Volatility Indexes and ETPs Last Week – 12/20/2015

Finally, the Fed raised rates.  I’m reading Ben Bernanke’s book and it is interesting that this was being debated when he was still the chairman.  The equity market loved it and then hated it with the result being a roller coaster of a week.  The VXST – VIX – VXV – VXMT curve was on heightened alert this time last week and returned to normal to end the week.  It is rare, but we seem to have experienced an earnings like volatility crush in SPX volatility in reaction to the Fed announcement.



Despite all that volatility last week the short funds were up (SVXY +4.52%) and the long funds dropped.  This is a function of VIX futures finishing the week lower and these funds now moving on to own January and February VIX futures.

VXV Table


On Tuesday I was looking for trades in front of the Fed and came across a couple that actually were looking for volatility to remain high to finish the week.  The trades I’m going to talk about are both 2500 lots so I’m guessing it is the same guy or girl on the other end.  Early Tuesday with VXX at 20.85 there was a seller of VXX Dec 18th 20 Puts at 0.63 who purchased the VXX Dec 18th 19 Puts for 0.27 and a net credit of 0.36.  VXX went up and then came back down and near the end of the day another trade in the same options of the same size took in a credit of 0.41.  The price action for the full week in VXX shows up below.

VXX Chart


About 24 hours after the second lot the Fed did its thing and VXX dropped as the stock market rallied.  VXX did bottom out for the week and finished at 21.77, safely in a place where all options expired with no value.


It is no secret that I am a big fan of vertical spreads.  This week’s trade is a great example of how defined risk and reward that is associated with a bull put spread makes it easy for a trader to stick with a conviction.  A player long VXX, with no hedge, may have panicked as VXX broke 19.00.  A seller of a put spread may not be particularly happy, but they have a defined loss and it is easier to stick this out.

New Risk-Off: More Fear Today Than Tomorrow

It has been over nine years since the Fed raised interest rates, but today, the Fed raised rates just as expected. While the Fed actions have been well telegraphed, and interest rates are probably the least of worries for commodities, there is one measure that might be worrisome.

Although since 1991, rising rates seem not to have been a decisive factor in equity performance, and have clearly not been a negative force (as shown in the chart below from this paper,) there is more uncertainty about the stock market today than tomorrow. 

Rising rates Stocks

One indicator of extreme market stress can be seen when the price of futures contract on the CBOE Volatility Index® (VIX) with a nearby expiration is more expensive than one later dated. This condition is called backwardation (it sounds like a bad diagnosis and usually is) but it is relatively rare, happening in only 17% of days since Mar. 29, 2004.

The futures contracts are now reflecting this condition for five days straight. This has happened a number of times before but one of the interesting things about today is that the market seems not only uncertain but downright jittery. It looks a bit like in 2007, soon after the Fed starting raising rates, when the market felt noticeable fear by the measured backwardation. It’s not the fear alone but the persistence. Just a few months ago, from Aug. 20 – Oct. 7, the Chinese stock market crash sent chills through the market. Backwardation appeared again from Nov. 13 – 16 with one of the biggest weekly stock market drops in months that crashed the S&P 500’s 200-day moving average, a bearish signal for many investors. Again, ahead of the Fed decision – which should not have been surprising – backwardation appeared and is present. The chart below shows the history of VIX backwardation with the S&P 500 index levels. The green triangles represent when the Fed raised rates in 2006 and when they started quantitative easing in 2008.

Source: S&P Dow Jones Indices

While the interest rates alone have not influenced stock prices, the unprecedented quantitative easing started a vicious cycle of risk-on/risk-off (RORO) that was the result of a binary outcome for risky assets – either the easing works OR it doesn’t. Since commodities are a risky asset, they are a class where the returns are noticeably impacted by fear before the financial crisis and after, when quantitative easing began. Pre-crisis, there was no relationship between a high VIX and commodities, but the relationship turned negative post-crisis.

Source: S&P Dow Jones Indices. Data from Jan 1990 to July 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance

The RORO environment meant investors either felt they were, or were not getting paid for taking the risk to invest in risky assets. This drove up the correlation of commodities with stocks to unprecedented levels, just over 0.7. By 2013, the Fed started to taper and the correlation fell back to zero, and stayed below its average of 0.26 until Aug., 2015, precisely when VIX backwardation appeared. In just slightly more than one month, the correlation doubled from 0.22 (Aug. 20, 2015) to 0.44 (Sep. 28, 2015). Since then, it has increased slightly more to 0.46, its highest level in over two years, since Aug. 20, 2013.

The one thing to worry about is the combination of higher than average VIX backwardation with high risky-asset (stock/commodity) correlation. This only happened three times before now. Once in the financial crisis, once in 2011 just following the debt ceiling crisis and U.S. downgrade, and for a very short time in the 2010 flash crash. This is illustrated in the chart below where the S&P 500 represents stocks and the S&P GSCI represents commodities.

Source: S&P Dow Jones Indices

Source: S&P Dow Jones Indices


Now Might Be the Time for VIX®

An alarming picture is being painted by an economically frail global economy: the threat of a U.S. Fed rate hike and renewed credit weakness driven by falling oil prices.  The S&P GSCI® (TR) was down 30.8% YTD, with all sectors in the index reporting negative returns for the year, but the S&P 500® and the U.S. stock market have not collapsed yet.  In fact, U.S. equities are on pace to outperform commodities for the eighth consecutive year, which would set a new record.  If this cycle changes, investors may need a way to protect themselves.

Historically, the CBOE Volatility Index® (VIX), which many investors know as the “investor fear gauge,” tends to spike when markets are tumultuous.  VIX measures the expected 30-day volatility of the S&P 500.  When implied volatility is high, the intraday moves can be large, and when implied volatility is low, intraday ranges tend to be narrow.

Since 1990, the S&P 500 has dropped in 37% of months (115 out of 300) and on average, when it fell, it lost 3.5%.  When VIX gained, it gained an average of 16.4%.  In October 2008, the S&P 500 lost 16.9%, its worst month on record, while VIX gained 52.0% in the same period.

Exhibit 1 shows VIX and S&P 500 returns when equities are in negative territory.  It can be seen that in most cases where S&P 500 returns are negative, VIX returns are positive.


Since the current commodity crash has played a major role in slowing global growth, it is important to note that VIX could also protect against drops in commodity prices.  Since 1990, the S&P GSCI has fallen in 46% of months (142 out of 311).  In those months, on average, commodities fell 4.7% and VIX gained 3.4%.  Exhibit 2 shows VIX and S&P GSCI (TR) returns; when commodities are in negative territory, it can be seen that in most cases VIX returns are positive.


Volatility indices like the S&P/ASX 200 VIX, the S&P/JPX JGB VIX, and the S&P/TSX 60 VIX could offer similar protection globally.

Is The Fed’s CCAR Pushing Up the SKEW Index and Driving More Demand for O-T-M SPX Puts? By Matt Moran

In a December 8 Bloomberg news report – “Who’s the Bear Driving Up the Price of U.S. Stock Options?” – Joseph Ciolli wrote – “For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks.”


The levels of the CBOE SKEW Index indicate increased demand for out-of-the-money (O-T-M) SPX puts during the past couple of years. The average daily closing levels of the CBOE SKEW Index have been —

(a) 118.0 since its start date in January 1990,
(b) 129.8 in 2014 (the all-time high for any year), and
(c) 126.9 in 2015 (through Dec. 8).

1-SKEW Index thr Dec 8

The value of the SKEW Index increases with the tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. Historically, SKEW has varied in a range of 100 to 150 around an average value of 118. The FAQ on the SKEW Index notes that – “The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.” www.cboe.com/SKEW.


The volatility skew charts below show that Bloomberg’s estimates for SPX 30-day implied volatility on recent dates were quite a bit higher for SPX options at 80% and 90% moneyness when compared with SPX options with moneyness at 100 or higher. Reports have indicated that O-T-M SPX put options usually have had higher implied volatilities than at-the-money SPX options and O-T-M SPX call options since 1987.

2-Volatility Skew two dates SPX

At his comprehensive December 1 presentation at the First Annual CBOE Risk Management Conference (RMC) Asia in Hong Kong, Buzz Gregory of Goldman Sachs discussed skew –

  • (1) The skew for the S&P 500 is the highest of any major market in the world, and
  • (2) The S&P 500 skew may remain high because of regulatory pressure on big banks to hedge big downside risks. Regulatory initiatives include – (a) Comprehensive Capital Analysis Review (CCAR), an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress, (b) Dodd-Frank Act stress testing is a forward-looking component conducted by the Federal Reserve and financial companies supervised by the Federal Reserve to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.


In his December 8 Bloomberg news report, Joseph Ciolli wrote about the possible reasons for the higher S&P 500 skew levels —

“… While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank AG says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. ‘Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,’ said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. ‘The way the marketplace has compensated for that is by driving up S&P skew.’”


If you expect that the SPX skew levels will be relatively high in upcoming months or years, what are some options strategies that an investor might consider? One of the most straightforward strategies to consider would be the sale of O-T-M cash-secured SPX put options.

On the writing of SPX put options, the website www.cboe.com/benchmarks has links to a number of papers on and these two benchmark indexes that write cash-secured SPX puts that are only slightly out-of-the-money – CBOE S&P 500 PutWrite Index (PUT) and CBOE S&P 500 One-Week PutWrite Index (WPUT).

Some mutual funds now are engaging in the sale of cash-secured puts; for a listing of more than funds that engage in a variety of options strategies, please visit www.cboe.com/funds for a 2015 paper on “Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs” – Slide Presentation (30-page PDF) and Highlights (4-page PDF). (CBOE does not endorse mutual funds). According to the analysis in the paper, the number of ’40 Act funds that use options rose from 10 in 2000 to 119 in 2014.

3 - options based funds chart

VIX Last Week – 11/29/2015

The S&P 500 was hardly changed on the week last week and the same may be said for VIX and the monthly term structure.  The lines don’t overlap, but if I am not wearing my reading glasses the chart below almost looks like the same line.

VIX Table

The only thing of interest to report about the short term futures chart is the dip that shows up on the orange line below.  That’s the contract that expires just before Christmas which may be discounting several holidays which will figure into implied volatility of SPX options expiring after three market holidays.  We always would witness a little discount in the traditional December contract and now it is showing up in the Weeklys as well.  Note that this is a generic chart and last week (the black line) this contract was Week 5.  It’ll be interesting to watch it move across the chart from week to week.

VIX ST Curve Table

One trader is betting that no black swans show up over the next few weeks.  On Friday there was a seller of the VIX Dec 26.00 Calls at 0.22 who purchased (for protection?) the VIX Dec 37.50 Calls at 0.04 for a net credit of 0.18.  All is well with this trade as long as standard VIX settlement is not over 26.18.  Things get pretty ugly if VIX returns to the upper 30’s for the holidays though.


Volatility Indexes and ETPs Last Week – 11/29/2015

Very quiet holiday week.  There really isn’t much else to say, but it is interesting that VIX remains over 15.00.  I’m also attributing the rise in VXST to getting a holiday shortened week behind us.  Man I’m glad it’s not my job to fill up a business network with programming which must have been a heck of a challenge last week, especially on Friday.


The funds were quiet as well, but you have to snicker when a 2.7% change (see VXX below) is considered nothing to get excited about.  SKEW continues at very high levels which means tail protection in the SPX arena isn’t cheap as the out of the money implied volatility continues to be bid up.

VXX Table

Someone is either looking for a big directional move out of VXX next week or possibly planning on trading around two long VXX option positions.  Whatever the motivation, just after lunch time on Friday there was a buyer of the VXX Dec 4th 19 Put at 0.80 and VXX Dec 4th 19 Call at 0.60 for a net cost of 1.40.  This all happened when VXX was trading at 18.81.  If held to expiration VXX needs to be over 20.40 or below 17.60 for the trade to turn a profit.  Based on the 18.81 pricing at the time of the trade VXX needs to rise about 8.5% or drop around 6.5% to break even.


After I put this trading example together, I spent some time thinking about different reasons to put on a VXX straddle.  I’m thinking out loud and major league jet lagged, but it occurred to me that this could be a ‘cheap’ hedge against a black swan event.  When I say cheap, I mean if the market is quiet next week the Put will have some value which offsets the cost of the call option which probably would expire out of the money.  Usually when you want to offset the cost of an option you sell another option.  For instance to lower the premium for the Dec 4th 19 Call a call option with a strike that is farther out of the money could be sold.  However, in that case a trader is giving up some upside.  Any thoughts are always appreciated – rhoads@cboe.com

VIX Last Week – 11/22/2015

The VIX term structure returned to normal from slight backwardation last week as the S&P 500 rose over 3%.  Two years ago a 3% move in the S&P 500 probably would have resulted in VIX under 12.00, but these are different times and with a rate hike looming down to the mid 15’s is the best we can expect.

VIX Curve with Table

The short dated term structure ended the week in slight contango which has been the norm when VIX drops since the futures were launched back in July.  The curve tends to be flat when VIX moves up slightly and has gone into backwardation during periods like late August.

ST VIX Curve with Table

Earlier this week I wrote a blog about some large trades in VIX Weeklys Options that expire on the open next Tuesday.  One of the trades was a seller of about 17,000 VIX Nov 24th 16 Puts.  That blog can be read at Block Trade Analysis – VIX Weeklys Option Trades.   So yesterday either that seller added to their position or someone decided that November 24th VIX settlement would come in over 16.00 and about 20,000 more VIX Nov 24th were sold at 0.30.  VIX finished the week at 15.47, but the November 24th VIX Future finished the day at 16.325.  I think there are one or two traders hoping that spot VIX moves toward the future early next week.


Volatility Indexes and ETPs Last Week – 11/22/2015

The shift for the VXST – VIX – VXV – VXMT curve was dramatic, but sort of what we have become use to in this buy on the dip culture.  VIX finished the week under 16.00, which voids a prediction that I had for the rest of the year.  I felt concerns about a December rate hike and the impact on stocks into 2016 would keep VIX elevated for the final few weeks of the year.


VXX and the other long funds came under pressure based on the drop in VIX and VIX futures last week.  The leveraged funds also got hit pretty hard as would be expected.  What stands out to me below is that VVIX remains pretty high despite the drop in VIX last week.  Demand has remained high reflecting demand for out of the money VIX calls.

VXX Table

On Friday one of the biggest VXX option trades seems to have a two-step mentality behind it.  In order for the trade to be successful VXX needs to run to the 30’s in the beginning of 2016.  The trade is a VXX calendar spread selling VXX Dec 18th 30 Calls for 0.21 and buying VXX Jan 15th 30 Calls for 0.56 and a net cost of 0.35.  The payout diagram below is based on pricing at the market close on December 18th.


Note how much VXX can ‘over shoot’ 30.00 and the trade still results in a profit.  However, I think the trader would be much happier if VXX runs up after December 18th but before January 15th as shown in the diagram below.  Assuming VXX finishes under 30.00 on December 18th and the short leg of this calendar spread expires out of the money, here’s the payoff for the long VXX Jan 15th 30 Calls at expiration.


Block Trades Using VIX Weeklys

Tomorrow is November VIX settlement, but that hasn’t stopped some short term VIX traders from putting on new positions, in fact it may have encouraged them to do some trading.

I ventured down to the trader floor late today to see what may be going on in the VIX Weeklys options set to settle on the open next Tuesday.  For those that know VIX well, you know that VIX futures and options normally settle on a Wednesday, 30 days before an expiration Friday.  However, December 25th is a Friday (and a holiday) so we have SPX options expiring Thursday the 24th of December.  Backtrack 30 days and we get a VIX Weeklys settlement on the open next Tuesday.

With about 30 minutes to go in the trading day I noticed the VIX Nov 24th 17, 18, 19, and 20 Calls all had traded about 7,000 contracts.  On the other side of the board over 17,000 VIX Nov 24th 16 Puts had traded.

I investigated further and it appears the Nov 24th 16 Puts traded in several lots over a 2 minutes period early in the day at an average price of about 0.28.  It appears it was paper selling.  The payoff on the open next Tuesday appears in the diagram below.  Note I’m only putting spot VIX on the diagram, which was at about 18.40 when the trade went off, since there’s a good chance this trade is to be held to settlement.

VIX PO 16 Put

The call trades were a little more perplexing.  But I did figure out that there was a seller of the VIX Nov 24th 18 Calls at 1.15 who purchased the VIX Nov 24th 20 Calls for 0.64 (net credit of 0.51 when VIX was at 18.00) and a seller of the VIX Nov 24th 17 Calls at 1.57 who paid 0.82 for the VIX Nov 24th 19 Calls (net credit of 0.75 when VIX was at 18.10).  For brevity sake I combined these two payouts into a single diagram below with the purple line representing the 17 – 19 spread and the red line below showing the payout at expiration for the 18 – 20 call spread.


It appears there were both bullish VIX and slightly bearish VIX players in VIX Weeklys today.  Also, it appears that everyone is happy with November 24th VIX settlement between 16.00 and 17.00.

Finally – if you want to know more about VIX Weeklys you can always visit www.cboe.com/vixweeklys

VIX Last Week – 11/15/2015

VIX managed a finish over 20 as Friday’s market action raised the level of concern among market participants.  You have to wonder if Friday August 21st and the follow through on the 24th is still fresh in trader’s minds.

VIX LT w Table

The short term curve flattened out which seems to be the norm when VIX move higher, since VIX Weeklys are relatively new.

VIX ST w TableMid-day on Friday while VIX was still under 20.00 (19.60 to be exact), there was a buyer of the VIX Dec 25 Calls who paid 1.10 and now has exposure that benefits from a repeat of late last August.  Less than two minutes later someone came in and bought the same number of VIX Dec 20 Calls and paid 2.10 for those options.  Both trades were 7500 lots and come darn close to a ‘call stupid’ which is a spread trade where two calls are purchased.  The origin of calling this stupid trade relates to no selling, just buying options which means paying double premiums.  However, if we experience a sell-off in the S&P 500 between now and mid-December we will not be allowed to make disparaging remarks about the traders behind these trades.


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