Last Week in Gold and Oil Volatility – 12/21/2014

Gold volatility represented by GVZ dropped 5% last week and the price of gold as represented by GLD was down 2.25%. Now on to what people care about these days –

The week over week price change for the United States Oil ETF (USO – 21.96) comes nowhere near telling the story from last week. From Friday to Friday USO was up 0.03 from 21.93 to 21.96. So why in the world is the OVX curve in backwardation and why was OVX up over 10% to close over 50.00 for the first time in over 3 years? Why, when I ask rhetorical questions do I automatically think of Aliens?

The reason for elevated OVX has to do with the path USO took last week. Twice last week, Tuesday and again on Thursday, USO was down over 6% for the week. That sort of price action will get traders on edge and that shows up in the term structure chart below.


At least one trader is expecting a rebound in the price of oil as represented by the performance of USO. Relatively early on Friday there was a trader who purchased over 10,000 USO Apr 26 Calls at 0.72 who also sold 10,000 Apr 30 Calls at 0.22 for a net cost of 0.50. To reach the maximum profit of 3.50 this trade needs to see USO gain 36% over a four month period.  I decided to look back four months and back in August USO was in the mid-30’s. Although it appears to be a pretty big move, relative to how the price of oil has moved lately and the market outlook based on the elevated levels of OVX it is not out of the realm of possibilities.


Last Week in Volatility Indexes and ETPs – 12/21/2014

Santa Claus did not disappoint and his annual rally took the S&P 500 up 3.41% last week.   That move took the air out of the four S&P 500 related volatility indexes with VXST leading the way and losing over 40%.   The curve shift formed the week over week ‘horn’ which I guess is appropriate for the season.


Sticking with a theme I’ve been all over this quarter the S&P 500 is only a few points from setting another record high. Despite this high level of the S&P 500, VIX is at 16.49 is over 2 points higher than the average close for 2014.  This  shows that despite this week’s monster rally concern remains in the pricing of SPX option. Another volatility index that is at high levels is the VIX of VIX. VVIX closed at 99.17 which is the middle of the historical range, but much higher than levels we have become accustomed to in this bull market. The chart below shows the daily prices for VVIX in 2014.

VVIX Daily 2014

I publish the table below each week, but leave out the far right column.  The main reason I do not include the year to date numbers is because I think year over year performance is useless when looking at volatility indexes.  However it is useful when looking at the ETPs.   I wanted to include it this week to show something that is interesting about the performance of the various ETPs in 2014. Note as of Friday all the volatility oriented exchange traded products have lost value in 2014. This is a function of the leveraged long and inverse funds both matching daily performance with compounding coming into the equation when we experience volatility events to the upside or a quick move lower. The trade example from Friday shows that at least one trader does not expect all the funds to be lower for long.

Index ETPs

Friday morning someone came in and did a spread trade that appears to be bearing on VIX which of course is bullish on the stock market. The trade is bullish on SVXY which is designed to return the inverse of the daily returns that one would get from VXX. Therefore, low volatility is good for SVXY, low volatility in VIX normally comes from a bullish stock market move.

I’ll go slow, because there are many moving parts here, but when SVXY was trading at 64.30 there was a seller of SVXY Jan 17th 80 Puts for 15.99 who also bought the same number of SVXY Jan 17th 60 Calls at 8.23 and a net credit of 7.76. The payoff diagram below is a good depiction of what the end goal is for this trade –

SVXY PO Diagram

The goal is to have SVXY as high as possible on January 17th of next year, but as long as SVXY is higher than 66.12 the trade make some sort of profit. Being short the 80 put and long the 60 call results in a 2 for 1 point move between 60 and 80. Once the put is out of the money, the call continues to move higher on a 1 for 1 basis. The risk is a quick move higher in VIX that takes the front two month futures contracts along with it.

Last Week in VIX – 12/14/2014

Nothing like a 3% drop to provide a year-end boost to VIX, especially when it appeared no one was expecting it. Last Friday we got through the employment report unscathed and the result was a VIX close under 12. The last potential big “known unknown” this year comes Wednesday afternoon with the FOMC announcement. As a friendly reminder, December VIX futures and options settle on the open Wednesday so any trades based on an FOMC announcement reaction should focus on January contracts.

The curve went from textbook contango to backwardation (when looking at the index and front two month futures). Do note that the farther dated contracts were up over 10% across the board last week. This shows there is a shift in longer term thinking about the health of the US equity markets. So far in 2014 the average closing price for VIX has been around 14. The farther part of the curve indicates the average in 2015 is expected to be higher than in 2014.

VIX Curve

On Wednesday this past week VIX was up 20% on the day rising from 15.35 to 18.53. The December future rose from 14.90 to close at 17.40 that day as well. Someone correctly decided that the upside move was not over and just a few minutes before the 3:15 closing time for VIX options they purchased several (in the 1000’s) VIX Dec 17 Calls at 1.60 and sold the same number of VIX Dec 18 Calls at 1.25 and a net cost of 0.35. With the December future finishing the week at 19.60 and the spot index at 21.08 so far this trade is looking pretty smart.


Last Week in Oil and Gold Volatility – 12/14/2014

I recall when I totally ignored Oil in this space for gold, my how things have changed.   USO dropped over 12% last week which places the fund down about 38% in 2014. The result for OVX, as seen on the right side below, was a jump of 45% and a move near all-time highs. The front month December future, which settles on the open Wednesday morning, finished the week at a 2.72 point discount to the index, which indicates to me that a quick move down in OVX (and stabilization of oil prices) is not anticipated for early next week. GVZ moved below 20 as everyone paid attention to the oil market.


I’ve never been an investigative journalist or played one on TV. However, I know (from TV dramas) that in order to find out what is really going on you need to ‘follow the money’.  This theory often leads me to looking at option trades as when someone puts on a position they are risking money based on an outlook. This led me to check into trading in USO options this past week to get a long term clue as to what traders may be thinking about the price of oil. Monday, when USO was trading around 24.00 someone came in and purchased some longer dated put options on the fund. The specific trade was a purchase of the USO Jul 21 Puts at 1.30. USO needs to drop from 24.00 to 19.70 or about 15% over the next seven months for this trade to result in a profit. However, as we all know, things got ugly for oil last week with USO finishing the week at 21.93. This put buyer is looking pretty and still has a ton of time for USO to continue to move lower. Also, checking quotes, the USO Jul 21 Puts were bid at 2.00 late Friday for a quick unrealized profit of 0.70.


Last Week in Volatility Indexes and ETPs – 12/14/2014

The VXST – VIX – VXV – VXMT curve shift was the most dramatic change I have seen since writing these blogs. Of course VXST is just a little over a year old so there’s not too much history for comparison. I am more intrigued by the right side of the curve with VXV and VXMT in the 20’s. As a reminder VXV is a 3 month version of VIX and VXMT measures 6 month implied volatility. Those two indexes moving above 20 and in line with VIX indicate some real concern for the S&P 500 going into next year.


Many things stand out from the market action last week. One that is almost over the top is VVIX (the VIX of VIX) finishing the week at 138.60. VVIX data goes back to 2007 and Friday’s closing level was the 3rd highest VVIX close over that time period.  The chart below shows the complete history for VVIX. When this index is high (like now) it indicates increased demand for VIX options.  Since over 70% of VIX option volume was on the call side Friday we can safely say that this elevated level for VVIX show strong demand for VIX calls.

VVIX Daily Closing Prices – 2007 – Present

VVIX History

VXX and the long ETPs gained about 30% on the week, the two leveraged ETPs moved up close to 60%, and the two inverse funds were down about 25%. Compounding does funny things to the performance of inverse and leveraged funds. For instance for 2014 VXX is down 20%, UVXY (2 x long) is down 55%, and SVXY (short) is down 12%.

Indexes ETPsLate Wednesday, with UVXY up 3.16 on the day trading at 23.18 a share, someone came in with a timely buy of the UVXY Dec 12th 22 Calls at 1.98. Imagine buying calls on a market that is up about 15% on the day. Take that a second step and imagine buying calls that expire in 2 days on a market that is already up 15% for the day. Kind of a risky proposition, but not in the world of double leveraged volatility ETF’s. Take a look at the payoff diagram below where I highlight UVXY’s price at the time of Wednesday afternoon’s trade along with where UVXY settled on Friday (when the options expired).   Not too shabby for a two day trade.


Last Week in VIX – 12/7/2014

VIX drifted to close under 12.00 for the first time since late August as the S&P 500 made more new highs. The leftover fear from the market’s dive in October seems to be gone just like all our Thanksgiving leftovers. At least one derivative strategist thinks lower VIX levels are on the near term horizon. Buzz Gregory from Goldman Sachs was featured in Barron’s this weekend saying his models point to VIX around 10.60 before 2014 is done. The trades executed last week and discussed in a previous blog and at the end of this posting match up well with this forecast.

VIX PADespite the prediction of lower levels for VIX and the S&P 500 continuing to make new highs, the curve remains fairly steep. I checked the economic calendar and there does not appear to be any more major ‘known unknowns’ coming up before December expiration. Despite that the December contract, which usually has a bit of a headwind due to the seasonal holiday effect on VIX remains at a premium.

VIX Curve

Early last week the discussion in the volatility world was all about a large VIX put buyer on Tuesday. Someone came in to the VIX market and purchased 175,000 VIX Dec 12.50 Puts for 0.13. This was mentioned in the Barron’s article referenced above and blogged about in this space as well. Since then another big put buyer showed up on Friday. There’s no way to know if it is the same player, but the numbers are kind of ironic. Someone purchased 175,000 VIX Dec 11.50 Puts for 0.05 just before lunchtime. The payoff diagram, if held to expiration, appears below.

VIX Fri Long P Payoff

I was on the road Friday and when I saw big volume in the VIX Dec 11.50 Puts my first thought was the buyer from earlier in the week was offsetting some of the cost of those 12.50’s and legging into a bear put spread. After making a couple of calls that did not appear to be the case and this trade was a customer buying the 11.50’s. VIX at 11.45 at expiration would result in break even, but VIX at 11.45 at expiration would result in a pretty nice payday for the buyer of the 12.50’s.  If the open interest for both the 12.50’s and 11.50’s remains around current levels I will definitely be keeping a close eye on VIX settlement the morning of December 17th

Last Week in Volatility Indexes and ETPs – 12/7/2014

With the S&P 500 racking up more record high closes last week volatility indexes dropped to levels expected when there is a strong bull market run combined with a lack of concern regarding a pull back for stock prices. We also got past the employment number, which did have a few traders on edge, without the stock market not visiting lower levels.

VXST - VIX - VXV - VXMT The next big economic event on the horizon is the FOMC Rate Decision coming out the afternoon of December 17th. Any traders concerned about the market impact from the Fed’s last meeting of 2014 would focus on January VIX futures and options since the December contracts actually settle on the morning of the 17th.

The long oriented exchange traded products followed VIX lower, but not nearly to the extent of the spot index drop. The long funds are now about 2/3rds January futures and 1/3rd December. Jan VIX was down less than 4% last week despite the big drop in the index.

Indexes - ETPs

Something that stands out on this table below is the week over week change for VVIX. VVIX is a 30 day implied volatility measure of VIX options hence the name VIX of VIX. VIX and VVIX normally move in sync with each other and demand increases for VIX call options when VIX is rising. Tuesday a big option buyer came into the VIX pit purchasing 175,000 VIX Dec 12.50 Puts. Coincidentally on Friday, and there is no way to determine if it is the same trader but it may just be, a buyer came in and purchased 175,000 VIX Dec 11.50 Puts.   Normally it is call volume that pushes VVIX to higher levels, however, this past week VVIX appears to have benefitted from demand on the put side of the equation.

Hedging With Volatility Is Not Just For Stocks

The CBOE Volatility Index, or what many investors have come to know as VIX, is the index many follow as a volatility indicator for the stock market. The benefit besides printing the “implied” or expected volatility for prices over the next 30 days, giving a range of expected prices 30 days from now, is that it has acted as a portfolio hedge.

Luckily for commodity investors, especially those in oil right now (and gold last year), there are volatility indices that may hedge losses like the VIX has done for the S&P 500.  Notice the in the chart below, the opposite movements with correlation of -0.58 of the S&P GSCI Crude Oil versus the OVX, CBOE Crude Oil Volatility Index.

Source: S&P Dow Jones Indices, Bloomberg and CBOE. Monthly data from Sep 2010 - Nov 2014.  Past performance is not an indication of future results.

Source: S&P Dow Jones Indices, Bloomberg and CBOE. Monthly data from Sep 2010 – Nov 2014. Past performance is not an indication of future results.

Historically when the S&P GSCI Crude Oil lost in a month, it lost 5.4% on average. During those months, the OVX returned 7.5% on average. However, when the S&P GSCI Crude Oil lost more than 5.0% in a single month, the OVX provided even more protection with an average return of 16.4%. This is exactly the kind of protection investors may look for in order to hedge the downside risk of the oil price drops. The worst month in history (since Sep 2010) for the S&P GSCI Crude Oil was in May 2012 when the index lost 17.5%. During that month the OVX returned 38.3% and continues to provide strong protection as evidenced by the 118.6% gain since Aug 2014 when the S&P GSCI Crude Oil lost 23.3%. If as an investor since Sep 2010, 10% of OVX was taken from an allocation to the S&P GSCI Crude Oil then the return would have improved from -7.8% to 4.0%, swinging the pendulum from red to black.

The same argument holds true for the relationship of the S&P GSCI Gold and GVZ, CBOE Gold ETF Volatility Index.  Notice the in the chart below, the opposite movements with correlation of -0.59 of the S&P GSCI Gold versus the GVZ.

Source: S&P Dow Jones Indices, Bloomberg and CBOE. Monthly data from Sep 2010 - Nov 2014.  Past performance is not an indication of future results.

Source: S&P Dow Jones Indices, Bloomberg and CBOE. Monthly data from Sep 2010 – Nov 2014. Past performance is not an indication of future results.

Historically when the S&P GSCI Gold lost in a month, it lost 4.3% on average. During those months, the GVZ returned 5.2% on average. However, when the S&P GSCI Gold lost more than 5.0% in a single month, the GVZ provided even more protection with an average return of 16.7%. Again, this is exactly the kind of protection investors may look for in order to hedge the downside risk of gold price drops. The worst month in history (since Sep 2010) for the S&P GSCI Gold was in June 2013 when the index lost 12.2%. During that month the GVZ returned 40.3% and provided strong protection as evidenced by the 48.5% gain in 2013 when the S&P GSCI Gold lost 28.3%, the worst year in history since 1981. If as an investor since Sep 2010, 10% of GVZ was taken from an allocation to the S&P GSCI Gold then the return would have improved from -8.6% to 19.1%, an astonishing capital preservation measure in my opinion.

Big VIX Put Buyer from Yesterday

Yesterday I participated in a webcast with Mark Sebastian from Option Pit shortly after the market closed.   The first thing he said to me was, “did you see that big VIX put trade today?” Since then there has been more discussion of VIX put volume and the buyer of VIX Dec 12.50 Puts that came into the market yesterday. The specific trade was a buyer of 175,000 VIX Dec 12.50 Puts at 0.13. The payoff diagram below shows the outcome if this position is held through settlement on Wednesday December 17th along with yesterday’s VIX and December VIX futures closing prices.  As a friendly reminder, VIX options and futures are AM settled contracts so these options will cease trading the day before on Tuesday afternoon. Any settlement below 12.37 will result in a profit for this trade.

VIX Long P Payoff

Upon hearing about this trade, I decided to take a look at the eleven VIX settlements in 2014. The lowest VIX settlement this year was in July at 11.03 with the highest settlement in October at 15.92. The average this year has been 13.51, but there have been several settlements below the 12.37 break-even level for this trade.  The graphic below shows the settlement levels in 2014 with the trade break highlighted.

Long P Break Even

I’m always around for VIX settlement ready to tweet or blog depending on the circumstances. Shortly after the open on December 17th I’ll be keeping a close eye on December VIX settlement and where it comes in relative to this particular trade’s break-even price.

OVX (Oil VIX) Rose Record 119%, GVZ (Gold VIX) Up 96% in Past 3 Months – By Matt Moran

Over the past three calendar months (September through November) —

  1. The CBOE Crude Oil ETF Volatility Index (OVX) rose 119%, the highest percentage rise for OVX over three calendar months since the inception of OVX price history in 2007. The OVX Index is a measure of the market’s expected future volatility of the United States Oil Fund ETF (USO);
  2. The CBOE Gold ETF Volatility Index (GVZ) rose 96%. The GVZ Index is a measure of the market’s expected future volatility of the SPDR Gold Trust ETF (GLD);
  3. The spot prices for crude oil (WTI) fell 31.1% and for gold fell 9.3%.
  4. The market capitalizations for Apple (AAPL) stock rose 14%, and for Exxon Mobil (XOM) stock fell 10%.


Investors who have a view on the future movement of oil volatility, gold volatility, and stock market volatility can explore tradable futures and options contracts on the OVX, GVZ, and VIX® indexes. Please note that the futures prices for volatility indexes often do not move as much as the spot volatility index prior to expiration. The closing values for last Friday were 36.44 for the OVX Index, 25.17 for the GVZ Index, and 13.33 for the CBOE Volatility Index® (VIX®).

1 - 3 vol indexes


As noted above, over the past three months, the spot price for crude oil (WTI) fell 31.1%, the market capitalization for Exxon Mobil (XOM) stock fell 10%, and the CBOE Crude Oil ETF Volatility Index (OVX) rose 119%. The chart below shows the market capitalizations for three stocks that have been among the largest in the world (in terms of market capitalization) since 1999, and changes in oil prices have impacted the value of Exxon Mobil stock.



Investors who wish to hedge exposure to energy-related securities might initially consider protective put options on XOM stock and the USO ETF, but if investors would like instruments with the potential to explode on the upside in the event of more volatility in the crude oil market, futures and call options on the OVX Index are other instruments that could be considered. As shown in the chart below, last month the contract volume for call options, put options, and futures on the OVX Index all topped 980 contracts.

OVX & GVZ volume

For more information on options and futures on volatility indexes (including strategies and pricing), please visit


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