While the VIX Index has been below 24 so far in 2012, and the VIX closed at 16.80 last Thursday (Feb. 23), the trends in trading volumes in VIX-related products indicate that there could be more recent interest in using VIX-related products for purposes of risk management for investor portfolios.
The average daily volume for the VIX call options, VIX futures, and some of the VIX-based exchanged-traded products (ETPs) is more than 55% higher this month than it was in the previous four months (see table below)
This month the VelocityShares Daily 2X VIX Short-Term ETN (TVIX) had an average daily volume of around 21,887,000, but in the past week Credit Suisse announced that it had temporarily suspended creations of shares of the TVIX ETN.
TABB GROUP REPORT ON VIX TRADING
The Tabb Group recently issued a 20-page paper “VIX Trading: The Structure of Uncertainty” (available for purchase). Tabb summaries of the paper on the CBOE Volatility Index® (VIX) noted that —
“ …VIX trading quite literally exploded over the past few years. The notional value traded of VIX products grew at an ear-piercing 5-year compound annual growth rate of 131% from 2006. … the S&P 500 volatility market reached an estimated 202 million average daily notional Vega (gross): SPX Options (75 million); VIX futures (48 million); VIX Options (39 million); VIX ETPs (30 million); and SPX Variance Swaps (10 million). …
WHAT ARE EXPECTATIONS FOR FUTURE LEVELS OF VOLATILITY?
A February 22 news story at www.wsj.com noted:
“… current VIX levels also show that traders expect stocks to dart around far more in the future than they have over the last month. The realized volatility of the S&P 500 over the last 30 days stands at about 8%, its lowest level since May, according to data from Livevol. That means traders are paying more for portfolio protection despite the placid markets. …”
The chart below shows a large spread of 9.3 points on February 23rd between the VIX Index spot value (16.80) and VIX June ’12 Futures price (26.10)
The webpage www.cboe.com/VIX provides a table delayed quotes with updates on the VIX and VIX futures values. Here is the table at mid-day on Feb. 24 —
UMASS STUDY ON VIX FUTURES AND OPTIONS AND DIVERSIFICATION
The paper “VIX Futures and Options–A Case Study of Portfolio Diversification During the 2008 Financial Crisis” was published in 2009 by an author from the University of Massachusetts.The paper found that, for a traditional portfolio of stocks, bonds and alternatives during the five-month time period from August through December 2008, if an investor made a 10% allocation to CBOE VIX futures–
– Total returns were improved by 15.7 percentage points (improvement to -4.0% from -19.7%)
– Standard deviation was reduced by about one-third (to 16.3% from 25.3%)
Please visit the VIX microwebsite www.cboe.com/VIX for the UMass study on use of both VIX futures and options.