2014 Nasdaq-100 Volatility Review

Of the three broad based market indexes that have tradable volatility markets, the Nasdaq-100 (NDX – 4236.28) was the clear winner in 2014. NDX rose almost 18% on the year while the S&P 500 was up 11.4% and the Russell 2000 gained only 3.5%. With the tech and biotech sector in favor for most of 2014 volatility as priced in by NDX options was relatively low.


The first thought I have when I look at the table below is disbelief. I’ve said this many times and I’m truly amazed that NDX has been down only one out of the last eleven years. 2008 (and early 2009) was such a tough time I guess it felt like more than just one bad year. The few volatility spikes we got in early and late 2014 were a bit more dramatic than those associated with the small stock market pull backs of 2013. The result was the average for VXN coming in almost a point higher in this year than last year. VIX made a post 2008 low, but VXN outdid VIX and made an all-time low (11.36) in 2014.

VXN Table

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

2014 Russell 2000 Volatility Review

As tough as 2014 was for small cap stock performance as represented by the Russell 2000 (RUT – 1204.70) the index did manage to put up a positive year. At the end of the third quarter the RUT was down just over 5% on the year so all the gains (and then some) for small cap stocks came in the fourth quarter.


For most of 2014 the risk perception for holding small cap stocks was justifiably high. I wrote about this earlier this week in a blog about what the CBOE Russell 2000 Index indicates about the prospects for small cap stocks going into next year. The link to that blog is at the end of this posting.

2013 versus 2014 is an interesting comparison for RVX. The index was 1.30 points higher this year that last year. Despite other volatility indexes putting in post 2008 lows, RVX did not follow suit. The only thing that really startles me on this table is that after all the negative press for most of 2014 the RUT managed a slightly positive year.

RVX Table

The blog regarding the risk perception for small cap stocks going into 2015 may be found at


For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

2014 Oil Volatility Review

In 2013 it was gold, this year the price of oil took it on the chin and the result was the worst performance for the United States Oil ETF (USO – 20.36) since the dark days of 2008. There are all kinds of theories over what is actually going on in the energy markets. I’m going to keep mine to myself and focus on what the numbers say.

With USO dropping 42% in 2014 and most of that coming in the fourth quarter the CBOE Crude Oil ETF Volatility Index (OVX – 50.24) reached levels not seen since 2011. I usually do not like to post charts where the lines cross like the one below, but I don’t think a different scale would do justice to the move in OVX over the last few weeks of 2014.

USO OVX Corrected

CBOE has data going back to early 2007 on OVX. The average for 2014 was 23.05, which does not tell the story of where we are now with respect to oil volatility. This past year did witness the widest recorded high low range for OVX which is a function of just how complacent energy traders were at the beginning of 2014 and that OVX put in an all time low before things got interesting. They were anything but complacent at the end of 2014 as the average OVX close in December was 47.80 and the index finished the year over 50.

OVX Table As I said there are several opinions as to what is up with the price of oil. Whether it is to muzzle Putin with respect to his ability to use oil as a weapon or the desire of oil producing countries to put pressure on the fracking industry. The one thing we can agree on, with OVX over 50, is that the market expects more headline grabbing moves in the price of oil to begin 2015.

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

2014 Gold Volatility Review

In 2014 the price of Gold did not have any of the headline grabbing moves like those that occurred in 2013. The SPDR Gold Shares ETF (GLD – 113.58) finished the year down a little over 2% and was down 1.4% on the last day of the year. If we had taken New Year’s Eve off GLD was have been practically unchanged on the year. The chart below shows the daily closing prices for GLD and the CBOE Gold ETF Volatility Index (GVZ – 20.08) for this past year.


If it were not for the fourth quarter this would be what I call a Seinfeld blog – about pretty much nothing. The increased implied volatility that occurred in GLD option trading to end the year was more about other markets than gold. A huge drop in the price of oil and increased global equity market volatility greatly influenced volatility in other sectors that did not experience the same sort of price changes. The gold market in the fourth quarter is a great example of how volatility in one market sector may influence the volatility of options in a loosely related market.

The table below will put GVZ action for 2014 in some context. We got a seven standard deviation move in the price of gold in 2013 and a break of several support levels which pushed GVZ to the mid-30’s. 2014 was a very range bound year for GLD and the result was the lowest average implied volatility over the almost seven year history that CBOE has for GVZ.

GVZ Table

One other thing that stands out on this table is the low for GVZ in 2014. The price action for GLD was range bound and VIX put in a post 2008 low this past year. One would guess that GVZ would follow suit. However, the low in 2014 was higher than the 2012 and 2013 lows. What I am starting to learn about volatility indexes is that it can take years to reach a new low after some sort of price shock. In the case of GVZ the memory of GLD dropping dramatically in April 2013 is fresh enough to keep traders on edge, even in a very quiet year for the underlying market.

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

2014 Volatility Index and ETP Review

During the first half of 2014 I got to have several conversations about whether or not VIX was ‘broken’ since the average level for VIX was so low. Needless to say I haven’t fielded a single call or email about VIX being broken since October. 2014 was a pretty interesting year in volatility trading. More market participants have become involved in the volatility markets through VIX future, options, or ETPs.

The table below shows the year over year change for the S&P 500, volatility indexes that focus on the S&P 500, and several volatility oriented exchange traded products. Year over year changes in volatility indexes don’t mean anything to me as a single day (think the last day of 2014) can dramatically change the year over year number. The average for the year is a little more meaningful. I’ll get to that after discussing the ETPs in 2014.

Index ETPs - Corrected


Something that observant readers will notice in the table above is the performance of the long ETPs in 2014 (VXX, VIXY, VIIX). These three funds all lost about 26% so logic would dictate the place to be in 2014 were the short funds. Not so fast, XIV and SVXY were both down a little over 9% in 2014.   These long and short funds have a slightly different structure. The long funds are designed to give returns based on a strategy that is long the front two month VIX futures. The short funds are designed to return the daily inverse performance based on a strategy that is short the front two month VIX futures. The key word is daily. I find pictures help with these sort of concepts so I created the chart below. This depicts the return of $100 invested in VXX and SVXY on the last day of 2013 and held through the end of 2014. The bottom line shows the daily closing prices for VIX.

SVXY - VXX - VIX 2014 Early in 2014 VIX moved up to the low 20’s and VXX benefitted from the spike in volatility. SVXY lost value and it took several weeks for SVXY to move back to positive on the year. As volatility was very calm for the middle part of 2014 VXX moved much lower. The spikes toward the end of the year, benefitted VXX again, but not nearly to the extent needed to get back in the black for 2014. Those spikes had a negative impact on SVXY which resulted in a loss for 2014 as well.

Something else that stands out on the table is VVIX finishing the year well over 100. I know I said year over year doesn’t mean much.   The average VVIX for 2014 was about 83 which was slightly higher than the average in 2013, but lower than the average for the previous three years. The chart below shows the high – low range and average for VVIX from 2007 through 2014. The 2014 average doesn’t seem like a big deal, but the average for the fourth quarter of 2014 was over 97 – that’s a clear indication of excess nervousness in the equity markets as of late. Well over 100 going into 2015 may be a red flag for the equity market in the new year.

VVIX Annual Comp

One last thing I would like to show for 2014 is the term structure for S&P 500 volatility as indicated by the VXST – VIX – VXV – VXMT curve. The chart below shows three term structure curves – the max, min, and average curve for the year. It is always interesting to see just how high volatility gets relative to the average for the year. In what was really not that eventful of a year the range for VXST was from a low of 8.54 to 31.12 – almost a 400% range.

2014 Curves

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts

26 Volatility Indexes in 2014 – OVX (Oil VIX) Rose 183%; SKEW Index Averaged Highest-ever 129.8 – By Matt Moran

Dec. 31, 2014 – Highlights of the year 2014 in volatility include the following –

  • In the 2nd half of the year crude oil prices fell, and the CBOE Crude Oil Volatility Index (OVX) rose 183% during the full year.
  • While the average daily close for the CBOE Volatility Index® (VIX®) was 14.2 for the second year in a row, the CBOE SKEW Index had its highest-ever average daily closing value of 129.8 (this could indicate that there was heightened interest in using out-of-the-money (rather than at-the-money) S&P 500 (SPX) protective put options).
  • The CBOE Brazil ETF Volatility Index (VXEWZ) shot up to close at 72.83 on October 20, prior to the Brazilian presidential election.
  • Futures and options on the VIX Index both set new annual trading volume records for the eighth year in a row.


In the first nine months of 2014, the CBOE Crude Oil Volatility Index (OVX) never had a daily closing value above 21.8, but the OVX rose to its yearly high closing price of 57.55 on December 15 as oil prices fell. In 2014 the average daily closing values were 23.05 for the OVX Index and 16.57 for the CBOE Gold ETF Volatility Index (GVZ).

1-OVX GVZ Dec 31


The VIX Index reflects the expected volatility of SPX options, and the highest daily closing value for VIX was 26.25 on October 15.

3-VIX in 2014


The CBOE VIX of VIX Index (ticker VVIX) examined the prices of VIX options and the index reflects the expected 30-day volatility of the VIX Index.

While one could say that the CBOE SKEW Index is not a “volatility index” in the same way that the VIX and OVX are, the SKEW Index still can be very helpful to investors who are pricing index options at various strikes. CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence. The value of SKEW increases with the expected tail risk of S&P 500 returns. If there were no tail risk expectations and concerns, SKEW would be close to 100.

The CBOE SKEW Index reached 146.08 on Sept. 19, 2014, its highest level since October 1998.

4-SKEW & VVIXThe highest daily closing value for the VVIX Index in 2014 was 138.60 on December 12.


In 2014 the SKEW Index set an all-time record for its highest average daily closing value in a year, with an average daily closing value of 129.8. The previous high average daily closing value for SKEW in a year was 122.5 in 2011.

4-SKEW avg per year5-VIX per yearIt is interesting to compare the above two column charts for the SKEW and VIX indexes.


The table below shows that for the entire year of 2014 – 24 volatility indexes rose and two volatility indexes (GVZ and SRVX) fell.

2-Table Vol Indexes Dec 31 2014

Futures and options now are available on the VIX, OVX, GVZ, and other volatility indexes, and the SKEW Index can be helpful to those who are investing in SPX options. To learn more about the SKEW, VIX, OVX, and dozens of other volatility-related indexes, please visit www.cboe.com/volatility.

Explaining VIX Price Behavior Using the Insurance Analogy

When we introduce aspiring option traders to the various pricing factors that determine the value of an option contract we often use an insurance analogy to describe implied volatility. The short version of the story is that implied volatility is the pricing factor that is closely associated with the risk of price movement in the underlying market.  We expand on this idea using the idea of the cost of homeowner’s insurance as a hurricane is bearing down on south Florida. If a homeowner has forgotten to renew their homeowner’s insurance they are going to find the policy cost as a hurricane is approaching their home much higher than during a period of calm weather. This increased cost is a function of higher risk of the home being destroyed in the near future. Stock option prices usually move higher in front of anticipate price moving events such as a new product announcement or earnings report. This increase in the option premium is associated with higher implied volatility much like the higher insurance policy premium is a function of higher risk for policy seller.

VIX is a consistent measure of 30 day implied volatility as indicated by S&P 500 Index (SPX) option pricing.   VIX has moved in the opposite direction of the S&P 500 about 80% of trading days over the past few years.  A very common question is, “why do VIX and the S&P 500 move in opposite directions?”  I’ve been thinking of ways to describe the ‘why’ behind this behavior in relation to the insurance analogy we use with respect to implied volatility.

With the description of higher implied volatility in relation to the cost of a homeowner’s policy the participants in the contract know a hurricane is on the way.  That’s why the insurance company would charge more for the homeowner’s policy and the unhappy homeowner would expect to pay up for protection.  We also tend to have a good idea of pending events that will move an individual stock price.  With the overall stock market it is not as easy to anticipate events that will move the markets.

Think of the reaction of VIX as if there were no way to forecast the weather other than what the weather is doing at the current moment. Before a hurricane hits there is usually heavy rain and a thunderstorm. Without a forecast of what is next, people living in south Florida may over prepare each time there is a bad storm.  If all they have to judge that a hurricane is on the way is the current weather there is no way of knowing if this the time the storm is the beginning of something worse.

In the financial markets when the S&P 500 shows some weakness portfolio managers may be uncertain if even a minor sell off is the beginning of a bigger move to the downside.  Based on this concern managers often seek portfolio protection through purchasing S&P 500 put options. This increased demand results in higher implied volatility as indicated by higher SPX option premiums. This translates into higher VIX. On the other side of the equation, when the markets are moving higher or are a little stagnant, managers may not be as aggressive when seeking portfolio protection which would translate into VIX moving down.

Last Week in VIX – 12/28/2014

On Friday VIX rose as the S&P 500 hit the 52nd record high of 2014. I got a question via Twitter about VIX rising when the S&P 500 rises. About 20% of trading days witness VIX and the S&P 500 moving in the same direction, but when the S&P 500 is making a new high it may turn some heads. I think part of the small rise in VIX on Friday may be attributed to the holiday impact on the VIX calculation. What I mean by that is when we closed Wednesday the markets were closed for a day and a half. The VIX calculation only takes calendar and not trading days into the equation. This causes VIX to be under a little extra pressure in front of weekends and more so in front of long weekends. A bit of the upside in VIX on Friday may be attributed to the holiday being behind us. What makes me pause a little is that VIX closed Friday at 14.50 when the average VIX close this year on S&P 500 record days is 12.48 this year. VIX two points higher than that average as we make another new high would be more concerning to me than the rise of VIX on Friday.

VIX SPX Record Dates

The VIX did drop about 12% or 2 points last week as the S&P 500 moved higher. Despite the 12% drop in VIX the January VIX future was down about 1/3rd as much as VIX. A week ago there was no real risk premium in shorting the January future, over the course of 3 ½ trading days that premium returned.

VIX Curve

Last Week in Volatility Indexes and ETPs – 12/28/2014

This past week the S&P 500 recorded a record high on 3 of the 4 trading days with Friday being number 52 in 2014. I did some digging on this topic and 52 new highs in a year is less than the number of new highs just last year. Last year the S&P 500 set 69 new highs, but that still isn’t the record number of new highs in a single year. 1995 holds that distinction with the S&P 500 closed at a record level 77 times.

The term structure curve is returning to normal based on the price action in the S&P 500 last week, but still elevated relative to record S&P 500 days. VXST is seeing some extra pressure due to the holiday this coming week.   The longer end of the curve shifted lower, but not nearly as much as the drop in VIX and VXST. I also added a third curve here to compare volatility on the 52 days the S&P 500 closed at a record high this year with Friday’s close. Note the purple line is much lower than Friday’s closing curve.

VXST - VIX - VXV - VXMTI left the year to date information on this table this week as I wanted to point out the performance of SVXY this year.   SVXY is one of the two very actively traded funds that match the daily short performance of a portfolio that is short the front two month VIX futures contracts. Conventional wisdom in the financial markets is that selling volatility is like picking up nickels in front of a steam roller. As of Friday SVXY was up just over 1% for 2014. Anyone that held SVXY for all of 2014 earned that 1% as on February 5th the fund was down 24% and over the course of 2014 SVXY has experienced a drawdown of over 40%.

Index ETP Table

There was at least one VXX trader looking for steady to lower volatility into next year. About 30 minutes after the market opened on Wednesday someone came in and sold more than 10,000 VXX Jan 32 Calls at 0.93 and bout the same number of VXX Jan 36 Calls for 0.52 and a net credit of 0.41. VXX finished the day at 28.31 so this trade is safe as long as VXX does not move up more than 13% by January 16, 2015 or over 32.00. In the VIX world that’s just one good day for VXX and one bad day for the S&P 500. The worst case scenario is for VXX over 36.00 at expiration which would result in a maximum loss of 3.59.



VIX and the Santa Claus Rally

A couple of days ago JJ Kinahan from TD Ameritrade and a good friend of The Options Institute wrote a blog for Forbes.  His blog was about the period of time between Christmas and New Year’s. In the financial markets world this is considered a bullish time for stocks and is often called the Santa Claus rally. His comments can be found at the link below.


Since everything I do begins and ends with VIX I decided to take a look at what VIX has done each year over this time period. I was honestly surprised by the results. I took the VIX closing price the day before Christmas and the closing price on the last day of the year for each year from 1990 to 2013.   If the expectation is that stock prices move higher over this time period, then we would also assume that VIX would be moving lower. That assumption made me do a double take when I complied the table below.

VIX Santa Rally

Note that only three of the twenty four years on this table saw VIX move lower. Part of this may be attributed to the holiday impact on VIX where some of the value drops due to an extra day and a half off for Christmas. However, there are several double digit gains on the table above and that’s more than just the extra days off. As President Reagan use to say, trust but verify. This time the verification process yielded some interesting results.


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