2017 is a Record-Breaking Year for Both SKEW-Over-145 and VIX-Under-10 Values

In recent weeks several news articles have noted that the CBOE Volatility Index® (VIX®) dipped below 10, and have asked if there is an unusual amount of complacency in the markets. The VIX Index closed below 10 on seven straight trading days (an all-time record) from July 13 to July 21. Recent headlines stated (1) “Too calm? Wall Street volatility collapses to lowest since 1993” (by CNBC), and (2) “Dip in volatility stirs warnings about too much complacency” (by Pensions & Investments).

IS THERE TOO MUCH COMPLACENCY IN THE MARKETS?

I believe that an argument could be made that the markets still are concerned about downside risk, and are not completely complacent in 2017, particularly if one looks at the statistics in three charts below: (1) the CBOE SKEW Index already has closed above 145 on 10 days in 2017 (more than any other calendar year); (2) a recent SPX volatility skew chart showed that the implied volatility estimates for many of the out-of-the-money put options ranged from 11 to 27, and (3) a recent VIX futures term structure chart showed VIX futures prices (with expirations at future dates) ranged from 10.35 to 16.

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 tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100.

SPX VOLATILITY SKEW CHART – SHOWS DEMAND FOR DOWNSIDE PROTECTION

The volatility skew chart below shows the implied volatility estimates for SPX options at the close on Friday, July 21. On that date the closing values were 2472.54 for the SPX Index, 9.36 for the CBOE Volatility Index® (VIX®) (the second-lowest daily close for the VIX Index), and 134.53 for the CBOE SKEW Index (SKEW). The long-term average daily closing values since January 1990 are 19.5 for the VIX Index and 118.7 for the SKEW Index.

The SPX volatility skew chart below shows:

  • Expirations on 26 upcoming dates in 2017 (including Mondays, Wednesdays, and Fridays and end-of-months) are available for SPX options; and
  • The implied volatility estimates for at-the-money SPX options ranged from around 5 to 12, and the implied volatility estimates for many of the out-of-the-money put options (with strike prices from 2230 to 2404, and that can be used for downside portfolio protection) were often much higher, with a range from around 11 to 27. With the SKEW Index at 134.53, one can expect generally higher implied volatilities for out-of-the-money SPX put options, when compared with at-the-money SPX options.

 

VIX FUTURES TERM STRUCTURE – RANGE FROM 10.35 TO 16

The VIX futures term structure chart is upward sloping and shows that the VIX futures prices ranged from 10.35 (for the July 26 expiration) to 16 (for the VIX futures expiring on February 14, 2018).

 

 

CONCLUSION

In order to gain a better sense of the amount of overall fear or complacency in the markets, analysts and investors can examine and compare many metrics, including the VIX Index, SKEW Index, volatility skew charts, and VIX futures term structure.

Links to more information on the SKEW Index, VIX futures and options, and more than 25 volatility indexes is at www.cboe.com/volatility.

Weekend Review of VIX Futures and Options – 7/23/2017

VIX closed Friday a tad shy of an all-time low while the S&P 500 continues to push higher having gained just over ½ a percent last week.  The curve below does appear steep, but the context of VIX being so low should be taken into account. One trader came into the VIX pit mid-day on […]

Weekend Review of Volatility Indexes and ETPs – 7/23/2017

VIX finished the week just off all-time lows and the VXST – VIX – VXV – VXMT curve shifted lower.  This is a result of realized volatility for S&P 500 price action remaining low and there not appearing to be any speed bumps on the horizon for the financial markets. VVIX dipped below 80.00 to […]

Weekend Review of VIX Futures and Options – 7/16/2017

VIX finished the week at the lowest close since 1993, but the two lower closes came during a holiday week so I’m considering consulting with other VIX watchers with respect to if this is basically an all-time low.  Note the dramatic move in the July contract that goes off the board on the open Monday. […]

Weekend Review of Volatility Indexes and ETPs – 7/16/2017

We only have data going back to the 2007 – 2008 period for the non-VIX SPX related indexes on the diagram below.  VXST, VXV, and VXMT all made all-time lows, based on the history we have to work with, on the close Friday.  VIX closing at 9.51 was the third lowest on record.  However, the […]

Award-Winning PUT Index Now Has 31-Year Price History with Strong Risk-Adjusted Returns

Over the past couple of years more investors have expressed interest in the cash-secured put writing strategy. The leading performance benchmark for this strategy is the CBOE S&P 500 PutWrite Index (PUT), an index that measures the performance of a hypothetical portfolio that sells one-month S&P 500® Index (SPX) put options against collateralized cash reserves […]

Weekend Review of VIX Options and Futures – 7/2/2017

IX had quite a midweek move rising above 15.00 for a very short period of time before settling at 11.18 to end the week.  Note the VIX action didn’t have much of an impact on the futures contracts which can be attributed to the steep nature of the curve going into last week. I spoke […]

Weekend Review of Volatility Indexes and ETPs – 7/2/2017

I’ve been traveling like a madman on behalf of CBOE in June.  I try my best to keep up with the markets when I’m out and about, but sometimes the catch up occurs outside of real time.  This weekend is one of those catch up weekends.  I was aware of the VIX move over 15.00 […]

PUT Index and PUTW ETF Win Sharpe Indexing Award

On June 26 the CBOE S&P 500 PutWrite Index (PUT) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund ETF (PUTW) won the 2017 Index/ETF Product of the Year award at an annual ceremony that was presented by IMN and the Journal of Index Investing. The awards ceremony was held during the 22nd Annual Global […]

Weekend Review of VIX Futures and Options – 6/25/2017

VIX was a bit lower to end the week and the curve moved down as well.   We retired June last week and now July is the front month and is at a premium of just over 1.80 to finish the week. Before getting into a trade I would like to point out some heavy activity […]

  • CATEGORIES

  • Recent Comments

  • Tags

  • authors

  •  

  • Quick Links

  • Blogroll

  • Follow Us

    RSSTwitterFacebookLinkedInYouTube
  • Archives