Volatility Indexes and ETPs Last Week – 11/1/2015

When I do these blogs I get the data, create the graphics and look at the markets.  I share these mundane facts about my ‘process’ to make a point about the diagram below.  Last week we got an FOMC meeting (although one without a press conference) and GDP number behind us without the stock market did not reacting negatively.  We are looking forward to the October employment report that comes out this Friday, but we did get two of the big three economic events behind us.  That combined with the S&P 500 rising on the week would make one think the volatility curve would have shifted lower, not higher.  However, numbers don’t line and the chart below shows some real concerns about the prospects for the stock market over the next few weeks.


Both SKEW and VVIX also remain elevated, although down on the week, which I take as a sign traders are not expecting to cruise through the end of 2015 without some detours or speed bumps along the way.

VXX Table

The biggest VXX option trade on Friday was also one of the last block trades of the day.  VXX was at 18.82 and a bear call spread was executed using the November 20th options.  The trader sold 6000 of the Nov 20th 17.50 Calls at 1.83 and purchased 6000 Nov 20th 18.50 Calls at 1.43 and a net credit of 0.45.  This trade is looking for three weeks of relative calm in the equity markets to persist and VXX to do as it does in this type of market, which is grind lower.   The payoff if held to November expiration appears below –


VIX Last Week – 11/1/2015

VIX, VIX futures and the S&P 500 all moved higher last week.  It happens, but with a couple of major economic events/numbers behind us (FOMC / 3Q GDP) and stocks moving up (although slightly) it was a bit surprising to see all that green when compiling data for this blog.

VIX with Table

The curve below is a comparison of generic VIX futures based on the number of days to expiration.  For example, Week 1 for the 10/23 curve was the October 28th contract while on the 10/30 curve it represents the November 4th VIX futures.  The shift higher in VIX futures was across the board with the short dated futures moving up as well.

VIX Weeklys with Table

VIX Weeklys futures were launched back in late July with the options following more recently on October 8th.  The first set of VIX Weeklys options settled this past Wednesday and the open interest for the October 28th options was well over 100,000 at settlement.  As of Friday the open interest for VIX Weeklys options expiring this coming week is over 106,000.  The table below shows the top five Nov 4th VIX options ranked by open interest.

VIX Weeklys Nov 4 OI

As I noted above VIX Weeklys futures have been around for almost three months.  The anticipation was that these contracts would closely follow the level of the spot VIX index.  I’ve been compiling five minute VIX data and the bid and offer for the contract that expires in just a few days to see if that the assumption of how the futures were going to behave relative to the index is holding up in the market.  So far the correlation between the index and mid-point of the futures bid-ask has a correlation of around 0.98 using 5 minute data and rolling to the next week’s contract on the close the afternoon before settlement.  If you are more of a visual person check out the chart below which is a comparison of VIX and the futures for the last three months. 5 Min VIX - First 3 Months


RMC Asia To Cover Worldwide Volatility, Options Skew, and Risk Management – by Matt Moran

The CBOE Risk Management Conference is the premier educational forum for users of equity index options and volatility products. Now in its 31st year in the US and 4th year in Europe, CBOE is pleased to bring this experience to Asia. The First Annual CBOE Risk Management Conference Asia will be held on November 30 – December 1 at the JW Marriott Hotel, Pacific Place, 88 Queensway, Hong Kong.


Topics to be covered include –

• Primer on Options and Volatility Strategies
• Benchmark Indexes & Research on Fund Use of Options-Based and Volatility-Based Strategies
• Panel on Options and Volatility Market Structure
• A New Volatility Regime? Navigating the Cycle with S&P 500 and VIX Options
• Volatility Reconnaissance: What can S&P 500 and VIX options tell you?
• The Short Story: The Volatility Risk Premium and strategies to take advantage
• Volatility and the Allegory of the Prisoner’s Dilemma
• ‎Hedge Funds and Volatility-Based Strategies: Presentation and Panel
• Perspectives on Listed Equity Derivatives from Chinese Exchange Leaders
• Cross-Region Volatility Analysis for Investing and Hedging
• Directional Options Strategies
• Volatility of Volatility


Many experts on volatility and options investing will attend RMC Asia. Five questions that I would like to see addressed at RMC Asia are in the all-caps headings below.

I have been told that the options volatility skew generally is different in the U.S. and Asia. The two charts below show the volatility skew for select index and ETF options. For five of the six options (all except VIX options), the estimated implied volatility at 80% moneyness (corresponding to 20% O-T-M put options) is the highest for any strike price shown. One could infer from this chart that there is great demand for index options that can protect against huge downside losses. At RMC Asia I plan to learn more about comparisons of the volatility skew in the U.S. and Asia.

1 - Vol Skew SPX etc2 - Vol Skew VIX USO

Money managers who consistently write index options often note that there has been a volatility risk premium for index options, i.e., the implied volatility usually has been higher than the realized volatility for the S&P 500 for at least the past two decades, and investors who sell richly priced options often have a goal of generating relatively string risk-adjusted returns. For more on these points, you can click on the 30-page PDF for a presentation by Keith Black and Edward Szado. Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs (Jan. 2015).

Below are two charts with comparisons of volatility indexes (the VIX Index for the U.S. and the VHSI for Hong Kong) and the 30-trading-day historic volatility of key stock indexes.

3 - VIX & Hist Vola

4 - Hon Kong Ex Hist Vola

At RMC Asia I plan to learn more about the interrelationship between volatility and volatility of volatility. On December 1st at RMC Asia William Chan and Michael Fagan will cover topics such as –
– Historical observations and interpretations for “vol-of-vol” surfaces
– Trading and hedging applications depending on client objectives
– A case study approach

In the index chart below, I show four volatility indexes – VVIX, OVX, VXFXI, and VIX. The VVIX Index hit a peak daily closing value of 168.75 on August 24, 2015, and the VVIX can be a helpful barometer to investors who are trading VIX options.

5- VVIX & 3 vol indexes


In July CBOE introduced ten new strategy benchmark indexes (e.g., the BXMD and CMBO indexes), and I look forward to discussing the performance of the indexes with the attendees.

6 - benchmark indexes

‎Christopher Cole, Managing Partner, Artemis Capital Management, will provide some answers to this last intriguing question.


On Twitter RMC updates are available at #CBOERMC.

Much more information on RMC Asia is available at http://www.cboermcasia.com/

VIX Last Week – 10/18/2015

It has been a while since I’ve started out saying we had a parallel shift in the VIX curve.  That’s what we got last week as the market calmed down a bit and the S&P 500 advanced.  The October contract settles on the open this coming Wednesday and went out at about a point premium to spot VIX which has been the norm over the past few years when VIX has been in the mid to low teens.

VIX Table

The short dated curve shifted a little more into contango last week.  It is still relatively early in the game to make a decision of what is normal for the short term curve and the excess volatility as of late hasn’t given many examples.  My guess when I knew VIX Weeklys were on the horizon was that the short term curve would resemble the two lines below.

VIX ST Table

Mid-day on Friday, with VIX at 16.00, one of my favorite VIX option spread trades was executed in the pit. The trader sold 14,000 VIX Nov 15 Puts for 0.47, purchased 14,000 VIX Nov 23 Calls at 0.92 and rounded things out by selling 14,000 VIX Nov 28 Calls at 0.57.  The net result was a payoff at November expiration that appears like the diagram below and a net credit of 0.12.


Volatility Indexes and ETPs Last Week – 10/18/2015

VIX closed under 16.00 for the first time since all the hubbub that occurred in late August as the S&P 500 continued to recover last week gaining 0.90%.  Among the four S&P 500 focused volatility Indexes VIX was the biggest loser shedding almost 12%.  I had been keeping a close eye on VXV as the 3 month time frame that VXV measures comes after the December FOMC announcement.  VXV fell a bit relative to VXMT (6 month volatility) which may be a FOMC indicator and may also be attributed to VXV’s time frame pushing to January, when the final Fed meeting of 2015 will be safely in the rear view mirror.


Two things stand out on the table below, VVIX and SKEW.  Despite the drop in VIX, the VIX of VIX (VVIX) rose last week to 97.58, which indicates demand abounds for VIX options despite or maybe because of the recent drop in VIX.  I say because of the drop in VIX since some traders may see this as an opportunity to get relatively cheap tail risk protection.

SKEW has been closing at record levels as of late which shows that concern regarding outlier moves to the downside persist despite the S&P 500 marching higher.  When SKEW is at elevated levels this means out of the money SPX puts are ‘rich’ compared to puts with strike prices closer to the S&P 500 which in layman’s terms means demand for protection against a large drop in the S&P 500 is still high.

VXX Table

I came across sort of an unusual VXX spread trade mid-day Friday.  With VXX around 19.90 there was a buyer of the VXX Oct 30th 23 Calls who paid 0.48 a contract and also decided it was a good idea to sell an equal number of VXX Oct 23rd 22 Calls for 0.32 resulting in a net cost of 0.16 for the diagonal spread trade.  A quick glance at a calendar of economic events may shed some light on the thinking behind this trade.  The position is short VXX calls that expire in a week and the economic calendar next week appears fairly light.  Looking to the week that ends October 30th, we have two of the big three economic announcements – an FOMC meeting and 3rd quarter GDP.  It could be one trader is betting on calm next week before a storm the following week.

VIX Last Week – 10/11/2015

A return to normalcy occurred last week with the 18% drop in VIX and 3.26% rally in the S&P 500.   Even the seasonal December pattern moderated a bit and we have a textbook contango curve for the first time since August.

VIX Curve Table

Read More »

Volatility Indexes and ETPs Last Week – 10/11/2015

In Chicago we are already getting use to the Bears getting pummeled each week.  This past week bears everywhere took it on the chin as the S&P 500 put up the best weekly performance in 2015.  What I find interesting on the chart below relates to VIX, which was down 18.4% for the week, which is actually the fourth worst week for VIX this year, despite VIX beginning the week over 20.00.


VXX dropped about 11% and SVXY was up closer to 12% last week.  However, the choppy year is resulting in losses for both funds (so far) in 2015.  A number that stands out to me on the table below is the VIX of VIX (VVIX) which finished the week at 89.08.  This is at the higher end of a longer term range and indicates demand for VIX calls remains high despite (or maybe because of) the recent drop in VIX.

VXX Table

Two trades from Friday in VXX caught my eye, both are bullish on volatility (bearish on the stock market), but have differing levels of bullishness.  First there is was a bull put spread initiated mid-day on Friday using the series expiring on October 16th.  A trader sold the VXX Oct 16th 21.00 Puts at 0.67 and purchased the VXX Oct 16th 19.00 Puts for 0.04 and a net credit of 0.63.  This all happened when VXX was trading around 21.05, so any spike in volatility next week would probably result in the trade being a profit, while the normal price action for VXX if VIX is steady or lower next week may result in a loss with losses being capped from 19.00 or lower.


The second trade has a little bit longer time frame, using options that expire on October 30th.  This trade is pretty darn aggressive as the VXX Oct 30th 24.50 Calls were purchased for 0.72 and the VXX Oct 30th 27.50 Calls were sold at 0.36 and a net cost of 0.36.  At the time VXX was trading at 21.65.  To get the full profit VXX needs to rally about 27% by the end of October.  For VXX this certainly is not out of the question and October is the kind of month that historically experiences increased volatility.


Outlook on Recent Market Volatility

In the past two months, several global volatility indices such as the CBOE VIX have been in the spotlight as they rose to the highest level in months or years.  What have been the drivers of this recent market volatility and how did the volatility indices react to that?  In a recent video interview, I spoke with one of VIX Views’ authors, Matt Moran, Vice President, CBOE, to answer these questions.


Last Week in VIX – 10/3/2015

Despite the S&P 500 rising over 1% last week VIX remained over 20.00 for the 30th straight day although it did drop by over 11%.  This run goes back to the beginning of the heightened levels of volatility that began back on August 21st.  The curve below shows that the curve based on standard monthly VIX futures went from backwardation to kind of crooked (that’s not a technical term).  I say crooked because depending on your definition of backwardation or contango the closing curve on Friday could be considered either.

VIX Curve Table

The short term curve went from backwardation to basically flat which is what I anticipate will be considered normal.  We only have about 10 weeks of short term futures data to work with so I haven’t come to a conclusion on what will be ‘normal’ for VIX Weeklys futures.

VIX ST Curve Table

Finally, a trade example that I found pretty interesting as well as smart from Friday.  Toward the end of the day there was a ratio spread that works as long as VIX is under 35.40 at November settlement.  The specific trade sells 2 VIX Nov 30 Calls at 1.10 each (2.20) and buys 1 VIX Nov 25 Call at 1.80 for a net credit of 0.40.  Both VIX and the November contract were in the 20 to 21 range when the trade was executed so I show where both finished the week last week on the payoff below.


Last Week in Volatility Indexes and ETPs – 10/3/2015

Those that casually watch VIX may not be aware of the variety of volatility indexes published by CBOE.  On at least a weekly basis I take a look more than VIX and try to gain a little insight into the mind of the market.  The curve below shows the relationship of four volatility indexes that represent consistent measures of implied volatility as indicated by S&P 500 (SPX) index option prices.  What has been catching my eye since excess market volatility started to commence on August 21st is the relationship between VXV (3-month) and VXMT (6-month).  Note the section of the curve highlighted by the purple box in the chart below and I’ll explain more below.


Since August 21st 3-month volatility has been at a premium to 6-month volatility on the close 25 of 30 trading days.  Going back to early 2008 the shorter dated focused VXV has closed at a premium to VXMT about 13% of trading days with about 2 out of 3 of those closing levels occurring during what we refer to as the Great Financial Crisis in 2008 – 2009.

My interpretation of VXV being at a premium to VXMT was that the market was braced for Fed action at one of the two meetings left in 2015 (most likely December).  VXV measured the nearest time frame just after the last meeting of 2015 and the one many pundits seem to be focused upon.  With the market rally in reaction to the employment number this past Friday VXV dropped below VXMT.  I heard calls that a hike may not occur until 2016 on Friday, but I’m not one for opinions, I like to see what the numbers tell me.  Implied volatility is forward looking measure which can be used to gain insight into Mr. Market’s mind.  If VXV remains under VXMT consistently over the next few trading days I’ll see that as the numbers agreeing with the pundits looking to 2016 for the first rate hike in my children’s lifetimes.

The S&P 500 rallied over 1% last week with all the gains coming from Friday.  VIX dropped, but remained above the 20.00 level to extend the consistent number of closing days over 20.00 to 30 in a row with the streak going back to August 21st.  The S&P 500 rally put pressure on the long funds with the leveraged long guys really taking it on the chin, againg with the price drop mostly being attributed to Friday.

VXX Table

Over the last hour of the day on Thursday this past week there was a pretty aggressive buyer of UVXY Oct 2nd 56 Puts.  They purchased about 1500 contracts over the course of an hour.  The best I can guess is the average price came to about 2.40.  Over the last hour UVXY prices averaged 56.30 although the range for UVXY over this period was wider than a point.  The payoff at expiration, which was Friday this past week, appears below.


I often refer to the monthly employment report as being like an earnings announcement for the equity market.  When I make this sort of statement I’m usually referring to the price action of SPX and VIX options.  I guess I need to broaden my focus and include the VIX related ETPs and their associated option markets as potential ways to play employment.  The result for this trade was pretty positive for the put buyer as UVXY was down dramatically on Friday which placed the UVXY 56 Puts exactly 7 points in the money.


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