Weekend Review – Volatility Indexes at ETPs – 3/6/2016

The S&P 500 rose about 2.7% last week and shorter term volatility took it on the chin with VXST and VIX both down over 14%.  The longer dated volatility indexes were lower as well, but as show below, remain elevated compared to their respective averages last year.  You can read that as the market still bracing for higher volatility over the balance of 2016 (or at least until 6 months from now).



The long and long leveraged VIX realted ETPs were down last week with VXX dropping 10.78% and UVXY losing 21.65%.  For the year VXX is still in the green by 8.76% and UVXY is up as well, but only by 7.99%.  That financial compounding thing really does rear its ugly head with respect to leveraged funds, regardless of the underlying market.

VVIX has been getting a lot of attention as the VIX of VIX creeped to post August 24, 2015 lows this past week. When VVIX shows real complacency the first digit is a 6, so take testing the 80 level signaling calm as not being entirely accurate.

VXX Table


With SVXY rising over 10% last week, short volatility is quickly coming back as a desirable strategy.  I came across an early Friday bullish SVXY trade that is the most basic of structures, but could be a heck of a speculative trade if VIX remains in the teens and the VIX term structure remains in contango.  With SVXY at 42.05 someone came in and bought just over 100 SVXY Mar 18th 50 Calls at 0.05.  The payoff shows up below, along with Friday’s closing price of 41.55.


In order for this trade to turn a profit SVXY needs to rise to 50.05 in the next two weeks.  That’s a gain of 20.46%.  This got me to looking at the historical numbers.  There are two weeks to expiration so I took a look at historical two week performance for SVXY.  Since SVXY was launched in late 2011 we have 227 two week observations to work with.


First I did the minimum of work and noted how often SVXY was up over 20.46% in two weeks just using the two week Friday close to close prices.  It turns out that only 6 of 227 weeks (2.6%) saw SVXY close up enough for this purchase of the 50 calls to result in a break even or better trade.

However, I’m not lazy and I know we don’t have to hold trades through expiration.  Therefore I took a look at how often the high over a two week period for SVXY was greater than the 20.46% threshold, this happened 15 of the 227 weeks (6.6%).  So rounding numbers this trade has about a 5% chance of working out depending on how nimble the trader is and what happens in the volatility markets.  Either way for 0.05 one trader got very cheap short exposure to volatility with very little downside if the market doesn’t go their way.

The 32nd Annual RMC and Key Indexes – VVIX, SKEW, VIX, SPX, OVX, and WPUT – By Matt Moran

On February 29 – March 2 I attended the 32nd Annual CBOE Risk Management Conference  at the Hyatt Regency in Bonita Springs, Florida, and I was pleased to view several presentations by excellent speakers, including keynotes by Leo de Bever, PhD, Former CEO, Alberta Investment Management Corp., and by Jim VandeHei, Co-Founder, President, and CEO of POLITICO.
In preparing for RMC, I looked at a number of indexes and charts as shown below.


An RMC session on March 1st discussed “Volatility of Volatility and Other Facets of VIX Options.” The two charts below show the relationship since January 2008 between the CBOE Volatility of Volatility Index (VVIX) (which had a daily closing high of 168.75 in 2015) and volume on the options on the CBOE Volatility Index® (VIX®).

Tw-01-VVIX Indx & VIX opt adv
Here are the average daily closing values for the CBOE Volatility of Volatility Index (VVIX) in three key years –

  • 81.9  Avg. daily close in 2008
  • 79.8  Avg. daily close in 2009
  • 94.8  Avg. daily close in 2015 www.cboe.com/VVIX

A volatility investor could ask this question – how might the levels of the VVIX Index impact the volume and open interest for VIX call and put options?


The next two charts show the relationship between the CBOE SKEW Index (SKEW) and SPX options volume since January 2008.

Tw-02-SKEW Indx & SPX volume

Historical data for the SKEW Index go back to 1990; here are the average daily closing levels for the SKEW Index in select recent years —

  • 113.7 Avg. daily close in 2008
  • 118.1  Avg. daily close in 2009
  • 122.4  Avg. daily close in 2013
  • 129.8  Avg. daily close in 2014 (the highest-ever average for a calendar year)
  • 127.5  Avg. daily close in 2015

It is interesting to note that in 2014 the VIX Index averaged 14.2 (and some people asked if the VIX was low relative to worldwide anxiety), but the SKEW Index averaged 129.8. www.cboe.com/SKEW.


The next two charts show the relationship between the VIX Index and VIX futures volume since January 2008.

Tw-03-VIX indx & VIX fut volume

While the long-term average daily closing value for the CBOE Volatility Index® (VIX®) since 1990 is around 19.8, here are the average daily closing values for VIX in select recent years —

  • 32.7  Avg. daily close in 2008 (the highest ever average value for a calendar year)
  • 31.5  Avg. daily close in 2009
  • 14.2  Avg. daily close in 2013 and in 2014
  • 16.7  Avg. daily close in 2015


The next two charts show the relationship between the OVX and VXEEM volatility indexes.


Here are the average daily closing values for the CBOE Crude Oil ETF Volatility Index (OVX) in select recent years –

  • 52.0 Avg. daily close in 2008
  • 22.5 Avg. daily close in 2013
  • 23.1 Avg. daily close in 2014
  • 45.0 Avg. daily close in 2015

With the plunge in crude oil prices over the past year, the OVX Index has risen substantially.


An RMC session featuring speakers from the University of Chicago, Office of Investments, and from UBS Securities, discussed “Tail hedging within an institutional portfolio framework.” In the past 16 years the S&P 500 Index had two very significant drawdowns.

Tw-05-SPX Index


A new paper is authored by a Professor of Finance at the University of Illinois at Chicago — Oleg Bondarenko. An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016). From 2006 to 2015 (CBOE introduced Weeklys options in 2005), the average annual gross premium collected was 24.1 percent for the PUT Index and 39.3 percent for the WPUT Index, the study found. While a one-time premium collected by the weekly WPUT Index usually was smaller than a one-time premium collected by the monthly PUT Index, the WPUT Index had higher aggregate annual premiums because premiums were collected 52 times, rather than 12 times, per year, and there is greater time decay for options as they approach expiration.

Tw-07-Premiums by Oleg

For more information on 30 volatility indexes and 27 benchmark indexes, please visit www.cboe.com/volatility and www.cboe.com/benchmarks.

New Study by Black and Szado Analyzes Six Options-Based Benchmarks – BXM, PUT, BFLY, BXMD, CMBO, CNDR – By Matt Moran

A new study examines six benchmark indexes that write S&P 500® (SPX) index options, comparing their performances with those of traditional stock, bond and commodity benchmark indexes. The study, “Performance Analysis of CBOE S&P 500 Options-Selling Indices,” is the first comprehensive study that examines the performance of options-strategy benchmark indexes that incorporate iron condor and iron butterfly strategies. Commissioned by CBOE and co-authored by Keith Black, Ph.D., CAIA, CFA, managing director of the Chartered Alternative Investment Analyst Association, and Edward Szado, Ph.D., CFA., assistant professor of finance at Providence College and director of research at the Institute for Global Asset and Risk Management (INGARM), the study analyzed benchmark index performances for the 29½-year period from mid-1986 to the end of 2015. The options-based benchmarks studied were the CBOE S&P 500 BuyWrite Index (BXM); CBOE S&P 500 PutWrite Index (PUT); CBOE S&P 500 Iron Butterfly Index (BFLY); CBOE S&P 500 30-Delta BuyWrite Index (BXMD); CBOE S&P 500 Covered Combo Index (CMBO); and CBOE S&P 500 Iron Condor Index (CNDR).

Key findings of the study included:

1. PUT INDEX HAD HIGHEST RISK-ADJUSTED RETURNS, WITH RICH PRICING FOR INDEX OPTIONS. The PUT Index had the highest risk-adjusted returns (as measured by the Sortino Ratio, Sharpe Ratio, Stutzer Index and M2) of all the 10 indexes in Exhibit 7. The PUT Index engages in cash-secured writing of one-month SPX put options every month. A key source of strong returns for the PUT Index was the fact that the SPX index options usually were richly priced in recent decades.

1 - Risk-adj returns

2. HIGHER RETURNS. In comparing the performance of 10 benchmark indexes over a 29½-year-period, the indexes with the highest annualized returns were the BXMD (10.66 percent) and the PUT (10.13 percent).

2 - Ann returns BXMD PUT

3. LOWER VOLATILITY. The indexes with the lowest annualized standard deviation were the CNDR (7.23 percent) and PUT (10.16 percent).

3- Standa deviations thru 2015

4. LESS TAIL RISK FOR CNDR AND BFLY. A histogram analysis reflected a lower occurrence of large losses or large gains (less tail risk) for the options-selling indices than for the S&P 500 Index. Looking at monthly returns in the 29½ years between July 1986 and December 2015, the authors found the S&P 500 Index posted 15 months of losses worse than 6 percent during the period, while the CNDR Index logged 10 months worse than 6 percent and the BFLY two months worse than 6 percent. The out-of-the-money (O-T-M) puts purchased help lessen the risk of big monthly losses for key options-based benchmark indexes.

4 - CNDR P&L

5 - BFLY Histo5.5 PUT histo
5. GROSS PREMIUM RECEIVED FOR A-T-M AND O-T-M OPTION SELLING. Exhibit 12 shows the gross premium earned by writing calls for the BXM and BMXD indices as a percent of the level of the underlying S&P 500. If the calls expire out-of-the-money, this premium reflects income generated by the strategy. This income will be mitigated by the extent to which the calls expire in-the-money. The exhibit reflects the higher premium generated by the at-the-money calls of the BXM index. While the BXM Index generated more gross premiums than the BXMD Index, note in the table that the BXMD Index had higher net returns than the BXM Index in all six of the bullish years from 2009 through 2014. The average cumulative six-month gross premium generated by the BXM Index was 10.4%, while the BXMD generated 4.6% per six-month period. While the gross premium generated is a positive number, please see the net returns table below and note that the option-selling indexes have had losses in years such as 2008.

6 - Gross premium BXM BXMD

6. CAPACITY AND NOTIONAL VALUE. The average daily notional value for volume on the SPX options rose to more than $190 billion in 2015. Fund managers examine trading liquidity and capacity when considering investment vehicles.

7 - Notional value thru 2015

7. MORE INFORMATION Visit the CBOE Benchmarks microsite for links to the new paper and to several other options-based strategy papers. For data and information on the study, please visit www.cboe.com/benchmarks.


CBOE Risk Management is One Week Away

One the best parts of my job as Director of Education at The Options Institute is getting to attend each of the Risk Management Conferences offered by CBOE.  Back in the Fall the running theme at both the European and Asian versions of RMC seemed to be how the markets were shifting from a low to high volatility regime.  Early 2016 price action has confirmed this.

There are five things that have me particularly excited about heading to Bonita Springs, FL next week for the 32nd Annual RMC Conference in the US.

1) First and foremost I look forward to hearing how traders and portfolio managers have been approaching the markets in 2016.  At the Asian RMC conference late last year one strategist stated that making forecasts for 2016 was one of the most difficult tasks he had faced in his career.  There are many things about the markets that have made 2016 a unique year for the markets and RMC will be a great place to hear how market participants have been dealing with it.

2) CBOE often announces new product initiatives at RMC when either Ed Tilly or Ed Provost gives the welcome address to kick off the first day.  The information is embargoed until then and I find out what’s new along with everyone else.  Ed Provost, President and COO at CBOE Holdings will offer the Welcome and CBOE Update address which I’m sure will lead to things that I will dive into almost immediately following his presentation.

3) Leo de Bever, PhD will be giving the keynote address on Tuesday morning with a discussion titled Long-Termism:  An Opportunity Work Seizing.  Until December 2014 de Bever was the CEO for the Alberta Investment Management Corporation.  Some of my academic work is centered on focusing on longer term investment results and trying to filter out the noise of short term market swings.  I hope to gain some insights from this discussion.  Also, as a side note, I am not alone among people at CBOE that are excited about this pending keynote address.

4) As I make this list I continue to go through the schedule and cannot narrow down the list of presentations.  I’m just going to say I’m just looking forward to every presentation I will get to attend.  I can’t clone myself, so I will miss presentations when we split into two tracks.  I have a game plan where I will be able to get color on the presentations I miss from Mark Sebastian of Option Pit who will be covering Risk Management for TheStreet.com.

5) Finally, we have to include the weather.  An early look shows 75 and sunny in Bonita Spring for all three days of RMC.  Although my free time is limited with blogging and tweeting along with CBOE-TV and Option Insider Radio Network duties, I do plan on trying to spend at least a few minutes outdoors.  For the golfers attending Wednesday afternoon looks like it will be perfect for networking and getting in a round of golf.

If you want to participate there is still time to register for CBOE’s Risk Management Conference.  Check out www.cboermcus.comfor all the details about speakers, the venue, and how to attend in person.

Weekend Review VIX Futures and Options 2/21/2016

VIX managed to stay in the 20’s despite the most resilient performance from the S&P 500 in 2016.  We did finally give up on the last bastion of backwardation (month 1 versus month 2) as March became the front month with February going off the board Wednesday on the open.

VIX LT Curve


The generic short dated VIX curve constructed using Weeklys futures flattened and then some last week based on the drop in VIX and a fairly light economic calendar over the next couple of weeks.  We can probably throw the end of earnings season in there as another reason volatility expectations have moved lower.

VIX ST Curve


It appears at least on trader expects VIX to remain below 23.00 for the next few weeks.  The last big VIX trade of the day on Friday was a seller of the VIX Mar 23 Puts at 2.56 who purchased the VIX Mar 24 Puts for 3.27 and a net cost of 0.71.  Usually bearish vertical spreads show up using call options, but in the world of cash settled index options it is not unheard of for a trade like this to show up on tehp ut side of the screen.  As long as standard March VIX settlement comes in below 23.00 this trade will result in a profit of 0.29, a renewal of higher volatility and settlement over 24.00 results in a loss equal to the cost of 0.71.

VIX PO Fixed

Weekend Review Volatility Indexes and ETFs 2/21/2016

VXST dropped dramatically last week and closed on the lows of 2016.  VIX managed to hold up a little better and looking at the economic calendar for next week I can kind of see why.  VXST often leads VIX so a move below 20.00 next week may not be out of the question.  After I typed that sentence I realized we are only 0.53 away from the teens so it wasn’t the most daring of market predictions.



This is the year I am going to focus more on the disconnection in performance between VXX, SVXY, and UVXY.  We all know that SVXY and UVXY offer daily inverse and leveraged performance that is offered by VXX and that over time UVXY does not return two times and SVXY does not offer the opposite of VXX.  Last week VXX was down a tad shy of 11%, while SVXY was up closer to 12%, and UVXY was down about 21%.  There was not much of a disconnect last week as the action wasn’t all that choppy.  Other things of note on the table below is SKEW rising while VVIX dropped dramatically, sort of a divergence of market reactions.

VXX Table


Despite the return to contango on trader put on a bullish VXX trade late Friday.  With VXX at 25.38 there was a buyer of the standard VXX Mar 28 Calls at 1.17 who sold the VXX Mar 33 Calls for 0.47 and a net cost of 0.60.  A home run for this trade would involve VXX over 33.00 on the close March 18th and the payoff equaling 4.40.  Anywhere over 28.60 and this trader will probably be content with stepping up during a period of backwardation to get long exposure to VXX.


Is VIX Approaching a Death Cross?

began my week updating charts and tables as I am heading to Tampa, FL to speak on options and then I’m off to Trader’s Expo in New York to deliver a couple of presentations.  The chart below, depicting the rolling 1 year and 5 year average closing prices for VIX is a favorite of mine.  I consider it a good depiction of the equity market shifting from a low to high volatility regime as the 1 year average approaches the 5 year average.  However, I noticed today that the 1 year average is very close to moving above the 5 year average and the last time this happened was in November 2007.  We all know how the markets acted in 2008 so I did some digging on the numbers.

VIX Death Cross


The specific day that the 1 year average last moved above the 5 year average was November 16, 2007 and the S&P 500 closed at 1458.74.  I took a look at where the S&P 500 closed 3, 6, 9, and 12 months after November 16, 2007.  Those numbers appear in the table below.

Death Cross Performance


Note that the S&P 500 was lower over all four of these arbitrary time frames after the 1 year average moved above the 5 year average.  In the stock world I have heard when the 50 day moving average close for the S&P 500 moves below the 200 day moving average it is referred to as a ‘death cross’.  If the VIX 1 year average moves above the 5 year and we experience the same sort of market that we did in 2008 I want it to be on record that I coined the term “VIX Death Cross”.

VIX Options and Futures Review – 2/5/2016

Friday provided our first glimpse into how the economy was faring in January and the stock market apparently didn’t like what it saw.  VIX finished the day up 7% which was just under half the over 15% rise we got last week.  The February future managed an 11% gain to finish higher than spot VIX.  However, backwardation is still in place with the February contract higher than the March contract.  More on this after the chart and table below.

VIX Curve Table


I’ve been obsessively fixated on the current state of front month versus second month backwardation.  The front month VIX future has closed higher than the second month every day in 2016.  That’s a running streak of twenty four trading days.  This is the longest stretch since 2011 and the fifth longest on record.

What surprised me a bit was that the spread between February and March widened on Friday.  I conducted a twitter poll last Monday and the (very unscientific) result was about 2/3rds of voters thinking February would close at a discount to March regardless of how the market took the employment number.  Congrats to the 1/3rd that got it right and I’ll admit I was on the side of the majority who got it wrong.

The chart below shows the spread between the first month and second month each day this year.  The last time the spread was greater than or equal to 1.00 was the day after the 2016 closing low for the S&P 500.  To save you the trouble of looking it up, the closing low for this year (so far) was January 20th at 1859.



On Thursday most traders were looking only one day in to the future with Non-Farm Payrolls being reported the next day.  However, one of the larger VIX option trades targeted the VIX Weeklys expiration on March 9th just after the March employment number is reported.  A VIX Mar 9th Iron Broken Wing Butterfly was constructed with the VIX Mar 9th 23 Puts being sold for 2.84 and VIX Mar 9th 23 Calls sold at 2.52.  The trade was completed with the VIX Mar 9th 18 Puts being purchased at 0.42 and VIX Mar 9th25 Calls at 2.01 and net credit of 2.93.  The payout upon March 9th Weeklys VIX settlement appears below.



Note that a volatility event pushing VIX into the upper 20’s, or even low 30’s results in 0.93 profit.  The risk is on the downside with a maximum loss of 2.07 being taken if VIX is below 18.00 at expiration (as of Thursday the closing low for VIX in 2016 was 19.34).  I think the takeaway may be as long at VIX is still in the 20’s this trade will turn out OK.

Volatility Indexes and ETPs Review – 2/7/2016

VIX rose last week as did the rest of the volatility indexes that based their levels on S&P 500 Index (SPX) option pricing.  Usually in times of panic VXST (9-day volatility) rises above VIX (30-day volatility), but that was not the case this past week.  You can read this two ways – traders think stocks will rebound or traders are mentally prepared for more downside in the market.  I’m leaning toward the latter.



I decided to leave the year to date numbers on the table below since it has been such an interesting week.  I find the one week and annual drop in SKEW interesting and took it as confirmation of the market being ready for more downside.  Most of that great performance for VXX and UVXY can be attributed to VIX first month versus second month backwardation which has been in place for all of 2016.

VXX Table Fixed



One trader took advantage of the higher state of volatility in front of Friday’s employment number.  Mid-day Thursday when VXX was trading at 25.29 there was a seller of the VXX Feb 5th 27 Calls at 0.13 who purchased the VXX Feb 5th 29 Calls for 0.04 and a net credit of 0.09.



Everyone is aware that the stock market did not react positively to Friday’s employment report.  VXX did move higher, but never reached the 27.00 price level that would have added to the stress associated with this trade.  26.81 was the high and VXX settled the week lower than that so the trade was a success.

VIX Options and Futures Review – 1/31/2016

The VIX term structure is approaching contango which many VIX watchers will consider a green light for the equity markets, but the February contract stubbornly remains elevated relative to the March contract.  Although on Friday this premium was down to 0.30.  My feeling is February may stay up a bit until we get the employment number behind us this coming Friday.  At that point I guess VIX will be just like the Fed (data dependent).

VIX LT Curve


The shorter term curve flattened out as VIX tested the teens as the equity market rallied on Friday.  We are now six months into having short dated or VIX Weeklys futures available for trading and I have a long list of testing I want to do with the data that is now available to play around with.  Of course anything of interest will be promptly reported in this space.

VIX ST Curve


As the equity markets were beginning an upward trajectory on Friday a volatility trader came in to take advantage of VIX in the 20’s in the form of selling an out of the money call spread.  With VIX at 21.40 (1.20 higher than the day’s closing price) a trader sold just under 25,000 of the VIX Feb 26 Calls for 1.09 and purchased the VIX Feb 32.50 Calls for 0.38 resulting in a net credit of 0.71.  As long as VIX remains under 26.00 between now and February VIX settlement on the open February 17th this trader will stay out of the danger zone where this trade starts to give up some of the premium received when the trade was initiated.


VIX PO Weekend


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