Last Week in VIX – 5/31/2015

The S&P 500 drop, which can be mostly attributed to market action on Friday, resulted in VIX putting up a pretty bullish week. Everyone is aware that we had a short week last week and VIX traders know this can cause a little disorientation when looking at VIX relative to the futures pricing. The curve below shows that VIX was up over 14% last week while the respective futures were pretty quiet. VIX futures traders are aware that VIX is a bit depressed before long weekends and tends to rebound afterward.

VIX Curve Table

With a couple of hours to go in the day on Friday there was a long call broken wing butterfly trade that came into the VIX pit. The trader purchased 1 VIX Jun 15 Call at 0.86, sold 2 VIX Jun 19 Calls for 0.37 each and finished the trade by purchasing 1 VIX Jun 22 Call for 0.22. The end result was a cost of 0.34 per spread. If you multiply 10,000 times the sizes above you get the idea of how big this trade was. The payout below, as always, assumes the trade is held to June expiration –


With VIX over 15.34 this trade is in good shape at expiration. However, as we are going into a week that may result in some extra volatility for the equity markets I would assume early profit taking on any spike in VIX and the June VIX futures.

Last Week in Volatility Indexes and ETPs – 5/31/2015

Short term volatility rose last week based on stock market action and some impact from the holiday weekend. VXST’s 42% rise is partially attributed to the three day weekend being behind us and we can probably give a little credit to the day off Monday for the 14% rise in VIX. The issue that has nothing to do with the four day work week is the shape of the curve below which shows VXST is basically in line with VIX as of Friday’s close. This is an indication that option traders are bracing a little for next week which could bring news from Greece as well as definitely learning about the employment situation in the US during May.


The long volatility related rose a bit last week with the gain in VIX and VIX futures that resulted from the almost 1% drop in the S&P 500.

VIX Table Corrected


As mentioned, VXX was up slightly for the week, but one trader appears to be looking for the move higher to be short lived. About mid-day on Friday, with VXX trading at 19.18, a trader came in and sold about 1,000 VXX Jun 6th 17.50 Puts for 0.03 and then 30 seconds later purchased the same number of VXX Jun 6th 18.00 Puts for 0.10 and a net cost of 0.07. If VXX finishes the week next week at or below 17.50 then the result is a profit of 0.43 which shows up nicely on the payout diagram below.


I highlighted the difference between where VXX closed on Friday and the short strike of 17.50 which is very close to 8% lower than where the fund closed on Friday. That 8% level sparked my interest and I did a little more digging based on that price point. I pulled weekly data on VXX since the fund was launched in early 2009. Of 330 weekly observations, VXX has lost 8% or more 61 times or just under 20% of the time. So with this trade there is a risk of 0.07 and a potential gain of 0.43 and based on history there is just under a 1 in 5 chance this trade will work out. A consistently calm or bullish stock market next week will be the key for potential success, but based on what has happened in the past, that 8% drop isn’t too farfetched.

Last Week in VIX – 5/24/2015

The VIX futures curve was lower last week with June losing more than the index or other futures as it was awarded the official title of “Front Month” with May VIX futures and options settling on the open Wednesday. Below I’ve changed things up a bit and the comparison is a year over year look at VIX and the VIX futures from Friday and a year ago on the Friday before Memorial Day.

Term Structure Plus Table

I was visiting the VIX pit with the attendees of the May version of The Option Institute’s Investing and Trading for College Students program shortly after the open on Friday. I actually heard this trade executed as an open outcry negotiation and knew what trade I was going to write about this weekend. There was a sale of 2725 VIX Jun 13.50 Puts at 0.47 combined with a purchase of 2725 VIX Jun 17.00 Calls at 0.57 (mostly at 0.57 – but this was the highest price so we’ll go with it). The net cost for this trade was 0.10 and a payout at June settlement that looks like the diagram below.


Note that there is risk below 13.50 due to the short put, but some real benefit if we get a spike in VIX between now and June VIX settlement which I have a feeling is what the l

Last Week in Volatility Indexes and ETPs – 5/24/2015

The S&P 500 moved up a little last week and the volatility curve moved lower. On the shorter dated end of the volatility term structure chart, there was the three day weekend effect which helped push VXST and VIX a tad bit lower than would be expected in front of a normal two day weekend. Just for the heck of it, I took a look at the curve 52 weeks ago and added it to the diagram below. I expected the 2015 pre-Memorial Day weekend curve to be higher than the 2014 version, but was surprised at the magnitude of the difference.


Other items of note in the volatility world include TYVIX which was unchanged on the week despite a ½ point drop in June T-Note futures. Long volatility oriented ETPs continued to get hit and VXX is actually down 40% for 2015. UVXY lost 13.74% for the week as the fund experienced the fifth reverse split since inception in 2012. More about that reverse split appears after the performance table below.

Perf TableUVXY underwent a change last week with a 1 for 5 reverse split effect on Wednesday May 20th. This means there are three different types of UVXY options available for trading. For more information on the specifics of the spilt and how the options that are left over from the previous split were impacted you can visit the link below –

I heard a lot of “what does this mean?” with respect to the UVXY split and then answer isn’t all that exciting. Basically it means that the good people at ProShares decided it was time to reverse split several funds, not just UVXY. In fact more than a dozen funds that ProShares offers had reverse splits last week. Despite the date being fairly arbitrary, I did run some numbers because that is what I do. The table below shows the S&P 500 performance for 10, 20, and 30 trading days starting with the day UVXY experienced the reverse split.   I admit most returns on the table are positive, but keep in mind the S&P 500 is up over 50% since the first UVXY split back in March of 2012.

UVXY - SPX Performance

Last Week in VIX – 5/17/2015

There was a fairly parallel shift lower in spot VIX and VIX futures pricing as there wasn’t much to get excited about last week. The May VIX future dropped a little more than the spot index as expiration is just around the corner. Despite the almost 5% drop in the May contract, the premium relative to spot VIX is about 1.30.

VIX Curve

The premium of the May futures contract relative to spot VIX got me looking into various puts that expire Wednesday morning. I copied down the closing offer prices for all May VIX puts that expire this week with strike prices from 13.00 to 17.00. I also included the intrinsic value for each option based on VIX at 12.38 (Friday’s close). The far right column shows the difference between this intrinsic value and the cost of each put. Note if VIX does not move at all into Wednesday expiration that each of these puts would be worth more than they cost on the close Friday afternoon. Please note, this is based on VIX not moving at all, but is an interesting exercise in see how VIX option pricing differs from other option markets.

VIX Puts

Sticking with looking at May expiration, on Friday it appears someone put on a calendar spread using VIX Put options. In two different transactions they bought about 6,000 VIX May 14 Puts at 0.55 and sold 6,000 VIX Jun 14 Puts for 0.41. I’m guessing this is a trade into May expiration with the June options acting as a sort of hedge in case there is some sort of volatility event that pushes VIX to much higher levels over the next couple of days.

Last Week in Volatility Indexes and ETPs – 5/17/2015

There was a slight shift in the VXST – VIX – VXV – VXMT term structure last week. VXST and VIX were down, VXV was actually up slightly and VXMT dropped. Relative to history, VXV and VXMT are higher than you would expect with the S&P 500 making all-time highs. I’m convinced the market is braced for a difficult end to 2015.


VXX and the other long oriented ETPs continue to grind lower as VIX stays at low levels and the futures maintain contango. SKEW stands out a bit to me on the table below along with VVIX creeping up a bit. This could be an indication of a little extra demand for tail risk protection. Also, TYVIX moved higher last week. For more color on that index check out a blog by Mark Sebastian at the follow link –

VIX ETP Table A few weeks ago I noted a buyer of 10,000 VXX Jan 2017 10 Puts for 0.93 when VXX was trading at 20.89. I checked in on that trade and so far so good as the bid side for those contracts was 1.05 on the close Friday. Something that caught my eye when getting an update on that trade was that the open interest is now over 30,000. While poking around I noticed that the Jan 2017 15 Puts have an open interest of over 100,000 contracts. The payout diagram below shows the payoff for each of these options based on the settlement price from Friday along with the percent drop to break even at expiration from Friday’s VXX close.


The Essence of VIX: What You Really Need to Know

What is the essence of VIX? This may seem like an abstract, philosophical question, but I can assure you it is not. It is a practical one, and if you can understand what makes VIX unique, you will know why this index matters so much.

Informed investors know that VIX:

  • Employs a wide range of options in its calculation, both calls and puts;
  • Maintains a constant 30-day maturity;
  • Is not based on an options pricing model such as Black-Scholes; and
  • Does not incorporate the S&P 500 price level in its calculation (VIX is negatively correlated to the S&P 500, but correlation does not translate to direct causation).

For most people, VIX is largely associated with the first two bullet points. But many indices use options prices and target certain maturities. The key attribute of VIX – the knowledge you need to take away from this post – comes from the final two bullet points. It has to do with how VIX measures implied volatility, and nothing else.

How is it that we can arrive at an implied volatility value without using an options pricing model like Black-Scholes? And how can it be that the VIX and the S&P 500 price levels are not directly related?

VIX and Variance Swaps

When institutional investors want to trade volatility, they often trade variance swaps. The magic of a variance swap is that by using a portfolio of options weighted in a certain way, the impact of other factors, such as the changing underlying index level, can be neutralized. The trader is left with exposure to volatility alone.

VIX uses the same processes employed in variance swaps to arrive at the same result: exposure to pure volatility. Though the math behind variance swaps is complicated, one simple technique, explained below, liberates VIX from the influence of other factors.

How Volatility is Isolated

A challenge in calculating a volatility index is that, as a general rule, options have higher sensitivities to changes in implied volatility (“vega values”) as their strike prices increase, as shown Figure 1. The bell curves in this graphic represent the sensitivities of options to implied volatility at different strike prices.

Figure 1

Vega increasing

This upward sloping effect links the price of the underlying index with the volatility exposure of the full portfolio. If the underlying index price is high, then the sensitivity of the options to changes in implied volatility will be high as well.

To offset this effect, the options need to be reweighted. The result of this reweighting is illustrated in Figure 2. The options demonstrate the same relative sensitivity to implied volatility in the portfolio regardless of the underlying index price.

Figure 2

Vega even

This is achieved through weighting the options by the inverse of their strike prices, squared. So, options with lower strike prices are given a higher weight to make up for the fact that they naturally have less sensitivity to changes in implied volatility.

This is the essence of the VIX calculation: a reweighting of the options so that exposure to implied volatility rises and falls independently of the underlying index price level. This is what allows VIX to be VIX, a pure measure of volatility, uncontaminated by other effects and factors.

For a deeper dive into this concept – and better charts! – I recommend reading a renowned paper published by Goldman Sachs in 1999. The ideas in this piece served as the foundation for the modernization of the VIX methodology, which took place in 2003.


The Big VIX Roll from May 11th – Part 2

I get to CBOE each morning about 7:15 and by 7:16 I was running around the floor trying to find out a little more about the VIX roll from yesterday.

First, I’ll start at the beginning. It appears this all began back on April 10th when the trade that got rolled forward yesterday was opened. Back in April about 180,000 VIX Jun 17 Calls were purchased for 1.74 and about 360,000 VIX Jun 23 Calls were sold at 0.82. I keep using ‘about’ as a hedge clause because the actual trade size is an odd number, but pretty close to 180,000 and 360,000 respectively. To break this down to a more manageable size and cost, the original trade was a 1 x 2 ratio call spread for a cost of 0.10.

Yesterday the trade was rolled out to July. To keep things simple I’m going to break out the closing transaction and the opening trade. First, the VIX Jun 17 Calls were sold for 1.20 for each of the two VIX Jun 23 Calls that were purchased 0.50. This results in a credit of 0.20 per spread and an unrealized profit of 0.10 on the June option position – they paid 0.10 to get into this spread and received 0.20 when they got out.

The July ratio spread involved the VIX Jul 17 Calls being purchased for 1.74 (some were at 1.73, but I’m using 1.89 to keep the math simple) and the VIX Jul 23 Calls were sold at 0.90 for a net cost of 0.09. Taking the running profits from the June trades (again 0.10) and some rounding, we can say this July 1 x 2 ratio call spread has no cost (excluding commissions). The payout below assumes no cost and that the trade is held through July expiration.

VIX Ratio PO

The best case scenario here is VIX at 23.00 at July expiration and all is well until VIX rises to 29.00 with losses being incurred above that level on a one for one basis with VIX.

Large VIX Ratio Call Spread Rolled from June to July Today

It appears one volatility trader believes a spike is on the horizon for VIX, but altered the timing of their outlook today. They were prepared for a move to the upside before June expiration, but rolled their position out to VIX options expiring July 22.

The specific position was long 180,000 VIX Jun 17 Calls plus short 360,000 VIX Jun 23 Calls (1 x 2) which was rolled out to long 180,000 VIX Jul 17 Calls plus short 360,000 VIX Jul 23 Calls in a big rolling trade at CBOE today. My hope is to visit the VIX pit tomorrow to get a little more color on this trade and report back with a little more color in the morning.

VIX option volume topped 1.5 million contracts today, aided by this large trade. The result is that despite a low volatility environment today was the busiest day of the year for VIX option trading and the eighth busiest on record.

PUT Index Tops 1500 and Hits All-time Daily Closing High – By Matt Moran

On Friday, May 8, the CBOE S&P 500 PutWrite Index (PUTSM) closed at 1501.08, its highest all-time daily close and the first time the index closed above 1500. PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500® Index (SPX) put options against collateralized cash reserves held in a money market account.

PUT-May 8The daily historical data for the PUT Index extends back to June 30, 1986. Since mid-1986 the PUT Index has had higher returns and lower volatility than the S&P 500 Index, the 30-Year Treasury Bond Index (Citi), and the S&P GSCI Index (that measures commodity performance).

PUT-SPTR line chart

Retu & SD PUT

In viewing the charts above, an astute investor might ask – if the markets are efficiently priced over the long term, how can one index have the highest returns and lowest volatility in a group of indexes?

There is evidence that suggests that, in most years since 1990, the markets for S&P 500 (SPX) options generally usually have been richly priced, and that consistent sellers of one-month SPX options have had the potential to achieve relatively strong risk-adjusted returns. Please see the chart below and the research papers at for more information on the topic of richly priced index options.

Implied minus realized

For the many investors today who are concerned about low interest rates for fixed income instruments, and high p/e ratios for stock indexes, it could make sense to explore the pros and cons of the PUT Index and the cash-secured put writing strategy. Later this year there may be a launch of an ETF that is designed to track the PUT Index. To learn more about the PUT Index, please visit


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