traded note (ETN), an uncollateralized debt obligation backed by Barclays that trades like a stock, leverages returns, depends on volatility and consists of futures contracts that mimic the supposed future volatility of an index. For gains.

Why should you care, sitting there in the IR chair? Eight of ten days, your stock is moving because somebodies speculated on the divergence of this versus that, or some other bodies tweaked their risk-management schemes to offset increasing implied volatility. Or whatever. It’s all interrelated. If you want to know why your stock behaves the way it does, you must see it in context of how markets work and what behaviors drive supply or demand in your shares.

VZZB’s name says it all. Literally. First, it goes long its components, buying them, not borrowing them and selling them short. Second, it’s “enhanced,” which means it’s using options to outperform the benchmark – for a day. Third, it’s based on the S&P 500. Fourth, it’s really derived from the VIX, the Chicago Board Options Exchange’s wildly popular measure of the implied volatility of the S&P 500 index (VIX options expire the 20th in the middle of earnings). And finally, its components are daily rolling VIX futures contracts four, five, six and seven months out – the “mid-term” – that simulate volatility at various points in the future.

Yet it offers correlated, enhanced returns today. Just a day. And realize this: There is an options chain for this instrument. You can trade puts and calls on this derivative, comprised of derivatives of derivatives, and their implied, leveraged volatility.

Need to help your CFO see why your stock sometimes does the craziest things? Say to him or her: “Look up this ticker, VZZB. Read how it works. Now think about the mindset that invests in volatility as an asset. It’s not fringe behavior. VZZB’s first cousin VXX regularly trades 30 million shares daily.”

Lesson for the observant: Barclays thinks market volatility is back. A Barclays executive said of the launch, “We continue to see investor demand for exposure to volatility…”

And there you have it. Money is buying volatility as an asset class.

Remember that Redford flick from the 1970s, Three Days of the Condor? It’s a thriller about high-level conspiracy. In volatility trading, an Iron Condor is not conspiratorial, just an income trade. You sell two puts and buy two calls, with the spread between both always giving you an initial credit in your account (your highest possible return). If the underlying issue, say an individual stock or the S&P 500 Index, the SPX, trades between your puts and calls, your options expire and you keep one or both credit spreads. It’s a popular thing to do in sideways markets.

Since the SPX converted Dec 24 from the June 2009 version to the next iteration of the S&P 500 Index (it’s called the SPX converting to the SPL), the three days before that might’ve been a deliberate effort to put a squeeze on some Iron Condor traders. Why? Quiet markets. No news is good news if you’re trading for a credit profit. Money’s on the sidelines.

Instead, the “Vega,” or unexpected volatility, increased. Was it chance, or did counterparties take advantage of the situation and push some Iron Condors into the money, forcing them to cover and pay rather than keep their credits? It’s possible. Also, Iron Condor is a pretty good name for a rock band.

Now, why would you care about Iron Condors, IROs and execs? Because once again something besides fundamentals affected market prices. The cool, contemporary and confident IRO has got to know market structure. If you thought it mattered in 2009, wait till you see the variables lined up to hit the 2010 markets.

Here’s one. If you wanted a swear word this past year that reflected something infinitely venal, you would mutter sharply, “auction rate securities.” Yesterday, the Federal Reserve announced that it would offer term deposits to banks through periodic auctions to try to bleed some of the $1-2 trillion of excess, created cash out of the system.

In the private sector, manufacturing an artificial means to deal with excess cash is called “money laundering.” But the Federal Reserve is counting on banks to park cash with them at your expense next year, since interest will be paid on these manufactured deposits.

The point is, what happens if banks use the new government auction-rate market instead of trading with that excess cash as they did in 2009? We don’t know. It’s a Vega Risk. Vega risks abound.

We actually think 2010 could be a ripper of a year in equities, at least for awhile. Why? It’s less risky to trade with money than to loan it into economies dictated by regulations and monetary policy. Loaning requires a term and performance by another party. Trading you can do any given day and end flat, and you can take advantage of what other people do, instead of depending on them. Maybe with some laddered Iron Condors.

Wry humor to end 2009! Have a fantastic New Year, and we’ll have more to say in 2010.

If you wondered why your trading seemed odd that day, there’s a good chance it had to do with inscrutable black-box risk metrics run by major sellside firms helping the buyside modulate macroeconomic risk.

Oh, for the days when buyers and sellers set prices.

Volatility contracts expire tomorrow, Dec 16, and the usual index, treasury, currency, bond and other futures and options contracts cease Thursday and Friday the 17th-18th. Also, Christmas week, the S&P 500 futures, the SPL/SPX contracts, convert, and a new SPL series is added.

What do these mean to the IR job, and how do they work? SPLs and SPXs are options to buy or sell the S&P 500 index at future dates. They can be used as an asset for margin, as protection against risk, for trading volatility, for synthetically adjusting portfolios to mimic the S&P 500 without buying the actual elements – all kinds of things. How the market behaves around these expirations is like seeing the attitude of money rather than hearing the words it speaks.

Here’s the key: contrary to prevailing notions, derivatives are not an evil tool of wicked free markets. Derivatives are always an effort to deal with price and risk uncertainty. The more widely they’re deployed, the greater the risks and uncertainties. Risks and uncertainties are greatest in speculative markets and highly regulated markets. In both instances, the role of value in setting prices is obscured.

IROs and execs, these features matter. Imagine going up the down escalator. This is the nature of the capital markets at present. Too many factors are interfering with natural price-setting mechanisms. In order to explain what seems inexplicable about your share price at times, it’s necessary to understand how the value of money and the effects of risk-management work in equity markets.

We continue to say that the single largest problem now is Federal Reserve policy. Central bankers believe that the supply of money, which represents an exchange of value, can increase, even if there is no exchange of value. On corporate balance sheets, these conditions would result in a reduction to retained earnings, a dilution to equity, a writedown of asset values, or a journalizing entry affecting net worth in some way.

But that doesn’t happen in Federal Reserve policy. Inevitably, a bubble forms someplace.