2014 Gold Volatility Review

In 2014 the price of Gold did not have any of the headline grabbing moves like those that occurred in 2013. The SPDR Gold Shares ETF (GLD – 113.58) finished the year down a little over 2% and was down 1.4% on the last day of the year. If we had taken New Year’s Eve off GLD was have been practically unchanged on the year. The chart below shows the daily closing prices for GLD and the CBOE Gold ETF Volatility Index (GVZ – 20.08) for this past year.


If it were not for the fourth quarter this would be what I call a Seinfeld blog – about pretty much nothing. The increased implied volatility that occurred in GLD option trading to end the year was more about other markets than gold. A huge drop in the price of oil and increased global equity market volatility greatly influenced volatility in other sectors that did not experience the same sort of price changes. The gold market in the fourth quarter is a great example of how volatility in one market sector may influence the volatility of options in a loosely related market.

The table below will put GVZ action for 2014 in some context. We got a seven standard deviation move in the price of gold in 2013 and a break of several support levels which pushed GVZ to the mid-30’s. 2014 was a very range bound year for GLD and the result was the lowest average implied volatility over the almost seven year history that CBOE has for GVZ.

GVZ Table

One other thing that stands out on this table is the low for GVZ in 2014. The price action for GLD was range bound and VIX put in a post 2008 low this past year. One would guess that GVZ would follow suit. However, the low in 2014 was higher than the 2012 and 2013 lows. What I am starting to learn about volatility indexes is that it can take years to reach a new low after some sort of price shock. In the case of GVZ the memory of GLD dropping dramatically in April 2013 is fresh enough to keep traders on edge, even in a very quiet year for the underlying market.

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

2014 Volatility Index and ETP Review

During the first half of 2014 I got to have several conversations about whether or not VIX was ‘broken’ since the average level for VIX was so low. Needless to say I haven’t fielded a single call or email about VIX being broken since October. 2014 was a pretty interesting year in volatility trading. More market participants have become involved in the volatility markets through VIX future, options, or ETPs.

The table below shows the year over year change for the S&P 500, volatility indexes that focus on the S&P 500, and several volatility oriented exchange traded products. Year over year changes in volatility indexes don’t mean anything to me as a single day (think the last day of 2014) can dramatically change the year over year number. The average for the year is a little more meaningful. I’ll get to that after discussing the ETPs in 2014.

Index ETPs - Corrected


Something that observant readers will notice in the table above is the performance of the long ETPs in 2014 (VXX, VIXY, VIIX). These three funds all lost about 26% so logic would dictate the place to be in 2014 were the short funds. Not so fast, XIV and SVXY were both down a little over 9% in 2014.   These long and short funds have a slightly different structure. The long funds are designed to give returns based on a strategy that is long the front two month VIX futures. The short funds are designed to return the daily inverse performance based on a strategy that is short the front two month VIX futures. The key word is daily. I find pictures help with these sort of concepts so I created the chart below. This depicts the return of $100 invested in VXX and SVXY on the last day of 2013 and held through the end of 2014. The bottom line shows the daily closing prices for VIX.

SVXY - VXX - VIX 2014 Early in 2014 VIX moved up to the low 20’s and VXX benefitted from the spike in volatility. SVXY lost value and it took several weeks for SVXY to move back to positive on the year. As volatility was very calm for the middle part of 2014 VXX moved much lower. The spikes toward the end of the year, benefitted VXX again, but not nearly to the extent needed to get back in the black for 2014. Those spikes had a negative impact on SVXY which resulted in a loss for 2014 as well.

Something else that stands out on the table is VVIX finishing the year well over 100. I know I said year over year doesn’t mean much.   The average VVIX for 2014 was about 83 which was slightly higher than the average in 2013, but lower than the average for the previous three years. The chart below shows the high – low range and average for VVIX from 2007 through 2014. The 2014 average doesn’t seem like a big deal, but the average for the fourth quarter of 2014 was over 97 – that’s a clear indication of excess nervousness in the equity markets as of late. Well over 100 going into 2015 may be a red flag for the equity market in the new year.

VVIX Annual Comp

One last thing I would like to show for 2014 is the term structure for S&P 500 volatility as indicated by the VXST – VIX – VXV – VXMT curve. The chart below shows three term structure curves – the max, min, and average curve for the year. It is always interesting to see just how high volatility gets relative to the average for the year. In what was really not that eventful of a year the range for VXST was from a low of 8.54 to 31.12 – almost a 400% range.

2014 Curves

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

26 Volatility Indexes in 2014 – OVX (Oil VIX) Rose 183%; SKEW Index Averaged Highest-ever 129.8 – By Matt Moran

Dec. 31, 2014 – Highlights of the year 2014 in volatility include the following –

  • In the 2nd half of the year crude oil prices fell, and the CBOE Crude Oil Volatility Index (OVX) rose 183% during the full year.
  • While the average daily close for the CBOE Volatility Index® (VIX®) was 14.2 for the second year in a row, the CBOE SKEW Index had its highest-ever average daily closing value of 129.8 (this could indicate that there was heightened interest in using out-of-the-money (rather than at-the-money) S&P 500 (SPX) protective put options).
  • The CBOE Brazil ETF Volatility Index (VXEWZ) shot up to close at 72.83 on October 20, prior to the Brazilian presidential election.
  • Futures and options on the VIX Index both set new annual trading volume records for the eighth year in a row.


In the first nine months of 2014, the CBOE Crude Oil Volatility Index (OVX) never had a daily closing value above 21.8, but the OVX rose to its yearly high closing price of 57.55 on December 15 as oil prices fell. In 2014 the average daily closing values were 23.05 for the OVX Index and 16.57 for the CBOE Gold ETF Volatility Index (GVZ).

1-OVX GVZ Dec 31


The VIX Index reflects the expected volatility of SPX options, and the highest daily closing value for VIX was 26.25 on October 15.

3-VIX in 2014


The CBOE VIX of VIX Index (ticker VVIX) examined the prices of VIX options and the index reflects the expected 30-day volatility of the VIX Index.

While one could say that the CBOE SKEW Index is not a “volatility index” in the same way that the VIX and OVX are, the SKEW Index still can be very helpful to investors who are pricing index options at various strikes. 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 and concerns, SKEW would be close to 100.

The CBOE SKEW Index reached 146.08 on Sept. 19, 2014, its highest level since October 1998.

4-SKEW & VVIXThe highest daily closing value for the VVIX Index in 2014 was 138.60 on December 12.


In 2014 the SKEW Index set an all-time record for its highest average daily closing value in a year, with an average daily closing value of 129.8. The previous high average daily closing value for SKEW in a year was 122.5 in 2011.

4-SKEW avg per year5-VIX per yearIt is interesting to compare the above two column charts for the SKEW and VIX indexes.


The table below shows that for the entire year of 2014 – 24 volatility indexes rose and two volatility indexes (GVZ and SRVX) fell.

2-Table Vol Indexes Dec 31 2014

Futures and options now are available on the VIX, OVX, GVZ, and other volatility indexes, and the SKEW Index can be helpful to those who are investing in SPX options. To learn more about the SKEW, VIX, OVX, and dozens of other volatility-related indexes, please visit www.cboe.com/volatility.

Explaining VIX Price Behavior Using the Insurance Analogy

When we introduce aspiring option traders to the various pricing factors that determine the value of an option contract we often use an insurance analogy to describe implied volatility. The short version of the story is that implied volatility is the pricing factor that is closely associated with the risk of price movement in the underlying market.  We expand on this idea using the idea of the cost of homeowner’s insurance as a hurricane is bearing down on south Florida. If a homeowner has forgotten to renew their homeowner’s insurance they are going to find the policy cost as a hurricane is approaching their home much higher than during a period of calm weather. This increased cost is a function of higher risk of the home being destroyed in the near future. Stock option prices usually move higher in front of anticipate price moving events such as a new product announcement or earnings report. This increase in the option premium is associated with higher implied volatility much like the higher insurance policy premium is a function of higher risk for policy seller.

VIX is a consistent measure of 30 day implied volatility as indicated by S&P 500 Index (SPX) option pricing.   VIX has moved in the opposite direction of the S&P 500 about 80% of trading days over the past few years.  A very common question is, “why do VIX and the S&P 500 move in opposite directions?”  I’ve been thinking of ways to describe the ‘why’ behind this behavior in relation to the insurance analogy we use with respect to implied volatility.

With the description of higher implied volatility in relation to the cost of a homeowner’s policy the participants in the contract know a hurricane is on the way.  That’s why the insurance company would charge more for the homeowner’s policy and the unhappy homeowner would expect to pay up for protection.  We also tend to have a good idea of pending events that will move an individual stock price.  With the overall stock market it is not as easy to anticipate events that will move the markets.

Think of the reaction of VIX as if there were no way to forecast the weather other than what the weather is doing at the current moment. Before a hurricane hits there is usually heavy rain and a thunderstorm. Without a forecast of what is next, people living in south Florida may over prepare each time there is a bad storm.  If all they have to judge that a hurricane is on the way is the current weather there is no way of knowing if this the time the storm is the beginning of something worse.

In the financial markets when the S&P 500 shows some weakness portfolio managers may be uncertain if even a minor sell off is the beginning of a bigger move to the downside.  Based on this concern managers often seek portfolio protection through purchasing S&P 500 put options. This increased demand results in higher implied volatility as indicated by higher SPX option premiums. This translates into higher VIX. On the other side of the equation, when the markets are moving higher or are a little stagnant, managers may not be as aggressive when seeking portfolio protection which would translate into VIX moving down.

Last Week in VIX – 12/28/2014

On Friday VIX rose as the S&P 500 hit the 52nd record high of 2014. I got a question via Twitter about VIX rising when the S&P 500 rises. About 20% of trading days witness VIX and the S&P 500 moving in the same direction, but when the S&P 500 is making a new high it may turn some heads. I think part of the small rise in VIX on Friday may be attributed to the holiday impact on the VIX calculation. What I mean by that is when we closed Wednesday the markets were closed for a day and a half. The VIX calculation only takes calendar and not trading days into the equation. This causes VIX to be under a little extra pressure in front of weekends and more so in front of long weekends. A bit of the upside in VIX on Friday may be attributed to the holiday being behind us. What makes me pause a little is that VIX closed Friday at 14.50 when the average VIX close this year on S&P 500 record days is 12.48 this year. VIX two points higher than that average as we make another new high would be more concerning to me than the rise of VIX on Friday.

VIX SPX Record Dates

The VIX did drop about 12% or 2 points last week as the S&P 500 moved higher. Despite the 12% drop in VIX the January VIX future was down about 1/3rd as much as VIX. A week ago there was no real risk premium in shorting the January future, over the course of 3 ½ trading days that premium returned.

VIX Curve

Last Week in Volatility Indexes and ETPs – 12/28/2014

This past week the S&P 500 recorded a record high on 3 of the 4 trading days with Friday being number 52 in 2014. I did some digging on this topic and 52 new highs in a year is less than the number of new highs just last year. Last year the S&P 500 set 69 new highs, but that still isn’t the record number of new highs in a single year. 1995 holds that distinction with the S&P 500 closed at a record level 77 times.

The term structure curve is returning to normal based on the price action in the S&P 500 last week, but still elevated relative to record S&P 500 days. VXST is seeing some extra pressure due to the holiday this coming week.   The longer end of the curve shifted lower, but not nearly as much as the drop in VIX and VXST. I also added a third curve here to compare volatility on the 52 days the S&P 500 closed at a record high this year with Friday’s close. Note the purple line is much lower than Friday’s closing curve.

VXST - VIX - VXV - VXMTI left the year to date information on this table this week as I wanted to point out the performance of SVXY this year.   SVXY is one of the two very actively traded funds that match the daily short performance of a portfolio that is short the front two month VIX futures contracts. Conventional wisdom in the financial markets is that selling volatility is like picking up nickels in front of a steam roller. As of Friday SVXY was up just over 1% for 2014. Anyone that held SVXY for all of 2014 earned that 1% as on February 5th the fund was down 24% and over the course of 2014 SVXY has experienced a drawdown of over 40%.

Index ETP Table

There was at least one VXX trader looking for steady to lower volatility into next year. About 30 minutes after the market opened on Wednesday someone came in and sold more than 10,000 VXX Jan 32 Calls at 0.93 and bout the same number of VXX Jan 36 Calls for 0.52 and a net credit of 0.41. VXX finished the day at 28.31 so this trade is safe as long as VXX does not move up more than 13% by January 16, 2015 or over 32.00. In the VIX world that’s just one good day for VXX and one bad day for the S&P 500. The worst case scenario is for VXX over 36.00 at expiration which would result in a maximum loss of 3.59.



VIX and the Santa Claus Rally

A couple of days ago JJ Kinahan from TD Ameritrade and a good friend of The Options Institute wrote a blog for Forbes.  His blog was about the period of time between Christmas and New Year’s. In the financial markets world this is considered a bullish time for stocks and is often called the Santa Claus rally. His comments can be found at the link below.


Since everything I do begins and ends with VIX I decided to take a look at what VIX has done each year over this time period. I was honestly surprised by the results. I took the VIX closing price the day before Christmas and the closing price on the last day of the year for each year from 1990 to 2013.   If the expectation is that stock prices move higher over this time period, then we would also assume that VIX would be moving lower. That assumption made me do a double take when I complied the table below.

VIX Santa Rally

Note that only three of the twenty four years on this table saw VIX move lower. Part of this may be attributed to the holiday impact on VIX where some of the value drops due to an extra day and a half off for Christmas. However, there are several double digit gains on the table above and that’s more than just the extra days off. As President Reagan use to say, trust but verify. This time the verification process yielded some interesting results.

Trade Looking for Lower VIX into 2015

December VIX settlement was last week and traders are starting to look to next year. Late Monday afternoon one of these traders took a position looking for VIX to return to the low teens in early 2015.   With VIX around 15.70 and the January VIX future at a 0.75 premium to the index at 16.45 a trader came in and bought a Jan VIX 14 / 15 Put Spread. The specific trade was a purchase of 4500 of the VIX Jan 15 Puts at 0.95 and sale of 4500 VIX Jan 14 Puts at 0.46 and a net cost of 0.49. The payoff at expiration for this bear put spread appears below –

VIX po

January VIX settlement at or below 14.00 will result in a gain of 0.51 on this spread. A partial profit may result from settlement between 14.00 and 14.51. Over 14.51 this trade starts to turn into a loser with a maximum loss equal to the 0.49 paid for the spread.

Oil VIX Is Up 209% and Brazil VIX Is Up 45% in 2014 Y-T-D – By Matt Moran

Dec. 22, 2014 – During the financial crisis of 2008, many investors bemoaned the fact many asset classes fell as the correlations among several asset classes rose. Since 2008 investors have searched for investments that have diversification potential in times of market stress.

So far in 2014 (through December 22) –

  • The CBOE Crude Oil ETF Volatility Index (OVX) is up 209%,
  • The CBOE Brazil ETF Volatility Index (VXEWZ) is up 45%, and
  • Crude oil prices are down about 44%.

Here are the highest daily closing values in 2014 –

  • The CBOE Crude Oil ETF Volatility Index (OVX) closed at 57.55 on Dec. 15 as oil prices plummeted (the average daily close for the OVX this year is only 22.3), and
  • The CBOE Brazil ETF Volatility Index (VXEWZ) closed at 72.83 on October 20, before the presidential election in Brazil (the average daily close for the VXEWZ this year is 31.3),

Futures and options are available on the OVX, VXEWZ, VIX, and other volatility indexes; investors are urged to study the pricing and settlement features of volatility instruments before investing.

01--Oil OVX Global

1-1 VIX1-2 SKEW & VVIX


So far this year, the average daily closing value for the VIX Index was 14.1, and some observers have asked if VIX has been somewhat low in light of all the worldwide geopolitical uncertainties and tensions in 2014. During the years 1990 through 2013, the average daily closing values were 20.2 for VIX and 117.2 for CBOE SKEW Index. So far in 2014, the average daily closing values were 14.1 for the VIX Index, 10.6 for the (20-trading-day) historic volatility of the S&P 500 Index, and 129.7 for the CBOE SKEW Index. So while the VIX recently has been below its long-term average, it is worth noting that the historic volatility of the SPX usually has been even lower than the VIX in 2014, and in 2014 the SKEW Index has been about 12 points above its long-term average. So in 2014 one might infer that the demand for out-of-the-money SPX puts (and disaster insurance) probably has increased relative to demand for at-the-money SPX options.


In the table below with 22 volatility indexes, four of teh indexes have risen more than 40% this year, but four of the indexes are down so far this year.  02-Table OVX Dec 22


CBOE Holdings offers many tools to manage portfolios in times of changing volatility. For more information on the indexes above, please visit www.cboe.com/volatility.

Last Week in VIX – 12/21/2014

The first chart in this blog is a bit out of place. I normally discuss the VXST – VIX – VXV – VXMT term structure in the space where we review volatility index and ETP trading. However, after I completed that blog I considered taking a look at where we closed Friday versus the average for 2014. On the short end VXST is only 0.07 higher than the average for 2014, but this can still be considered relatively high since we are moving into a holiday shortened week. Volatility indexes are calculated based on calendar days and when there are market holidays it creates some downside pressure. This pressure shows up even more in VXST since it is measuring eight day implied volatility.   The rest of the curve is pretty elevated relative to this past year which, if correct in the extra concern, may not be a good sign for stocks in the first half of 2015.

VXST - VIX - VXV - VXMT 2014 Comparison

The VIX curve returned to normal for the holidays as the S&P 500 rallied 3.41% last week. January is almost at parity with VIX which indicates no risk premium was being paid to for VIX futures sellers or that there is little expectation of VIX moving up from current levels over the near term. I know that directly contradicts the first paragraph in this blog, but the markets probably don’t expect much over the next couple of (holiday impacted) weeks.

VIX Curve

Wednesday was December VIX expiration so the focus is all on 2015. One trader is looking to a VIX settlement in the teens or lower come January 21st.   Just a few minutes after the open on Thursday, with VIX at 17.15 and the January VIX future around 17.65 there was a broken wing butterfly that caught my eye. A trader sold the VIX Jan 15 Put at 0.89 and sold the VIX Jan 15 Call for 2.89. They completed this spread through purchasing a VIX Jan 14 Put at 0.48 and VIX Jan 23 Call at 1.05. The result is the payoff that shows up below –


Note that January VIX settlement anywhere below 17.25 results in a profit for this trade, the perfect storm is VIX settlement at 15.00 and a profit of 2.25.   Any settlement below 14.00 results in a payout 1.25. The risk to this trade is a similar situation to December with January VIX settlement at 23.00 or higher. In this case this broken wing butterfly would result in a loss of 5.75.


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