OTM Bear Call Spread from Monday’s VIX Rally

Fear was heightened on Monday and Greece and then China was making news.  VIX was high there and there was a trade that came into the VIX pit taking advantage of the move.  As the day came to a close, VIX was at 19.66 and the July Futures were more than a point lower. Someone saw that they could sell VIX Jul 32.50 Calls for 0.25 and purchase VIX Jul 35.00 Calls for 0.15 taking in a credit of 0.10.


July VIX expiration is the 22nd so as long as VIX does not go up about 65% and the July futures follow the index to the upside this trade will be OK. If we do get a volatility spike to 35 or higher this trade ends up with a loss 2.40 a spread.

Reviewing a VIX Option Trade into Expiration

CBOE and the CBOE Futures exchange plan on launching VIX Weeklys options and futures respectively over the next couple of months. Usually when new markets start trading we have to do a little wait and see with respect to strategies that large traders are implementing. However, with VIX Weeklys we have over 100 expirations since VIX options were launched and we can look to trading in VIX options and futures that have occurred near expiration.

With this in mind I did some digging around on the Monday June 15th to find an interesting trade to write about. I chose that day because VIX was up 11.6% on the day closing at 15.39 and the June VIX Futures contract was up 9.5% to finish the day at 15.50. I also picked this day because the June VIX futures and options settled on the open on Wednesday June 17th.  That means any trade initiated on this Monday only had one trading day and overnight remaining until settlement.

What I came across was a bit of a head scratcher. Peter Lusk and I spent a little time debating what was going on here and we reached a consensus which I will now share. First, with seconds left in the trading day, VIX at 15.39 and the June VIX Futures at 15.50 there was a 2 x 2 x 3 spread that was executed in a handful of block trades. The trader sold 2 VIX Jun 15 Puts for 0.30 each and also sold 2 VIX Jun 16 Calls at 0.50 each. The trade was then completed as the trader purchased 3 of the VIX Jun 18 Call at 0.20 each. The net result for a 2 x 2 x 3 spread was a credit of 1.00 and a payoff at expiration that is highlighted.

VIX Short Term Chart

The two most important levels for this trade seem to be 14.50 on the downside and 16.50 on the upside. As long as June VIX settlement falls between these two levels the trade would result in some sort of profit. The best case results would be if June VIX settlement came in between 15.00 and 16.00 (spoiler alert – it didn’t). Another potential positive would involve a big one day rally in VIX which would most likely have been in response to a dramatic sell off in the equity markets (spoiler two – that didn’t happen either). The price action for the day leading up to the trade and the last trading day for June VIX options is below.

VIX Chart Fixed

This is a two day chart showing the price action on Monday the 15th and Tuesday the 16th. The price levels for VIX and June VIX at the time of the trade is highlighted. Note that this trade was not without some stress as VIX and the June VIX Future spent most of the following day grinding lower.  Tuesday VIX finished the day at 14.81 and the last trade for the June VIX future was 14.90, both prices were above the downside break-even point, but below the put strike of 15.00. However, if held to settlement, this trade still was not completed.

VIX options and futures are AM settled so any open positions do have some overnight risk. In the case of June settlement, final settlement was a tad lower at 14.67, once again above the break-even level, but not high enough for all options in the spread ending up out of the money.

New VIX Weeklys Futures and Options – Enhanced Responsiveness with More Wednesday Expirations – By Matt Moran

CBOE Futures Exchange (CFE®) plans to list futures with weekly expirations on the CBOE Volatility Index® (VIX®) beginning Thursday, July 23, 2015, subject to regulatory review. VIX Weeklys options at CBOE are expected to follow on a later date, also subject to regulatory approval. The new VIX Weeklys futures and options will offer more expirations that have the potential to provide more precision and responsiveness for investors. www.cboe.com/VIXWeeklys


In the Striking Price column in Barron’s, Steve Sears noted that with the new VIX Weeklys futures and options –

“ … traders will be able to calibrate VIX contracts with market-moving events, ranging from economic data releases to Federal Reserve rate-setting decisions. This should prove attractive because the capital at risk is relatively small, and payouts can be huge. Since CBOE introduced weekly expirations in 2005, short-dated expirations have proven wildly popular. Overall, about 35% of CBOE total volume is attributed to weekly expirations, up from 26% in 2013. …”


The addition of weekly expirations to standard monthly futures and options expirations offers volatility exposures that more precisely track the performance of the VIX Index. By ‘filling the gaps’ between monthly expirations, investors may obtain new opportunities to establish short-term VIX positions, and fine-tune the timing of their hedging and trading activities.


The closer VIX futures and options are to expiration, the more closely they generally track the VIX Index. For example, compare the daily % moves in the column charts below of the VIX Index (in orange) and the VIX nearby futures (in green). Note that on the three charts below on the left (within 7 trading days of the standard VIX expiration), the VIX nearby futures rose more than 25% on all three dates. However, for the three column charts below on the right (dates more than 16 trading days prior to the standard VIX expiration), the VIX nearby futures rose less than 14.5%. With the addition of the new VIX Weeklys futures, investors should always have access to VIX futures with five or fewer days to the VIX futures expiration, and thus have access to VIX futures that potentially are more responsive than VIX futures with 20 or 30 days to expiration. See the next section for more analysis on this point.

1- Daily change - Six select dates4. MORE RESPONSIVENESS – COMPARING MORE THAN 2,700 DATES
While in the previous section I presented six select dates to compare responsiveness, the chart below presents the beta of the daily change of VIX futures to the VIX Index as a function of time to expiration. Note that the VIX futures had a beta of 0.79 with one day to the VIX standard expiration, while the VIX futures had a beta of 0.39 with 33 days to expiration.

2-Beta VIXWith the addition of the new VIX Weeklys futures, investors should always have access to VIX futures with five or fewer days to the VIX futures expiration, and thus have access to VIX futures that potentially have a higher beta to the VIX Index than VIX futures with 20 or 30 days to expiration.


CBOE expects that quotes on VIX Weeklys will be listed within the VIX futures and options chains.

VX Weeklys Futures symbols will be VX01 through VX53. Embedded numbers denote the specific week of a calendar year during which a contract is settled. A VX ticker symbol followed by a number will not be used for any week that has the standard expiration for VIX futures (e.g., on August 19, 2015). In the table below, note that for this month and previous months, there was only one expiration date for VIX futures, but in the future most months should have 4 or 5 expirations for VIX futures.

3 - Expiratn dates Tickers VIX Weeklys


More information and updates regarding VIX Weeklys futures and options is at www.cboe.com/VIXWeeklys.

VIX Last Week – June 29 – July 2

VIX rallied over 34% on Monday as the Greece situation worsened and global equity markets sold off. The front month July VIX contract gained just under 20%. As the week progressed we gained insight into June economic activity with an unusual Thursday release of the non-farm payroll report. The stock market moved on quickly and VIX and the July future both finished the week with a 16 handle.  The curve, which moved to backwardation on Monday finished the week in contango, but a much flatter version of contango than we have witnessed as of late.

VIX Curve

On Thursday last week I came across a trade I do not normally see executed in the VIX pit. There was a broken wing butterfly that involved selling the VIX Jul 20 Call at 1.22 and VIX Jul 20 Put at 4.24.   For downside protection the VIX Jul 14 Put was purchased for 0.33 and to the upside the VIX Jul 25 Call was bought at 0.63. All this activity resulted in a credit of 4.50. Those that are quick with numbers will notice that the long put is six points lower than the short option strike while the call is five points higher.


Note the July VIX futures and spot VIX closed with a 16 handle on Thursday. That means the trader behind this particular position is hoping for higher VIX with a specific target of 20.00 at July expiration. Normally we think of any time of butterfly having a neutral price outlook, that’s not the case in this instance.

Volatility Indexes and ETPs Last Week – June 29 – July 2

We had the most exciting market action during the holiday shortened week. As everyone knows we can thanks the cradle of civilization Greece for all the hub bub. On Monday the S&P 500 was down over 2% for the first time since October of last year. VIX reacted accordingly by rising over 34% on the day for the biggest one day move in over two years.

Despite the S&P 500 rebounding a bit, the VXST – VIX – VXV – VXMT curve continues to signal some concern. The VXST to VIX premium is pretty interesting considering that on Thursday we got the June employment number behind us and we are in the middle of a long weekend. Typically VXST experiences a big of a head wind going into a long weekend due to the calculation being based on calendar days. I was honestly a bit surprised at the shape of the curve when I started putting this blog together Thursday night.


I often respond to criticism of VXX by stating that, “it does what it is supposed to do when it is supposed to do it.” This past week the long ETPs did what they were designed to do and rallied on Monday in response to a dramatic increase in market volatility.

VIX Index Table

Late Thursday a ratio spread was executed in the UVYX space that will result in a profit as long as UVYX does not rally over 43% between now and July 10th. With UVYX at 42.32 there was a buyer of 300 UVXY Jul 10th 55 Calls at 1.90 who also sold 600 UVYX Jul 10th 60 Calls at 1.39 each for a net credit of 0.88 per spread. The payout diagram below shows how things will turn out base on this spread being held through the close this coming Friday.


UVXY finished the day at 42.59 and the break-even price for this trade is up at 65.88. That’s a 43.6% move to break-even. As long as UVXY finishes the week at 55 or lower the result will be the 0.88 per spread credit taken in when the spread was established turning into a profit.

Block Trade Analysis – VXX Option Trade from Monday

Monday of this past week was one of the more exciting days we have had in 2015. That’s probably an understatement since VIX futures volume was the highest it has been this year. When the S&P 500 is down and volatility is up there are traders always looking to take the other side of the move. Either through selling volatility or through getting long the stock market. The iPath S&P 500 Short Term Futures ETN (VXX) market is one instrument that can move quickly to the upside when the S&P 500 is under pressure. The daily chart shows the VXX move on Monday which was 17.6% higher than where it closed four days earlier.

VXX Chart

Taking the other side of a big move is commonly referred to as a fade trade.   This type of trade involves taking the other side of momentum in the market which can be dangerous if the correct risk controls are not put in place.   A vertical spread, whether bullish or bearish, is a common way of fading a big move since the maximum potential loss from the trade is defined when the spread is initiated. When VXX is up tremendously like it was on Monday I go searching for short dated bear call spreads in the VXX option market.

With less than an hour left in the day Monday, and the stock market actually making new lows, there was a seller of 5,000 Bear Call Spreads. Specifically the VXX Jul 2nd 21 Calls were sold at 0.61 and the VXX Jul 2nd 26 Calls were purchased for 0.09 and a net credit of 0.52.


Note in the payoff diagram above that the 21.00 prices level is about 3.5% higher than were VXX was trading when the spread was initiated. As long as VXX was not over 21.00 at expiration this trade results in a profit of 0.52. The maximum potential loss of 4.48 for this trade occurs at 26.00 or higher. However, to reach this price level VXX needed to climb another 28% in three days.

Big Week for VIX re: Backwardation, Big Moves and Volume, ETH, Put/Call Ratio, and Bollinger Bands – by Matt Moran

After the news broke last Sunday (June 28) regarding the closing of banks in Greece, worldwide markets for stocks and oil plunged, and investors sought assets that could rise and serve as diversifiers. The VIX® July futures prices responded by rising from 14.525 on June 26 to 17.375 on the next trading day (June 29).

Below are seven key points about VIX action during this past big week – these points could be of interest to technical analysts who are looking for trading signals, and to portfolio managers who wish to diversify in times of market stress around-the-clock.

1. BACKWARDATION — For the first time since January, VIX was in backwardation for 3 straight days (see Figure 1 below);
2. VIX OPTIONS DAILY VOLUME – rose to 946,467 on June 30 (see Figure 2 below);
3. VIX FUTURES DAILY VOLUME – rose to 417,574 on June 29 (the highest daily total in 2015; see Figure 3);
4. VIX INDEX ROSE 34.5% ON JUNE 29 — (biggest daily % rise in 2 years) (see Figure 4);
5. VIX 20-DAY ROLLING PUT/CALL RATIO – fell to 0.31 on June 30, its lowest level since 2008 (see Figure 5);
6. BOLLINGER BANDS FOR VIX INDEX – dropped below the lower band on June 23 and 24 (first time below lower band in 2015 (see Figure 6));
7. RECORD VOLUME DURING ETH SESSION – VIX futures volume in the 5 pm (Sunday)-to-2 am CT session was a record 32,617 (estimated) contracts, an all-time record for that 5 pm-to-2 am CT time period. For more on Extended Trading Hours (ETH) for VIX futures and for VIX and SPX options, please visit www.cboe.com/ETH.

1&2 - Backwa & VIX Opt volu

3 & 4 - VIX Fut volum VIX biggest day moves

5 & 6 - Put-call & Bollinger

For investors who wish to learn more about the CBOE Volatility Index® (VIX®) and related portfolio management and diversification tools, they can –

  • Visit www.cboe.com/VIX
  • Register to attend an upcoming CBOE Risk Management Conference (RMC) to hear expert presentations on managing volatility –
    1. RMC Europe: Monday-Wednesday, September 28-30, 2015 at the InterContinental Hotel, Geneva
    2. RMC Asia: Monday-Tuesday, November 30-December 1, 2015, at the JW Marriott Hotel, Hong Kong
    3. RMC US: Monday – Wednesday, February 29 through March 2, 2016 at the Hyatt Regency Coconut Point, FL   www.cboermc.com


Mid-Year Recap – Vol-selling Indexes Up; Big Jump for VIX and VVIX on June 29 – By Matt Moran

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.

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%.

1- Benchmrks 1st half

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.

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.

2 - table big VIX moves

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.

2-VIX avg per year

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.

On Sunday Night VIX Futures Volume Topped 26,600, as VIX Futures Rose 10.8% – By Matt Moran

       Managing Volatility Around-the-Clock

SUNDAY, JULY 28 AT 11 PM CT – Tonight the VIX futures estimated volume topped 26,600 contracts, and the VIX nearby (July) futures rose 10.8% in the time period from 5 p.m. to around 10:30 p.m. Chicago time. News stories tonight indicated that the Euro, many Asian stock indexes, and U.S. stock futures prices were falling due to worries about the Greece crisis and the closing of banks in Greece.

Each week’s trading in VIX® futures generally begins at 5 p.m. CT on Sunday night. Extended trading hours are offered for VIX futures, and (beginning at 2 a.m. Chicago time on Monday) for options on the S&P 500® (SPX) and on the CBOE Volatility Index® (VIX). VIX futures are offered more than 23 hours a day on trading days. To learn more about extended trading hours, please visit www.cboe.com/ETH.

The table below shows delayed quotes for VIX futures prices from cfe.cboe.com at 10:30 p.m. tonight. The July 2015 VIX futures (ticker VIX/N5) rose 10.8% compared to their closing price on Friday.

VIX table on Sun July 28For investors who are concerned about managing volatility around-the-clock, VIX futures, and options on VIX and SPX could be valuable investment tools. Protective positions that could be considered include long positions in (1) VIX futures, (2) VIX call options, and (3) SPX put options. To learn more about these strategies, please visit the Education tab at www.cboe.com.

The Greece Crisis is Not Our Concern, Say US Options Investors

English speakers have grown to love the German word schadenfreude. But what’s the single word for indifference to the suffering of others? We need to figure this out to describe what’s happening in the US options markets.

For the past decade, European and US options investors have been sympathetic to each other’s pains. When we chart the EURO STOXX 50 Volatility Index (VSTOXX) against the CBOE Volatility Index (VIX), we can see that the VSTOXX has typically been a little higher than VIX, but that these two indices have moved largely in sync.

Something strange has happened, though, in the past year. VSTOXX and VIX have diverged. As VSTOXX has gone up, VIX has stayed near its floor in the low teens.


This is easier to see when we subtract the daily values of VIX from the daily values of VSTOXX and chart the difference. For only the third time in the past decade, the gap between these two measures has hit 15 volatility points.


The chart below shows the same measure, but just over the past 18 months. The trend is unmistakable.


Why this decoupling? One explanation I have heard is that investors see the troubles in Greece more as a political crisis than a financial one. Financial crises, such as the one that rocked the world in 2008, tend to more directly affect financial institutions that span multiple regions. Political crises, on the other hand, are less likely to spill over borders. Or so the theory says. Personally, I have difficulty seeing the difference between the two types of crises in this case.


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