Weekend Review of Volatility Indexes and ETPs – 5/7/2017

The chart below may be one of the final references to the French Election which came to an end this weekend.  Note VXST, which reflects the IV of very short term SPX options was elevated going into the weekend.  I don’t think it is too much of a stretch to say that a quick drop in VXST may be in the cards come Monday morning.


SKEW dropping dramatically last week may be the last bastion of higher volatility dropping.  This happened despite VIX dropping which makes the SKEW move even more significant.  I was a bit surprised that TYVIX was higher, although off a very low base, since we got an FOMC meeting behind us last week.

VXX Table 05052017

SVXY is now a rounding error below up 65% for the year and UVXY is now down 70%.  It’s only May 5thand these numbers are more like what would be expected as the year comes to an end, not with about seven months to go.

VXX SVXY UVXY Comp552017

Two weeks ago, all volatility indexes quoted by CBOE were lower.  Many, but not all, rebounded last week.  I guess we need to keep an eye on China, Oil, and other emerging markets if the volatility index changes are to be believed.

Vol Index Prices 05052017

Finally, over the weekend I posted a chart that resulted in me being called some ugly names and my intelligence being questioned.  Thank goodness my children don’t have Twitter yet.  The chart below is the chart in question and now I attempt to explain it in more than 140 characters.

2007 2017 VIX Comp

I was asked by a reporter to double check what year was the last time VIX had moved below 10.00.  It turned out to be early 2007 so I took a stab a overlaying 2007 VIX daily price action with the year to date 2017 action.  Note that in the second half of 2007, as a prelude to the Great Financial Crisis, VIX made some dramatic moves to the upside.  The point here is that this can happen, not that it will.

Traders do well selling volatility when VIX is low and often give up profits when we get a quick move to the upside in VIX.  My goal is to make sure people trade smart and reminding a complacent market what can happen was my goal when posting that chart.

Weekend Review of VIX Options and Futures – 4/30/2017

Everyone knows what an ear worm is and if not you will now.  It is basically when a song is stuck in your head.  Since Monday REM’s Orange Crush has been on constant replay in my head.  VIX losing 26% and the front month down 14% definitely qualify as a volatility crush.

VIX Table TS 428

Since all this crushing was caused by events in Europe (France specifically) we will take a look at the week over week VSTOXX and associated futures term structure change.  Now I have Officer Barbrady from South Park in my head saying, “Nothing to see here”.  However, that’s anything but true.  VSTOXX got hammered as did the futures markets.  Worth noting is that as of Friday the May and June contracts at a discount to spot VSTOXX.  Between now and May expiration there is the final round of the French election and before June expiration we get an election in Great Britain.  It appears the markets expect there will nothing to worry about with either of these known unknowns.


Late Friday, with VIX right at 11.00 and the standard May futures contract at 12.30 a fairly large and cheap trade came into the VIX pit.  A bull call spread was created with 12,000 May 20 VIX Calls purchased for 0.15 and 12,000 VIX May 21 Calls sold at 0.12 for a net cost of 0.03.  The payoff diagram below shows the payoff on May 17th AM settlement and a potential payoff with 10 days left to expiration.

VIX PO 428

Note the half way to expiration profit is nowhere near as the maximum payout for this trade as shown by the at expiration line above.  However, keep in mind the cost of this trade was 0.03 and exiting at 0.20 or 0.30 is a pretty nice return.

Weekend Review – Volatility Indexes and ETPs – 4/30/2017

S&P 500 implied volatility was dramatically lower last week.  Of significance is VXV which hit 2017 lows.  I’m teamed up with an academic putting the final touches on a study showing that VXV leads VIX so this may be a signal that the low for VIX in 2017 hasn’t be established and a close below 10.00 is a distinct possibility.


Beyond the long ETPs on the table, which had a pretty tough week, are some other markets worth noting.  First, TYVIX, which was over 6.00 for the first time in a while finished the week down almost 26%.  SKEW gained, but don’t take that as an increase in tail risk as this would be expected with volatility moving lower across the board.  Finally, VVIX under 80.00 is possibly the most relatively complacent of the indexes quoted below.

VXX Table 428

SVXY approached all-time highs and is now up almost 60% for the year.  VXX and UVXY got hit on the move lower in the VIX complex.  I discuss a long SVXY trade that worked out well based on last week’s action at the end of this blog.  Do keep in mind that the second round of the French election is this coming weekend, there’s not a lot of uncertainty priced in, but if Le Pen makes a run in the polls we may have another opportunity in volatility trading brought to us by the French election process.  After that our attention will turn to London with elections being held in early June.


I need to double check with our volatility historian (who is actually me and I just don’t have time this weekend to confirm what I’m about to say) but I believe this is the first time since including this table in this blog that all volatility indexes were down on the week.

Vol Indexes 428

There are many ways to play a volatility crush like we saw last week.  One is to get long exposure to SVXY.  With a couple of hours to go in the trading day on Friday April 21st SVXY was around 127.50.  At that time, a trader purchased the SVXY Apr 28th 142 Calls for 0.68 and then sold the SVXY Apr 28th150 Calls for 0.18 and a net cost of 0.50.  A payoff based on this past Friday’s close appears below.


I did a little more work on this trade.  First, I took a look at how often SVXY has rallied enough in a single week to hit or exceed the long strike (150) in this call spread.  To hit 150, SVXY would needed to have gained about 17.6% last week.   SVXY has been around for 128 weeks and one 3 times a one week rally of 17.6% or greater has occurred.

If held to expiration, the result would be a profit of 2.51 (0.50 cost – 142 Call 3.01 in the money on Friday’s close).  Personally, I would have taken this trade off early so I checked the profit based on each day’s closing prices for the two option in this trade.  Monday, on the close, a profit of 2.77 could have been realized, Tuesday 3.87, Wednesday 3.10, and Thursday 3.13.  Any way you slice it, this trader did a good job anticipating the subsequent drop in S&P 500 volatility that we witnessed last week.

April: A Testing Month for VIX Traders

Shorting VIX® was among the top strategies in the past year.  XIV and SVXY both went up over 50% in Q1 2017 (~15% in March alone), almost doubled in the past six months, and returned ~180% over the past 12 months (see Exhibit 1).  However, the declining VIX spot level can only explain part of their performance.

Both XIV and SVXY consistently provide a short exposure to VIX futures, not the spot VIX index.  They are exchange-traded products that track the S&P 500® VIX Short Term Futures Inverse Daily Index, which, as its name suggests, seeks to track the inverse of the S&P 500 VIX Short Term Futures Index.

The S&P 500 VIX Short Term Futures Index takes long positions in the first- and second-month VIX futures contracts.  A proportion of the first-month contract (ticker UX1) is rolled to the second month (ticker UX2) every day to maintain a constant 30-day maturity.  As the second-month futures are usually more expensive than the first month (see Exhibit 2), this long VIX futures exposure usually incurs a loss from the roll (the “roll cost”), while the inverse of this exposure, as provided by the S&P 500 VIX Short Term Futures Inverse Daily Index, usually generates a profit from the roll (the “roll yield”).

The roll cost of the S&P 500 VIX Short Term Futures Index may seem small on daily basis, but in aggregate, it causes the index to go down over a long-term horizon.  In the 12-month period (253 trading days), positive roll cost occurred on 247 days (97.63%).  This is the main driver behind the enormous growth of inverse VIX futures products.

However, April 2017 will be an interesting month for VIX traders for a number of reasons.

First of all, the spread between the first-month and second-month VIX futures contracts has narrowed (see Exhibits 2 and 3).  In addition to the reduction in roll yield of the short VIX futures exposure, the flattening of the VIX term structure usually indicates anxiety being built up in the market.  In a distressed market, the VIX term structure may even -become inverted, when the first-month futures  become more expensive than those of the second month.

Secondly, the spread between the VIX spot and the 30-day realized volatility of the S&P 500 has tightened.  As the benchmark of implied volatility, VIX is expected to be higher than the 30-day realized volatility of SPX.  A tightened spread often indicates that the market is complacent and a VIX spike is on the way.  When VIX spikes, the inverse VIX futures products usually incur losses.


Finally, risk coming from outside of the U.S., including the upcoming French election, should not be overlooked.  As illustrated in Exhibit 5, the term structure of VSTOXX, a VIX-like index that measures the 30-day implied volatility of the Euro Stoxx 50 index, became inverted over the month of March 2017.  As the European market is getting ready for the April 23, 2017 election, market participants in the states might need to fasten their seatbelts.

The U.S. equity market was resilient after Brexit and the U.S. presidential election, but how it will respond to the results of the French election is yet to be revealed.  April could be an interesting month for all VIX investors, on the long or short side of the trade.

Weekend Review – VIX Futures and Options – 4/2/2017

The Friday to Friday change in the VIX term structure was as orderly as I’ve seen it in some time.

VIX Table Curve 330

VIX has had a lower average daily close during a quarter only once, the fourth quarter of 2006.  However, the low to high range for VIX has never been tighter than what we experienced in the first quarter of 2017 with the range of 2.54.  On average the range of closing VIX prices is about 10.60 so the VIX market may be a bit wound up to the point where a big move to the upside is coming sooner rather than later.

VIX by Quarter330

Another factor that is looming over the volatility space is the pending election process beginning later this month in France.  The curve below shows spot VSTOXX and associated futures pricing. Note the shape is not normal with the April contract as an outlier.  VSTOXX and VIX usually move in line with each other, but the futures pricing of each market indicates a divergence is on the horizon.  Either VSTOXX pulls VIX higher or VIX is the leader and VSTOXX moves lower over the next few weeks.

VSTOXX Curve330

It may seem like a long time ago, but VIX came close to a 15 handle early Monday before backing off and returning to normal levels for 2017.  There were contrasting trades early Monday, one fading the move and one looking for some follow through to higher levels for VIX.  Let’s look at the fade trade first.

With VIX around 14.80 and the April futures around 14.60 (yes backwardation!) there were a seller of the VIX Apr 14 Calls at 1.54 who purchased the Apr 21 Calls for 0.46 and a net credit of 1.08.  The payoff at April expiration appears below.

VIX Bearish PO 330

The bullish VIX trade occurred when spot VIX and the April contracts were at similar levels.  This trader bought the VIX Apr 15 Calls at 1.29 and sold the Apr 20 Calls for 0.52 and a net cost of 0.77.  That payout appears below.

VIX Bullish PO 330

So far so good for the fade trade, as spot VIX and the April contract finished the week much lower than where it started, however there’s still time to go for the bullish trade.

Weekend Review – Volatility Indexes and ETPs – 4/2/2017

The shift lower in the VXST – VIX – VXV – VXMT curve was 75% parallel and 25% dramatic.  The dramatic move was at the shorter end of the curve where VXST dropped 28% moving from a premium to discount relative to VIX.


As noted volatility was lower across the board.  Of interest below, VVIX finished below 80 and TYVIX remained at very low levels. For the volatility bulls the only glimmer of hope is SKEW around 140, but it is pretty difficult to get excited about any level of SKEW when VIX is in the tweens.

VXX Table330

SVXY knocked the cover off the ball rising over 55% for the first quarter.  Not on the chart, but worth noting is the REX VolMAXX Short VIX Weekly Futures Strategy ETF (VMIN) which focuses on a shorter time frame than SVXY and XIV, was up 61.4% in the first quarter.


Since the quarter has come to an end the focus will soon turn to first quarter earnings.  Higher option implied volatility is often a bi-product of a pending earning release.  Although the announcements are a few weeks out, AMZN and AAPL option volatility rose last week.  The two Euro Currency related volatility indexes were among the gainers.  VXEFA which is an indication of risk associated with Euro Zone stability.  VXEFA is based on EFA ETF options which is a fund that gives investors exposure to developed markets excluding North America (US and Canada).  As a result, there is a heavy weighting toward European stocks in this index.

Vol Indexes 330

Finally, the first size VXX trade I’ve seen that appears to be focusing on the French election process which should come to an end on May 7th.  On Friday, with VXX at 15.53 a trader sold the VXX May 5th14.00 Puts at 0.33 and the purchased the VXX May 12th 13.50 Puts for 0.33.  Selling puts that expire before the final election and purchasing puts that expire just after just might be a bet on a post French election volatility crush.  The payoff below shows the outcome upon expiration of the May 5th position.


This trade is pretty interesting as it is offers short volatility exposure, but does not realize any losses if we get an unexpected upside volatility event between now and May 5th.  The worst-case scenario of a complete collapse in volatility which overshoots the put strikes and results in some sort of loss, which is capped at 0.50.  I always say traders will continue to find fascinating ways to utilize the different tools at their disposal and here is another example.

Weekend Review – Volatility Indexes and ETPs – 3/12/2017

The short end of the VXST – VIX – VXV – VXMT curve moved up while the longer end hardly budged.  TYVIX is at 2017 lows going into FOMC week, but it appears equity volatility may be pricing in some uncertainty in front of this week’s Fed decision.

Needless to say and already mentioned, VXST is the big attention getter on the table below with a 24% gain last week.  The Ten-Year futures dropped more in front of higher rates, but note that TYVIX, which closed at 2017 lows last Friday was unchanged on a week over week basis.

Short volatility was all the rage at RMC last week in California and the SVXY performance on the chart below explains why.  VXX and UVXY are just continuing to grind lower due to an absence of a volatility event in 2017.

On the table below I love comparing what was hot and what was not and this past week it was commodities at both ends.   Oil futures broke 50.00 which pushed OVX higher.  Gold didn’t do much and at the bottom of the table $GVZ and $VXGDX were the biggest volatility losers last week.

With Gold volatility so low I went looking for a trade that got long GLD volatility from last week.  I did not have to look very far as on the open Friday there was a buyer of a GLD Mar 17th 114.50 Straddle on the open Friday.  With GLD at 114.44 they paid 0.98 for the 114.50 Call and 0.95 for the 114.50 Put resulting in a net cost of 1.93 and a “V” looking payout demonstrated below.

If held to expiration this trade needs gold to move down about 1.6% or up 1.7% to break even.  I took a look at GLD weekly price action over the last 12 years and on average GLD moves up or down 2%.  This doesn’t take into account moves during the week which could be gamma scalped.  On a more recent time frame six of the ten most recent weeks have experienced a move of more than 1.7%.  I’m not a big advocate of buying straddles, but when volatility is cheap it can make sense.  It’s pretty hard to argue with the logic behind this trade.

Weekend Review – VIX Options and Futures – 3/12/2017

VIX was higher and all VIX futures were lower last week.  We have been in a pretty steep state of contango which flattened a bit.  However, there are expectations that April will remain elevated due to market conditions in Europe.  This will be explained a little more below.

The VSTOXX term structure appears below and note the elevated April futures contract price relative to the spot index (it’s impossible to miss).  This shape has been around for a while now and we’ll keep an eye on it as the French election approaches.

With a couple of hours remaining in the trading day this past Friday there was a risk reversal initiated in the VIX pit with a focus on April.  With the April futures contract at 14.40 and VIX at 12.00 someone sold 4050 VIX Apr 19th 13.50 Puts for 0.86 and bought 4050 VIX Apr 19th 20.00 Calls for 0.60 for a net credit of 0.26.  The payoff along with the futures and spot price highlighted appears below.

Weekend Review – VIX Options and Futures – 3/5/2017

The week over week change for VIX and the futures doesn’t tell the whole story last week. Despite falling on a week over week basis, VIX did show some life closing on Tuesday at 12.92 before retreating to close under 11.00 for the week.

VIX Term Structure Table

I’m going to add something to this space for the next few weeks as there is a divergence in the volatility world.  Specifically, VSTOXX futures pricing from April and beyond is at a significant premium to corresponding VIX pricing.  The chart / table below shows market concern for the Eurostoxx 50 going into April which coincides with the French election process.

VSTOXX Curve table

Also, for more on this divergence, Reid Steadman put up a nice blog late last week.


Since the volatility world is now fixated on April, I went searching for a trade that may be looking for higher volatility during that month.  On Friday, there was a diagonal spread that appears to be looking for a low VIX into March expiration and then higher volatility between then and April expiration.  With VIX just over 11.00 there was a seller of the VIX Mar 14.50 Calls for 0.49 who used those proceeds to cover some of the cost associated with buying VIX Apr 16.00 Calls for 1.36.  The spread came to a net cost of 0.87.

Weekend Review – Volatility Indexes and ETPs – 3/5/2017

Textbook and parallel are two terms that come to mind to described the shift in the VXST – VIX – VXV – VXMT curve below.  Also, steep comes to mind as the longer dated indexes are pretty elevated when compared to VIX and VXST.


The long funds below benefited from volatility increasing a bit on Tuesday last week, with VIX even putting in a 2017 high, before resuming their downward trajectory.  Note TYVIX giving up 10% which puts the volatility of 10-Year Treasury Note options at the lowest levels since October 2016.

VXX Table

Short volatility has ruled 2017 and SVXY is now up well over 40% while VXX has given up over 30% and UVXY is down exactly 54%.


Leaders to the upside, or where the volatility was at last week, were the EuroCurrency (EUVIX), Brazil (VXEWZ), and Gold Minders (VXGDX).

Vol Indexes

Tuesday VXX closed at 18.42 which was 0.13 off the high for VXX last week.  One nimble trader came into the market with a bearish spread executed at the closing bell.  The specific trade was a buyer of 3000 VXX Mar 10th 18.50 Puts for 0.85 who then sold 4500 VXX Mar 10th 17.50 Puts for 0.30.  The net for each 2 x 3 spread comes to a cost of 0.80.  The payoff for this trade on the close this coming Friday appears below.


I placed where VXX finished the week on this diagram to show the market is right where the trader behind this spread wants, just a week early.  17.50 is the very best outcome for this trade, with upside break-even at 18.20 and room on the downside to 16.30.


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