Emerging Market Volatility Last Week – October 19, 2014

Both EEM and EWZ moved higher last week, despite the drop in the S&P 500. Also, the respective volatility indexes moved up based on an increase in global equity risk perceptions. I’ll start here with the duller of the two and talk about VXEEM.

EEM rose just over .5% and VXEEM was up over 10% for the week. On Wednesday, when the world appeared to be coming to an end, VXEEM finished the day at 31.90 for the first closing price in the 30’s since December of last year.


Next weekend the people of Brazil will choose to keep their existing President or vote in a replacement. The implied volatility of options on EWZ has been elevated and rising leading up to next weekend. Even the most casual of market observers should be aware of the impact the uncertainty of this election has been having on VXEWZ.


The curves below reinforce the election’s impact on EWZ implied volatility. This very unusual shape has been in place for a while with the October contract, which expires this week, being at elevated levels since VXEWZ is expected to be high until next weekend. Just past October, the November contract is at a much more reasonable level which indicates the political storm will be over by then.


Short Term Volatility Last Week – October 19, 2014

The CBOE Short-Term Volatility Index was introduced less than a year ago and since then there have not really been any headline grabbing moves in the volatility space. That was until last week where the high range for VXST stretched from close to 20 up to almost 40. The closing VXST level on Wednesday was the first close over 30 since early December 2011.


There is nothing like a volatile week to shake things up. I have debated changing the method I use to display the week over week VXST curve change for some time. The table showing the week over week changes is the same, however the term structure chart has a slight change. I change the futures to uniformly show the curve change by not altering the underlying contracts. So Week 1 below is the October 15th contract for the October 10th curve and Week 1 represents the October 22nd contract on the October 17th curve. I think it is a better and more consistent picture of what is going on with these short dated futures contracts relative to the spot VXST index.


Finally, VXST option trading has been scattered across many strike prices. The heaviest open interest as of Friday rested at the VXST Oct 22nd 28 Calls followed by the VXST Oct 22nd 21 Calls and VXST Oct 22nd 19 Puts.

NDX and RUT Volatility Last Week – October 19, 2014

The CBOE Russell 2000 Volatility Index (RVX) climbed over 30.00 during the day Thursday for the first time since June 2012. For the week RVX finished at 25.48, up 4.64% while the underlying market was up 2.75% for the week. Yes you read that right, the Russell 2000 was up 2.75% last week which was a week where it didn’t feel like such a thing was possible.


The CBOE Nasdaq-100 Volatility Index rose as well last week, but lagged RVX only gaining 2.25% despite trading over 31 last week.


Both the RVX and VXN term structure curves are in backwardation with VXN having a steeper curve than RVX. Kind of lost in the news shuffle has been the fact that next week is the heaviest week of the third quarter earnings season. Once the large components of the NDX get through reporting earnings (AAPL reports early next week) that curve will flatten and of course if the equity markets follow through with an upside move we will go right back to contango.


Volatility Indexes and ETPs Last Week – October 19, 2014

I hate being a broken record in this space, but the week over week changes do not do any justice to what was last week in the equity and volatility markets. I threw the closing curve from Wednesday in the mix below when VXST closed at the highest level since December 2011.  On Monday VVIX was also at much higher levels closing over 130 for the first time since August 2011 when VIX got all the way up to 48.00 based on a 6.66% drop in the S&P 500.


The long ETPs finished the week higher, but well off the highs for the week. For example VXX was up 7.62% from Friday to Friday, but mid-day Wednesday VXX was over 23% higher than last Friday’s close. I would also like to defend VXX a little more, while it is at elevated levels, and note that from September 18 through Friday VXX is up 41.8%.

ETPs - Indexes

Apparently on Thursday around the open when VXX was over 44 someone decided that enough was enough and sold some VXX Calls. Over 16,000 VXX Nov 50 Calls were sold at 4.80 and over 14,000 Dec 70 Calls were sold at 3.00. By the end of the week the VXX Nov 50 Calls were offered at 2.40 and the VXX Dec 70 Calls were offered at 1.70. There’s still time to go, but so far the timing of those two sells seemed to be near perfect.

Some Volatility Trades that Worked Well in Last Week’s Action

VIX is much higher than it was early last week.  So are VXX and RVX.  Also, the S&P 500 and SVXY are both lower.  Anyone can tell you that, so I decided to do some digging and find some timely trades from last Tuesday and Wednesday (or beyond) when the idea of VIX in the 30’s was something that even a permabear would not have imagined.

First I want to highlight a trade I noticed just under a month ago (specifically September 19th) in the CBOE Russell 2000 Volatility Index option space.  Someone came in and bought RVX Oct 29 Calls for 0.25 and as RVX moved up a little that day they also purchased the RVX Oct 30 Calls for 0.25.  The 29’s traded at 1.25 today and the 30’s were bid at 0.75.

Poor old VXX is always getting flack for not providing good long volatility exposure.  When I defend VXX, I say think about owning it like owning a long out of the money call on volatility.  When you own an out of the money call you often lose money when the underlying market moves up just a little.  You definitely lose money when the underlying market is flat or moves lower.  I just described the price behavior of VXX and it has reacted with quite an upside move over the past few days.

Well the underlying for VXX (October and November VIX futures contracts) are up dramatically over the past few days and VXX is up about 25% since last Tuesday (October 7th) closing today at 40.33.  When VXX was trading at 31.13 there was a buyer of VXX Oct 30 Calls at 1.99 that also sold VXX Oct 40 Calls for 0.21 and a net cost of 1.78.  If this trade is held through the close on Friday and VXX finishes the day over 40.00 the net result is a profit of 8.28.

On last Wednesday (Oct 8th) there was a very boring (but profitable) trade executed in VIX options.  There was a buyer of a good number of the VIX Oct 18 Calls for 1.25.  October VIX settlement is not until next Wednesday October 22nd.  I would think a buyer of those VIX Calls would have taken at least a partial profit by now.  There are also several call spreads that were purchased early last week that have increased dramatically in value in about a week and a half of trading.

SVXY is more or less the opposite of VXX.  It takes an inverse position in VIX futures relative to the long position represented by VXX.  The result is a grind higher for SVXY when VXX grinds lower.  It also means that SVXY will drop when VXX rallies and that is exactly what has happened.  SVXY finished today at 53.26.  Last Tuesday when SVXY was at 74.39 someone bought SVXY Oct 24th 68 Puts at 2.10 and sold SVXY Oct 24th 66 Puts for 1.70 and a net cost of 0.40.  If SVXY is under 66 next Friday and if the trade has not been exited early the result will be a profit of 1.60.

I could go on all night, but there are other duties calling me.  I’m looking forward to taking a closer look at all the different ways to get volatility exposure and how those markets acted this past week over the weekend.

VIX Index Rises 73% As New Volume Records Are Set – By Matt Moran

Oct. 15, 2014 — The S&P 500® (SPX) Index declined by 5.4% and the VXST Index rose 113.3%. over the past week, and many investors are looking for havens to help protect their portfolios from left tail risk.


Since early this month, there have been dramatic increases in trading volume in tools that can be used to manage portfolio risk, including the SPX options, and futures and options on the CBOE Volatility Index® (VIX®).
Voume 3  Oct 15Today a CBOE Holdings press release noted the following records –

S&P 500 Index (SPX) Options at CBOE    Trading of options on the S&P 500 Index (SPX) at CBOE set a new single-day volume record on Wednesday, October 15, as 2,671,462 contracts (estimated) traded, surpassing the previous high of 2,282,029 contracts on June 20, 2013.
VIX Index Futures at CFE    At CBOE Futures Exchange (CFE), trading of futures on the CBOE Volatility Index (VIX) set consecutive single-day volume records on Tuesday, October 14 and Wednesday, October 15, with 616,906 contracts and 791,638 contracts (estimated) traded, respectively. These records surpassed the previous high of 528,628 VIX futures contracts on August 1, 2014.
Total Volume Record at C2  C2 Options Exchange (C2) set a new single-day exchange-wide volume record on Wednesday, October 15, as 714,529 options contracts (estimated) traded, eclipsing the previous high of 665,789 contracts on February 3, 2014. … “


As shown in the table below, over the past week the VIX Index rose 73.7% and the VXST Index rose 113.3%.

aa-table header

  • -5.4%      1862.49          SPX – S&P 500
  • 14.5%       20.04            GVZ – CBOE Gold Volatility Index
  • 43.8%       36.36            OVX – CBOE Crude Oil Volatility Index
  • 44.8%       129.01          VVIX – CBOE VIX of VIX Index
  • 55.3%         7.72            VXTYN – CBOE/CBOT 10-year U.S. Treasury Note Volatility Index
  • 56.8%       26.48           VXEFA – CBOE EFA ETF Volatility Index
  • 73.7%       26.25            VIX® – CBOE Volatility Index®
  • 113.3%     31.12            VXST – CBOE Short-Term Volatility Index

SPX Oct 15VXST Oct 15

For more information on 26 volatility indexes and tools for risk management in volatile markets, please visit www.cboe.com/volatility.

The VIX is at a crossroads – mind the gap.

As you, dear patient reader, have no doubt noticed, volatility is back. The VIX® has reached levels not seen since the peak of the Eurozone crisis over two years ago. The exact reasons might be debatable, but either way October is living up to its perennial reputation as the cruelest month for equities.


Source: CBOE

Each time in recent history that the VIX closed above 20, it has rapidly collapsed (see above). And duly following the principle of induction, spikes in volatility are now interpreted as a selling opportunity (in respect of the VIX) by the average punter.  One example of this demand: the largest exchange-traded product providing a short exposure to VIX futures has doubled in shares outstanding in the last few days:


Source: Bloomberg, as of Oct 15th 

Yet volatility levels are not guaranteed to fall. If the U.S. Federal Reserve’s largess was indeed the primary cause of the suppressed levels of volatility seen in the first three quarters of this year, the seat-belts are off. QE3 is expected to end in the next few weeks; history was not kind to equity investors in the periods immediately following the last two rounds:


Source: S&P Dow Jones Indices

It requires an unusual degree of foresight, bravery or foolishness to take short positions in the VIX; there are, notoriously, considerable stings in the tail. Moreover, it is a bet framed in terms of death or glory: the VIX rarely resides in the low 20s, instead historically it is brief staging post on the way to crisis or back to recovery.  And despite the enthusiasm for selling volatility at current levels, losses can escalate very quickly if it continues to spike. At some point, those short investors will capitulate; the risk is then a material short squeeze. 

Hypothetically, such a short squeeze would trigger large purchases in volatility futures just as it is already shooting up. A jump from 25 to 35 in such circumstances is not entirely unfeasible. Investors would be wise to mind the gap. 

Perspective on Recent VIX Action

Since we haven’t had VIX in the mid-20’s for over 2 years it is probably worth getting a little perspective on recent volatility market price action.

The last time VIX was around these levels was early June 2012 when VIX got as high as 26.66.  VIX reached this level after the S&P 500 had dropped about 8.5% in a month.  On May 1, 2012 the S&P 500 closed at 1405.82 and by June 1st the S&P 500 closed as low as 1278.04.  The recent (and all time) closing high for the S&P 500 is 2011.36 from back on September 18th.   We are currently about 7.25% off the all-time high.  Only about 2.75% before the financial press starts frequently using the word correction.  To save you getting out the HP 12C a 10% drop from the high would put the S&P 500 around 1810.

As for the CBOE Volatility Index, looking back to May 1, 2012 VIX closed at 16.60.  Since 2008 was a more recent memory and we had yet to experience the great performance of 2013 VIX was higher and closer to a long term average.  On September 18 of this year VIX closed at 12.03 and we finished today at 24.64.

For the VXX watchers (or critics) from September 18 through today VXX is up just over 45%.  Not so bad for something that no one ever claims to have actually purchased.  Back in 2012, from May 1, 2012 to June 1, 2012 VXX rose about 41% – so VXX has done a little better in this mini-correction.

Finally, let’s get the real story and take a look at the VIX term structure change from Friday to today.  We all know the real VIXophiles don’t do anything without consulting the curve (nor should they).

VIX Curve 10132014

The moves in October and November, which mostly kept pace with cash VIX today, can be read one of two ways.   Either that’s some real panic and more is to come or that’s some real panic and you believe panic is an indication that a market bottom is close.  The one thing to agree on – VIX moving from 12 to the mid-20’s, VXX up 45%, and one of the most defined VIX term structure backwardations in some time all indicate that the dip buyers that have done so well for so long are on the sidelines for the moment.

This Week VXST Index Rose 58.4% and VIX Index Rose 46% – By Matt Moran

This week the CBOE Short-Term Volatility Index rose 58.4%, the CBOE Volatility Index® (VIX®) rose 46%, and the S&P 500 Index fell 3.3%.

More investors are looking to use volatility-based products to diversify and manage risk in their portfolios, as the preliminary estimates for the Oct. 10 (Friday) trading volumes were 1.56 million for S&P 500 (SPX) options, 1.34 million for VIX options, and 515,000 for VIX futures. To learn more about strategies and price trends, please see the graphs below, and visit www.cboe.com/volatility.

Table one week changes Oct 10~

One-week VIX Oct 10


VIX Spot Index to Include SPX Weekly Options Beginning Oct. 6 – By Matt Moran

Beginning Monday, October 6, 2014, CBOE will calculate the spot value of the CBOE Volatility Index® (VIX®) using S&P 500® Index (SPX) options with weekly and standard 3rd Friday expirations that more closely bracket the 30-day target timeframe. While this change is not expected to have a dramatic impact on the spot VIX Index (see point 4 below), the change is a more precise enhancement to the VIX as the premier 30-day measure of the expected volatility of the S&P 500 Index.
The addition of SPX Weeklys options to the VIX Index calculation will not impact the VIX futures and options contracts. The final settlement value for VIX futures and options will continue to use the same VIX Index formula and the opening prices of standard (i.e., third-Friday expiration) SPX option series with 30 days to expiration. Furthermore, the October 6 change will not impact the fair value calculations for VIX futures and options.
Since 2003, the VIX Index has been and will be designed to provide a constant, 30-day measure of the expected volatility of the S&P 500 Index. On most days of the month there is no S&P 500 option that expires in exactly 30 days, and so the VIX Index usually uses the expected volatilities for two different SPX options expirations, and then applies a weighting to develop a constant 30-day measure of expected SPX volatility.
Prior to the October 6 change, the VIX Index used nearby and second nearby SPX standard-expiration (third Friday) options with at least 8 days left to expiration, and then weighted them to yield the VIX (spot) Index. On some dates CBOE needed to do an extrapolation to calculate the VIX Index; for example, on Monday, August 11, 2014, the VIX Index used SPX options that expired on September 19 (39 days out) and on October 17 (67 days out), and then applied an extrapolation to develop a 30-day measure of the expected volatility of the S&P 500 Index.
Beginning on October 6, the VIX Index will use S&P 500 options (including SPXW Weekly options) with more than 23 days and less than 37 days to expiration, and then weight them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index. The addition of SPX Weeklys options will allow VIX Index spot values to be calculated with S&P 500 Index option series that more precisely match the 30-day target timeframe for expected volatility that the VIX Index is intended to represent.
As shown in the table below, in the calculations on October 6, the VIX Index will use SPXW options expiring 25 and 32 days out, whereas the legacy VIXMO Index will use SPX options expiring 11 and 46 days out.

0-Table with SPX options used
Two indexes that can help in the understanding of the calculation of the VIX Index, and that track the level of implied volatility from single SPX maturities are: (1) CBOE Near-Term VIX Index (VIN), which reflects the nearer term SPX expiration used in VIX calculation, and (2) the CBOE Far-Term VIX Index (VIF), which reflects the farther term SPX expiration used in VIX calculation. In looking at the 2-month end-of-day chart, one could note that there was a day that the difference between the VIN and VIF indexes was more than two volatility points, and that on each day from August 11 through August 14, the VIX was less than both VIN and VIF. It is expected that after October 6 the spread between VIN and VIF will be tighter, and that the VIX Index value usually will be within the VIN and VIF indexes.


At the VIX website www.cboe.com/VIX, CBOE provides a detailed spreadsheet for “New VIX Intraday Price Comparison – 5/22/14 through 9/16/14.” The spreadsheet contains more than 120,000 “new VIX” values for informational purposes, but please note that the official new VIX values (using SPX Weekly options prices) begin dissemination on October 6. The chart below shows the values in the spreadsheet, and the average values were 12.37 for the new VIX and 12.47 for the VIX Index. The new VIX often was slightly higher than the VIX Index on “extrapolation” dates before the third-Friday expiration of SPX options (e.g., on Monday, August 11), and the VIX Index often was slightly higher than the new VIX around the first of the months.

3- Comparing VIX & New

On October 6 there will be two earlier (legacy) versions of the VIX Index that will continue to be disseminated –

  • Index Introduced in 2003 — CBOE will continue to calculate and disseminate spot VIX Index values calculated using only standard SPX options. Beginning October 6, 2014, the legacy spot VIX Index values will be published under the new name CBOE S&P 500 Standard Monthly Only Volatility Index (ticker VIXMO).
  • Index Introduced in 1993 — The original version of the VIX Index used S&P 100 (OEX) options in its calculation, and is now known and disseminated as the CBOE S&P 100 Volatility Index (VXO).

Implied volatilities can vary depending on the expiration dates of options, and the concept of term structure can be very helpful in understanding the calculation of the VIX and the pricing of options in general. CBOE provides an updated term structure chart and table at www.cboe.com/vixterm. At that page on Oct. 2nd at 10:13 a.m. Chicago time, the estimated SPX implied volatilities were — 17.35 for the Oct. 18 expiration date, 17.33 for Nov. 22, 17.77 for Dec. 20, and 18.04 for Jan. 15 expiration date. For most of this year the term structure has been upward sloping.

Some investors have inquired about the recent levels of VIX in relation to the long-term average of VIX (around 20) and to VIX futures prices. While some ask if VIX is low in light of worldwide geopolitical tensions, it is worth noting that the VIX Index usually has been higher than SPX historic volatility in recent months (and arguably the VIX Index is not “low” when compared to SPX historic volatility; see chart below). The second chart below shows that in recent months the VIX Index usually has been in contango; the VIX futures often have been higher priced than the spot VIX Index. When asked if investors have an interest in hedging their portfolios, it also is worth noting that the CBOE SKEW Index recently high a 15-year high. www.cboe.com/SKEW.

4-Charts VIX & SPX HV & Fut

A contributing factor that facilitated the October 6 change is the growth in volume for S&P 500 Weekly options (SPXW), which expire on any Friday of the month other than the third Friday of the month, and are P.M.-settled series. Trading in expiring SPX Weeklys closes at 3:00 p.m. on their expiration date. Average daily volume for S&P 500 Weekly options rose from 65,254 in March 2012 to 272,825 in September 2014.

6 - SPX Weeklys volume

Rising interest in the VIX Index is shown by the fact that this year the average daily volume has grown to more than 188,000 for VIX futures and 640,000 for VIX options.
For more information on the VIX Index and the October 6 change (including links to Circulars, VIX White Paper (with detailed methodology), Press Release, spreadsheets, and charts), please visit www.cboe.com/VIX.


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