A recent Bloomberg story noted —
“The S&P 500 drifted to an all-time high on May 21, before the Greece crisis overshadowed signs that a first-quarter slowdown in economic growth would prove transitory. The benchmark index tumbled 2.1 percent Monday, the most since April 2014 and erasing gains for the year, as Greece surprised investors by shutting lenders and imposing capital controls after debt negotiations broke down.”
Below are four key points regarding volatility and options-based indexes.
1. VOLATILITY-SELLING INDEXES ROSE IN THE FIRST HALF
The first chart below shows the percentage change for the 1st half of 2015 for 8 CBOE performance benchmark indexes and the CBOE Volatility Index® (VIX®). Two benchmark indexes that sell one-month VIX futures – VPD and VPN – both rose more than 7%, while two benchmark indexes that sell at-the-money one-month S&P 500® (SPX) index options – BXM and PUT – both rose by more than 3%.
The index with the highest returns for the first half was the CBOE VIX Premium Strategy Index (VPD); this index tracks the value of a portfolio that overlays a sequence of short one-month VIX futures on a money market account. The VIX futures are held until expiration and new VIX futures are then sold. The money market account decreases leverage relative to a stand-alone short position in VIX futures. To further limit risk, the number of VIX futures sold at each roll is set to preserve 75% of the initial value of the portfolio in the event that VIX futures increase by 25 points. To learn more about CBOE’s benchmark indexes (which could be appealing in times of low interest rates and high p/e ratios), please visit www.cboe.com/benchmarks.
2. BIGGEST ONE-DAY MOVE FOR VIX IN MORE THAN TWO YEARS
On Monday, June 29, after the markets absorbed news regarding the closing of banks in Greece, (1) the CBOE VIX of VIX Index (ticker VVIX) rose 40.8%, and (2) the VIX Index rose 34.5%, its biggest one-day move (in percentage terms) in more than two years.
3. AVERAGE DAILY CLOSE FOR VIX INDEX WAS 15.1
Investors often inquire as to whether the VIX Index recently has been relatively low or high. In the first half of 2015, the average daily close for the VIX Index was 15.1, which was higher than its 14.2 average for each of the last two calendar years, but was much lower than the average in 2008 and 2009. In viewing the chart below it is interesting to ask whether the VIX price levels move in cycles and if the VIX may begin to trend upward the next few years. www.cboe.com/VIX.
4. GAUGING HEDGING INTEREST BY COMPARING THE SKEW, VVIX, AND VIX INDEXES
For investors who wishing to gain a better idea of the relative costs of hedging with SPX protective puts and VIX calls, three key CBOE indexes to watch are the SKEW, VVIX, and VIX indexes. CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence. The value of SKEW increases with the expected tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. Historically, SKEW has varied in a range of 100 to 147 around an average value of 115. So far in 2015 the average value of the CBOE SKEW Index has been 124.6, indicating that there is some strong interest in tail risk protection.
To learn more about the above indexes and download data and white papers, please visit www.cboe.com/benchmarks and www.cboe.com/volatility.