Low-cost Protection — One Year After VIX Peak

AUG. 9, 2012 — A year ago, on August 8, 2011, the CBOE Volatility Index® (VIX®) closed at 48.00, its highest closing value since March 9, 2009.

Yesterday, on August 8, 2012, the VIX closed at 15.32 (a level that was 68% lower than the year-earlier level).

Yesterday Reuters published an article is entitled “Time may be ripe to buy low-cost option protection.” The article noted that now could be a good time for investors to explore the possibility of buying SPX puts or VIX calls for protection.


The Reuters article noted that —

“ …The summer months are often a slower period, when many traders head for the beaches and volatility typically wanes before the historically volatile months of September and October.   This is often reflected in the CBOE Volatility Index or VIX … ‘Now is a good time to buy downside puts on the S&P 500 index because they can increase in value if the market falls and if volatility moves up,’ said WhatsTrading.com options strategist Frederic Ruffy. …”

According to Bloomberg, with the S&P 500 Index at around 1400 on the morning of August 9, 2012, for the SPX options expiring in 44 days on Sept. 22, here are rough estimates of implied volatilities –

  • around 18 i.v. for the SPX 1300 puts,
  • around 16 i.v. for the SPX 1350 puts,
  • around 14 i.v. for the SPX 1400 puts.

Out-of-the money SPX puts often have higher implied volatilities than at-the-money SPX puts because of the SPX skew and demand by investors for portfolio protection.

Here is a 13-month chart for the VIX Index, which can provide some clues to the price of SPX options.


The Reuters article also noted —

“…’A similar trade would be to buy VIX call options which are also cheap right now,’ said Bill Luby, a private investor who writes the “VIX and More” blog in San Francisco. ‘VIX call options will increase in value if the market has a sharp downward correction or investors view there is more risk on the horizon.’ …”

One tool that can be helpful to VIX options investors is the CBOE VIX of VIX Index (VVIX). www.cboe.com/VVIX The VVIX Index is an indicator of the expected volatility of the 30-day forward price of the VIX®.

Here is a chart showing the past 13 months of VVIX daily closes — 


CBOE offers options on four volatility indexes —

VIX – CBOE Volatility Index® (VIX®) Options
GVZ – CBOE Gold ETF Volatility Index Options
VXEEM – CBOE Emerging Markets ETF Volatility Index Options
VXEWZ – CBOE Brazil ETF Volatility Index Options

The CFE offers futures on a number of volatility indexes, including VIX, OVX, NDX, GVZ, VXEEM, and VXEWZ.  http://cfe.cboe.com



The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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