VXST Last Week – 8/24/2014

The S&P 500 made new highs and VXST ran for cover almost hitting the single digits this past week dropping 24%. VXST takes a cue from what the S&P 500 is doing, but also has a forward looking component as well. There is very little in the form of known unknowns in the next week so VXST is reflecting this as well.


I’m surprised to see the September 10th contract at a discount to the September 3rd since the 10th is the first expiration after the August employment report which is due out on the 5th.   Out of interest, I’ll be keeping an eye on that pricing relationship over the next week.

VXST Table

Emerging Market Volatility Last Week – 8/24/2014

The iShares Emerging Markets ETF (EEM – 44.75) lagged the performance of the US markets last week rising only one-half a percent. VXEEM seemed diverge from EEM and took the lead from VIX dropping over 15% on the week. Complacency seems to be taking over the world.



Brazil is a country worth watching for the next couple of months. The stock market has defied all critics this year and is up just over 15% (based on the performance of the iShares MSCI Brazil Capped ETF (EWZ – 50.41).   Despite a 2% rise in EWZ, VXEWZ was down less than VXEEM. This less of a drop was also off of a higher base, which means VXEWZ has farther to drop.


The VXEEM curve is a normal looking yawner so let’s look to the right at the VXEWZ curve. As I mentioned Brazil is a market to watch and note the elevated levels of the September and October VXEWZ futures – that’s all about a big election coming up on October 5th. India experience a similar situation back in the spring and I look forward to seeing how VXEWZ plays out based on the potential change in leadership in Brazil.


NASDAQ-100 and Russell 2000 Volatility Last Week – 8/24/2014

The NASDAQ-100 closed at a 2014 high rising 1.64% last week. VXN was already at a pretty depressed level, but continued to drift lower based on the strength of the underlying market. VXN also reacts in anticipation of earnings announcements, but with there being a lull in the earnings calendar there was nothing anticipatory to speak of with respect to VXN.



Unlike the NDX, the Russell 2000 did not put in a 2014 high this past week, but did finish the week up 1.64% – just like the NDX. In fact the Russell 2000 is basically flat for 2014 and this performance has kept RVX at a premium relative to VIX. That premium remains despite RVX dropping about 8.5% last week.


The curves are in textbook contango, but the VXN slope has a little more rise to it. I can guess that is a function of VXN being so low that the only direction the VXN futures market can see is a move to the upside. The September RVX future is at over a 2 point premium to the spot index, so despite an elevated RVX, there is quite a risk premium showing up in the future. September and October have been scary months for the markets in the past so we could see some seasonal concerns in volatility futures over the next few weeks.


Quantifying VIX Contango and Backwardation

I’m in the process of updating different VIX related charts and statistics for next week’s three day VIX webcast series. I realized it has been a while since I addressed the topic of VIX contango and backwardation.   For those unfamiliar with these terms, a picture is worth a thousand words. The term structure illustration below shows a textbook example of what contango and backwardation are all about.


Typically a term structure chart created using VIX futures looks more like the blue contango line above where the futures prices are higher as there are more days left to expiration.  In times of increased VIX the term structure takes on the form that looks a bit more like backwardation where the futures prices are lower than the spot index. The financial engineer in me went to work and I came up with a method of quantifying the shape.


To calculate my method of determining whether the market is in contango or backwardation I take the next two VIX futures contracts that have at least one weekend left until expiration. The Friday before VIX futures and options expire is the day where I roll into the next pair of futures contracts. For example last Friday August 15th the pair changed from August and September VIX to September and October VIX.   I use the pricing of these two relevant futures contracts and time weight them based on days to expiration. The time weighted result is a consistent VIX future that may be used to compare the futures market to spot VIX. A chart covering January 2, 2014 through August 15, 2014 of this modified VIX future price relative to VIX appears below.

VIX vs Mod VIX

Note more often than not the VIX future is at a premium relative to VIX. Also when VIX moves up quickly the index will sometimes close at a premium relative to the modified VIX future. When VIX is higher than the modified future I define the market as being in backwardation. When the index is at a discount to the modified future I say the market is in contango. The table below shows how often the VIX term structure has been in contango or backwardation from January 2007 through last Friday. I also put the S&P 500 price performance for each year at the end of the table.

Contango Table

Since 2007 on about 20% of trading days the modified future is at a discount to VIX. The majority of these days occurred in 2008 when the stock market was under pressure.   Also note over the most recent time period we have not seen too many backwardation days – this goes along with relative calm and bullishness in the overall market.

If you have more interest in the modified VIX future versus the index I will spend more time discussing it next week during the three day noon webcast series that is going to run from Monday through Wednesday next week. To register click on www.cboe.com/webcasts

CBOE Hosting Three Free VIX Education Webcasts Next Week

In just under a week The Options Institute at CBOE will be offering three free webcasts discussing different aspects of the CBOE Volatility Index or VIX. On Monday August 25th I’ll start out with the basics of volatility indexes and introducing exactly what VIX is measuring.  In addition we will look at how the index has historically behaved relative to the S&P 500. The following day I will discuss VIX futures and options which are two of the most common methods of gaining exposure to market volatility. Finally on Wednesday we will wrap things up on Wednesday with a discussion of trades that are appropriate for any market outlook.

Here is a more extensive description of each webcast –

Monday 8/25/2014 – Noon – Introduction to VIX – What is VIX? – In this webcast which kicks off three days of VIX education, Russell Rhoads, CFA and Senior Instructor from The Options Institute will introduce the CBOE Volatility Index, commonly known as VIX. Whether you are relative new to option and volatility trading or have been trading VIX futures and options for years and want a refresher on how VIX behaves this webcast will be of benefit to you. Russell will explain how VIX is calculated, the unique pricing relationship that VIX has with the S&P 500® Index, and how broad based index implied volatility behaves differently than other types of market volatility.

Tuesday 8/26/2014 – Noon – Volatility Trading with VIX Futures and Options – In Part 2 of the VIX education series of webcasts Russell Rhoads, CFA from The Options Institute will introduce two of the most common instruments used to gain exposure to expected market volatility. VIX futures will be introduced with a discussion of just how these instruments trade relative to VIX. Following up on VIX futures Russell will introduce and discuss the unique price behavior of VIX options.

Wednesday 8/27/2014 – Noon – Bullish, Bearish, and Neutral Trading with VIX Futures and Options – in the final part of our VIX education series Russell Rhoads, CFA will cover trades that make sense for either a bullish, bearish or neutral outlook for expected market volatility. Russell will show how traders take an outlook and translate it into a trade using VIX futures, VIX options, or even a combination of both.

To attend one, two or even all three of these free webcasts you can register at www.cboe.com/webcasts

12 Key Stats Re: VIX Index — By Matt Moran

In the recent August 16 Striking Price column in Barron’s, Steven Sears authored a piece entitled “A New Vision of VIX” that noted –

“Over the past 21 years, the CBOE Volatility Index, or VIX, has emerged as one of Wall Street’s most watched sentiment indicators. … Krag “Buzz” Gregory, a Goldman strategist, found that U.S. consumer spending, manufacturing, and employment data explain 57% of the variability in VIX levels back to 2000. …Gregory told clients that the options market is engaged in a tug of war between a strengthening U.S. economy and menacing geopolitical concerns. Against this battle between the constructive and destructive, the VIX has averaged 16.3 in August, versus a year-to-date average of 13.7. …”

The column noted that there are “widespread worries that investors are too complacent or somehow missing the larger picture.” Some observers have questioned whether the CBOE Volatility Index® (VIX®) has been low in light of overseas tensions, while other commenters have noted that the historic volatility of the S&P 500® Index generally has been even lower than the VIX Index throughout most of this year.

We see and hear many comments and questions on the popular VIX Index and related products; here are twelve key stats —


13.6 – Average daily closing value for VIX in 2014 (year-to-date)
10.4 – Average historic volatility for S&P 500 (SPX) Index in 2014 (year-to-date, see graph below)
12.32 – VIX Index closing value on Aug. 18
17.30 – settlement value for VIX April 2015 futures on Aug. 18

LONG-TERM STATS re: Daily Closing Values of VIX (Jan. 1990 – Aug. 15, 2014)

18.28 – Median daily closing value of VIX
20.03 – Average daily closing value of VIX
80.86 – Highest daily closing value of VIX (on Nov. 20, 2008)
9.31 – Lowest daily closing value of VIX (on Dec. 22, 1993)


0.36 – put/call ratio for VIX options in 2014 (through July), with total volume of 25,951,739 VIX put options, and 71,454,856 VIX call options (buyers of VIX call options have the potential to profit if VIX futures prices rise sharply)
640,264 – average daily volume for VIX options this month (through August 15)
292,683 — average daily volume for VIX futures this month (through August 15)
159,498 – average daily volume for VIX futures in 2013 (the highest total for any full calendar year)

VIX Aug 18

For those investors who wonder if VIX is “too low” or “too high” relative to their own views of the market, VIX futures and options now offer investable instruments to implement investment strategies.  You can visit www.cboe.com/VIX to learn more about investing in VIX futures and options.

Volatility Indexes and ETPs Last Week – 8/17/2014

Volatility came back down to what is considered ‘normal’ levels for 2014, but there was a slight twist. Note that on Friday VXST closed at a slight premium relative to VIX. I was hosting a VIP tour in the last hour of trading on Friday and things were pretty active as the S&P 500 worked back up to about unchanged after a pretty interesting day. I was talking to one of the guys in the SPX Pit and commented, “It feels like no one wants to go home short volatility this weekend.” His response, “Nobody wants any positions over this weekend.” So far the shooting in Ukraine hasn’t increased, but the weekend is still not over.


The long oriented exchange traded products took it on the chin last week as the August VIX future dropped 17% and September was down 14%.   The long products are very heavily weighted to September as August futures come off the board this week.

Index and Options Table

Finally we can take a quick look at a bullish VXX option trade that I saw on Thursday. There was a seller of over 24,000 VXX Oct 25 Puts that took in 0.68. VXX finished the week at 28.88 so this trader expects a couple of bullish moves out of VXX over the next couple of months. I do not agree or disagree, but will note that September and October are months that have people a little more on edge based on history.

Russell 2000 and Nasdaq-100 Volatility Last Week – 8/17/2014

The Nasdaq-100 rose over 2.5% last week. Over 20% of NDX’s performance is based on two stocks – Apple (AAPL – 97.98) and Microsoft (MSFT – 44.79) – both of which rose about 3.5%. Whatever the reason, NDX was strong and VXN was over 20% lower on the week.



The Russell 2000 was the laggard of the three broad based indexes that have volatility trading available and was higher by just under 1%. For comparison sake, the S&P 500 rose 1.22% last week. RVX continued to narrow the gap with VIX dropping 2.88 while VIX was down 2.62. The first half of 2014 was not good to small caps relative to other market sectors and RVX was elevated relative to VIX. Over the past couple of weeks the spread has narrowed which can be taken as the market saying the small cap underperformance may be a thing of the past.


There are only two trading days remaining until August volatility futures and options expire on the open this coming Wednesday. The premium of the August VXN contract relative to the index (0.48) sort of caught my eye, especially since VXN was down so much last week. It will be interesting to see if the futures premium has it right which would me VXN moves up a bit over the next couple of days. The story is the same with RVX, but there has been a higher risk perception for small cap stocks so that one doesn’t surprise me as much as the VXN futures premium.


Emerging Market Volatility Last Week – 8/17/2014

The emerging market sector continues to perform well in 2014. This performance comes in spite of the iShares MSCI Emerging Markets ETF (EEM – 44.51) having about 5% of the fund exposed to Russia. EEM rose about 1.8% last week which places the fund up more than 7% for the year. VXEEM dropped over 14% based on the strong week.



Brazil is the star of the emerging market sectors this year. The iShares Brazil Capped ETF (EWZ) was up a hair shy of 3% last week and finished the week 12.81% higher for 2014. Despite the strong performance VXEWZ was down less than a point last week. There was a tragedy on Friday where one of the leading candidates for president was killed in a plane crash which rattled VXEWZ a bit.  I posted a blog in this space about the market impact of that plane crash earlier last week –


I’ll discuss the other reason VXEWZ remains elevated in the discussion of the curves below.


VXEEM shifted to have more of a contango appearance with the index moving lower. The more interesting curve story comes from VXEWZ. This curve is fairly elevated with September and October futures and then the November price is at a discount to the other two. On October 5th Brazil may elect a new president, unless the old one is re-elected. The markets are showing some real uncertainty regarding the potential outcome and may continue to do so until the results are announced. This is going to be something I’ll keep a close eye on until early October.


Short-Term Volatility Last Week – 8/17/2014

VXST was displayed the expected amount of calm over a week where the S&P 500 rose over 1%. The only real excitement came via a little noise on Friday morning. After a bit of a swoon and by the end of the day the S&P 500 was almost unchanged. I guess the time frame for recovery from international events is now down from a day or two and can be measured in hours.


The VXST curve moved in sync with the index and shifted lower. The September 10th contract started trading on Thursday and I was really looking forward to seeing how that contract was priced relative to the other futures. The monthly employment number that always catches the attention of the investment world comes out on September 5th so the relative pricing of the September 10th contract can be an indication of how the market is discounting the risk of a big move around this economic report. It appears from the curve below that traders are more concerned with the last few weeks of summer than what may come from the jobs report.



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