Weekend Review – VIX Options and Futures 9/4/2016

VIX finished the week just under 12.  We can attribute this to a combination of the equity market being pleased by Friday’s August Non-Farm Payroll report along with the three-day weekend effect.  Note the September futures, which settle on the 21st moved lower, but held up a bit relative to spot VIX.  This is common regardless of the directional move out of the index, but is accentuated whenever we have a long weekend.

VIX Table Chart

Despite there only being one trading day (and an overnight) left until expiration, over 30,000 Sept 7th VIX options traded on Friday.  Almost 1/3rd of that volume was focused on the VIX Sep 7th 13 Calls.  Early in the day someone chose to sell these calls for 0.45 in several lots.  This transaction did not appear to be part of a spread trade so  I’m going with the payoff diagram below as a depiction of how this may work out on the open Wednesday.

VXI PO

Later in the day there was a sale of 3000 VIX Sep 7th 13 Calls down at 0.32.  I investigated a little and this appears to be part of a spread that also put on a bear call spread.  In addition to the previously mentioned transaction, the trader also sold 3000 of the VIX Oct 19th 13 Calls at 3.54 and then completed the spread by purchasing the VIX Oct 19th 20 Calls for 1.08.  I’m going to do my best to keep an eye out for more 3000 lot sales of short dated VIX 13 strike call options to see if this is the beginning of a progressive trade.

Weekend Review – Volatility Indexes and ETPs 9/4/2016

The VXST – VIX – VXV – VXMT curve does what it normally does on a pre three-day weekend week and got steeper.  It’s been a while since I ran the numbers but I’m fairly certain VXST almost always drops before a holiday weekend and then rebounds when we all return to work refreshed and ready to trade.

VXST-VIX-VXV-VXMT

 

SKEW below 130 was the first thing that stood out to me on the table below.  A quick check and I saw that it had been consistently higher than 130 for the better part of August despite the 2016 average being close to 128.  Although at the lower end of this year’s range, VVIX at 81 is relatively high considering VIX finished the week below 12.

VXX Table

With VIX moving lower last week and the futures following the spot index lower the long ETPs had a rough week.  What’s bad for VXX and UVXY is good for SVXY which surpassed the 50% performance line for 2016.

SVXY VXX UVXY Performance

Looking across the range of volatility indexes you can see that most markets experienced an implied volatility drop.  The outlier was OVX which rose 7% last week.  If you are ever trying to find where there may be higher volatility the table below is taken directly from www.cboe.com/volatiltiy

Vol Index Prices Week over Week

When we see high commodity market implied volatility I always take things to the next step and check out the skew chart from my LiveVol pro platform.  Below is a chart of the option skew for October 7th USO options which is the market used to calculated OVX.  The underlying finished the week at 10.24 and I think it’s pretty obvious that implied volatility is higher on the downside than the upside.

USO Skew

Sept. 22 Webinar – Case Studies on Institutional Investor Use of VIX

On Thursday, September 22 at 2:00 p.m. E.T., S&P Dow Jones Indices and CBOE will co-host a complimentary webinar for financial professionals on the topic of — How are Institutional Investors Using VIX®?  Financial professionals who wish to register and see more information are welcome to visit this link — http://bit.ly/VIX-Sep22.

A - Sep 22 webinar speakers

The panel will cover:

  •       An introduction to the VIX index, its related tradable products, and its historical performance relative to the S&P 500
  •      Using VIX Index products as the basis for pure-play volatility strategies to manage risk, extract yield, or diversify portfolios
  •      First-hand experiences and case studies from asset owners and managers who use VIX Index products in their portfolios as a means to mitigate risk while capturing returns

You are welcome to submit your questions during the live Q&A session following the webinar.

**********

In several recent news clips financial professionals have comments on the possibility that the VIX Index might rise in coming months with possible interest rate changes and the U.S. presidential election.

This chart shows recent prices for the VIX Index and for select VIX futures; note that while the price for the VIX Index was 14.07, the price for the VIX future with the November 16 expiration was 17.85. During the webinar the institutional investors will discuss the pricing for VIX futures and options, and how these products are used in portfolio management.

B - VIX futures on Aug 31

Financial professionals who wish to register and see more information are welcome to visit this link — http://bit.ly/VIX-Sep22.

 

 

Weekend Review – Volatility Indexes and ETPs – 8/21/2016

For the second week in a row the S&P 500 Index related volatility indexes hardly budged. Three out of four were lower with the longest dated, VXMT, up slightly on the week.

VXST VIX VXV VXMT

 

We’ve ranted and raved in various forums about how VVIX has been holding up despite a lower VIX. It was kind of like the last holdout for higher equity market related volatility until this past week when it took a 12% dive.  This puts VVIX closer to the lower end of the historical range. I guess we will now focus on SKEW which is the sole index that remains relatively high.

VXX Table

 

 

Since the equity market bottomed in February both VXX and UVXY have given back all the early 2016 gains and then some. As long as contango prevails in the VIX futures term structure and VIX remains low we will probably continue to see SVXY widen the 2016 lead on the long funds.

VXX SVXY UVXY

 

I’ve started looking beyond broad based equity market volatility in this space.  This week the biggest moves to the upside came from the currency focused volatility indexes. If something is getting ready to upset the financial markets maybe it is macro in nature and the heightened risk is showing up in $BPVIX, $JYVIX, and $EUVIX.

Volatility Indexes

 

Finally, on Friday the CBOE Options Institute held the first of a series of focus classes. We spent the day covering all things VIX and Volatility with a great group of students. I actually like these sorts of classes because I always seem to come away with new things to work on based on student questions or comments.

One student noted that he likes to buy SVXY on any pull back of about 20% and this prompted another student to ask if he’d ever considered selling out of the money puts on SVXY. We fired up LiveVol Pro and took a look at the skew of SVXY options. A condensed version of that chart appears below showing the skew for SVYX options expiring on September 16th.

SVXY Skew

 

SVXY finished the week at 73.44 and we kicked around different 60 strike SVXY puts. The skew chart above shows the IV for September 16th SVXY 60 Puts is around 80%. With volatility like that priced into options we looked at the bid side for all the 60 strike puts expiring in September. With Weeklys there are actually five alternatives to consider.

SVXY 60 Put Bids

 

The premiums ranged from 0.35 for the September 2nd puts to 2.05 for the September 30th contracts. Of course this is the equivalent of being short volatility since a volatility spike can take 20% out of SVXY in just a day, but if a trader would be a willing buyer of SVXY on a dip to 60.00 the opportunity to get paid to do so exists since the IV is so high for out of the money puts on this ETF.

Weekend Review – VIX Futures and Options – 8/21/2016

VIX dropped a little as the equity market did a whole lot of nothing last week.  We retired the August contract on the open Wednesday morning and September took over as the front month.  With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again.  What is interesting below is the behavior of the curve beyond October.  November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

VIX Curve Table

 

At least one trader decided that there is a possibility of higher volatility over the next few weeks.  In a rarity there was a fairly large out of the money call buyer in the market early Friday.  With VIX a tad over 12.00 a trader purchased 60,000 VIX Sep 25 Calls in three lots paying 0.29.  The September VIX futures contract was trading at 14.80 when this trade came into the pit as well.

VIX PO

 

The VIX is Low, But Should You Fasten Your Seatbelt?

VIX has spent the whole of August below 14, and remains – at time of writing – close to its lowest levels in two years.  But the present calm may be dependent on a short-term seasonal effect; and we are approaching the traditional period where it ends.

August is traditionally a quiet month for U.S. equities.  The usual deluge of corporate announcements, elections, and product launches attenuates to a trickle, while traders and investors decamp to their holiday destinations.  Then, in September and throughout October, the world returns to business, sometimes only then announcing or processing events that may have occurred over the summer.

The lack of news flow in August and subsequent ramp-up creates a seasonal effect in volatility, with VIX depressed over the summer months and rising through late August and early September.

The graph below shows the historical extent of such seasonality, plotting the average level of VIX in comparison to its one year trailing average at each point in the year.  The effect is not dominated by one or two outlier events, but instead appears persistent; the grey shaded area shows a similar pattern for the 25% and 75% percentile range of values.  Today’s value is well below the historical interquartile range as VIX is 30% below its average level for the past year.

Capture

Interestingly, there is a clear seasonal lull between late June and early August, and a significant increase towards the end of August.  The 35th week of the year showed, on average, the biggest rise in volatility.  Given that we are presently approaching the end of the 34th week of 2016, investors might wish to bear this history in mind.

Focus on VIX Class to be Hosted at CBOE Options Institute

The CBOE Options Institute is hosting the first in a series of classes that will focus on different aspects of option and volatility trading. The first class, appropriately named Focus on VIX and Volatility Products, will be held on Friday August 19th at CBOE. For those unable to make it to Chicago the class is also available online. Specific topics to be covered include

  • VIX and the behavior of volatility indexes
  • VIX futures and options price behavior
  • Trading VIX related Exchange Traded Products
  • Long, short, and neutral volatility strategies

In addition to CBOE instructors, Mark Sebastian will be on site to discuss his approaches to trading VIX and from noon to 1:00 we will be broadcasting an episode of Volatility Views on the Option Insider Network from the CBOE Classroom.

The options institute instructors will also be available to answer questions about all things related to using volatility as a tradable asset. As an extra bonus all attendees will receive a copies of Option Strategies for Advisors and Institutions as well as Volatility Trading Strategies (scheduled to be published in the fourth quarter of 2016) by Russell Rhoads. Early bird pricing for this class ends this coming Friday August 5th..

Weekend Review – Volatility Indexes and ETPs – 7/24/2016

VIX was the biggest mover among the four S&P 500 related volatility indexes this past week.  VIX dropped more than 5% while VXST lost 0.39% and VXV was down 1.19%.  Longer dated volatility actually rose last week with VXMT gaining 0.28%.  The curve remains very steep which I’m taking as uncertainty abounding with respect to the balance of 2016, especial the fourth quarter of 2016.

VXST VIX VXV VXMT Curve

 

Most the data points on the table below are as one would expect after a relatively quiet week.  VVIX moving up is a bit surprising, but the upper 80’s has been a common area for VVIX this year.  At least when VIX is hovering around the low end of this year’s range.

VXX Table

 

The year to date performance for VXX and UVXY continues to suffer from the low volatility environment while SVXY is now up over 19% for the year.  It should be noted that SVXY has not recovered from the hit taken last fall and is still much lower than the all-time high of 97.40 just over a year ago.

UVXY SVXY VXX

 

The table below ranks the full suite of volatility indexes quoted by CBOE based on their performance last week.  Oil Volatility was the big gainer, but even in the high 30’s is at the lower end of the recent range.  Gold was a close second which may indicate some inflation fears are emerging.  At the opposite end of the table are VXIBM and VXGS which dropped after IBM and GS reported earnings last week.

Vol Indexes

 

Finally, I came across an interesting trade that is taking a longer term look at volatility moving down.  With VXX at 11.11 someone sold the VXX Jan 2017 20 Calls for 0.85 and then purchased the VXX Jan 2017 12 Puts for 2.95 and a net cost of 2.10.  This trade works out with VXX below 9.90 on the third Friday of January next year.  Interestingly I think that’s this expiration coincides with the next presidential inauguration.  I doubt the two are connected, but you never know.

VXX PO

Weekend Review – VIX Futures and Options – 7/24/2016

Last week VIX broke the 12 level, which surprised some market participants who felt 2016 was going to be a roller coaster ride that kept VIX at elevated levels.  I have already spent time on the Wall of Shame as I count as someone who felt VIX was spend more time around 20 than it has in several years this year.

Do note on the term structure chart below that the shape of the curve is steep.  Those of us grasping at straws with respect to elevated volatility see that as a glimmer of hope for higher VIX sooner rather than later.  Also, check out the October contracts which was up a bit last week despite the 5% drop in VIX.

VIX Curve Table

 

One trader late Friday came in with a spread trade that does well without a spike in VIX and does well if VIX makes a monster move to the upside in the next few weeks. The issue would be somewhere between those two outcomes.

With spot VIX at 12.02 and the August future at 15.30 someone sold 7,500 VIX Aug 18 Calls at 0.77 and then purchased 15,000 of the VIX Aug 24 Calls for 0.29 which comes to a credit of 0.19 per 1 x 2 spread.  As long as VIX remains under 18.00 between now and August expiration this trade ends up with a profit equal to the credit.  To the upside a spike in VIX may result in some trading around this position.  Holding through expiration, which is unlikely if we do see a volatility event, VIX needs to higher than just a tad lower than 30.00.

VIX PO

 

Weekend Review – VIX Futures and Options – 7/17/2016

With VIX testing 2016 lows this past week the soon to be retired July future headed lower at a slightly faster rate than VIX dropping 6.43% versus 4.02%.  Even with the bigger loss on the week the July contract finished the week at more than a one premium to VIX.  We will see on Wednesday morning if the futures or the spot index win the tug of war into July settlement.  I would be remiss if I didn’t point out the steepness of the VIX curve from August to December.  VIX is low now, but the futures are braced for some sort of move higher.

VIX Curve Table

 

In a previous blog I mentioned VIX call buying that appeared to be short covering on Friday.  Here are the two instances that I came across.  First, one good trade appears to have sold 1000 of the VIX Jul 27th 22 Calls for 0.75 back on July 1st.  They came in Friday and bought those contracts back at 0.15 for a nice profit of 0.60.  The second trade has a couple of moving parts.  Back on July 6th there was a seller of 3000 VIX Jul 27th 15 Calls at 3.12 who also purchased 3000 VIX Jul 27th 23 Calls for 0.70 and a net credit of 2.42.   They closed on leg of this trade by covering the short calls for 0.85 on Friday and chose to leave the long piece of the spread trade open.  This means they have booked a profit of 1.57 and if we get any volatility event in the next few days they may improve on that outcome by cashing out the long 23 Calls.

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