VIX Options and Futures Review – 2/5/2016

Friday provided our first glimpse into how the economy was faring in January and the stock market apparently didn’t like what it saw.  VIX finished the day up 7% which was just under half the over 15% rise we got last week.  The February future managed an 11% gain to finish higher than spot VIX.  However, backwardation is still in place with the February contract higher than the March contract.  More on this after the chart and table below.

VIX Curve Table


I’ve been obsessively fixated on the current state of front month versus second month backwardation.  The front month VIX future has closed higher than the second month every day in 2016.  That’s a running streak of twenty four trading days.  This is the longest stretch since 2011 and the fifth longest on record.

What surprised me a bit was that the spread between February and March widened on Friday.  I conducted a twitter poll last Monday and the (very unscientific) result was about 2/3rds of voters thinking February would close at a discount to March regardless of how the market took the employment number.  Congrats to the 1/3rd that got it right and I’ll admit I was on the side of the majority who got it wrong.

The chart below shows the spread between the first month and second month each day this year.  The last time the spread was greater than or equal to 1.00 was the day after the 2016 closing low for the S&P 500.  To save you the trouble of looking it up, the closing low for this year (so far) was January 20th at 1859.



On Thursday most traders were looking only one day in to the future with Non-Farm Payrolls being reported the next day.  However, one of the larger VIX option trades targeted the VIX Weeklys expiration on March 9th just after the March employment number is reported.  A VIX Mar 9th Iron Broken Wing Butterfly was constructed with the VIX Mar 9th 23 Puts being sold for 2.84 and VIX Mar 9th 23 Calls sold at 2.52.  The trade was completed with the VIX Mar 9th 18 Puts being purchased at 0.42 and VIX Mar 9th25 Calls at 2.01 and net credit of 2.93.  The payout upon March 9th Weeklys VIX settlement appears below.



Note that a volatility event pushing VIX into the upper 20’s, or even low 30’s results in 0.93 profit.  The risk is on the downside with a maximum loss of 2.07 being taken if VIX is below 18.00 at expiration (as of Thursday the closing low for VIX in 2016 was 19.34).  I think the takeaway may be as long at VIX is still in the 20’s this trade will turn out OK.

Volatility Indexes and ETPs Review – 2/7/2016

VIX rose last week as did the rest of the volatility indexes that based their levels on S&P 500 Index (SPX) option pricing.  Usually in times of panic VXST (9-day volatility) rises above VIX (30-day volatility), but that was not the case this past week.  You can read this two ways – traders think stocks will rebound or traders are mentally prepared for more downside in the market.  I’m leaning toward the latter.



I decided to leave the year to date numbers on the table below since it has been such an interesting week.  I find the one week and annual drop in SKEW interesting and took it as confirmation of the market being ready for more downside.  Most of that great performance for VXX and UVXY can be attributed to VIX first month versus second month backwardation which has been in place for all of 2016.

VXX Table Fixed



One trader took advantage of the higher state of volatility in front of Friday’s employment number.  Mid-day Thursday when VXX was trading at 25.29 there was a seller of the VXX Feb 5th 27 Calls at 0.13 who purchased the VXX Feb 5th 29 Calls for 0.04 and a net credit of 0.09.



Everyone is aware that the stock market did not react positively to Friday’s employment report.  VXX did move higher, but never reached the 27.00 price level that would have added to the stress associated with this trade.  26.81 was the high and VXX settled the week lower than that so the trade was a success.

VIX Options and Futures Review – 1/31/2016

The VIX term structure is approaching contango which many VIX watchers will consider a green light for the equity markets, but the February contract stubbornly remains elevated relative to the March contract.  Although on Friday this premium was down to 0.30.  My feeling is February may stay up a bit until we get the employment number behind us this coming Friday.  At that point I guess VIX will be just like the Fed (data dependent).

VIX LT Curve


The shorter term curve flattened out as VIX tested the teens as the equity market rallied on Friday.  We are now six months into having short dated or VIX Weeklys futures available for trading and I have a long list of testing I want to do with the data that is now available to play around with.  Of course anything of interest will be promptly reported in this space.

VIX ST Curve


As the equity markets were beginning an upward trajectory on Friday a volatility trader came in to take advantage of VIX in the 20’s in the form of selling an out of the money call spread.  With VIX at 21.40 (1.20 higher than the day’s closing price) a trader sold just under 25,000 of the VIX Feb 26 Calls for 1.09 and purchased the VIX Feb 32.50 Calls for 0.38 resulting in a net credit of 0.71.  As long as VIX remains under 26.00 between now and February VIX settlement on the open February 17th this trader will stay out of the danger zone where this trade starts to give up some of the premium received when the trade was initiated.


VIX PO Weekend

Volatility Indexes and ETPs Review – 1/31/2016

The equity market came to life last week and avoided what could have been the worst January in most of our lifetimes for stocks.  In response the four volatility indexes that are based on SPX option pricing were lower, but all four are also well above where they were to end 2015.



I included a year-to-date performance column in this week’s table.  A big part of the motivation was to show the stellar performance of VXX and UVXY (along with the comparable funds) for 2016.  To quote a really smart guy at CBOE, “those long funds did what they are supposed to do when volatility expectations are high.”

VXX Table


With the market rally came a drop in volatility in the form of VIX.  However, the long oriented ETPs have held up fairly well with first month versus second month backwardation being the state of things every day in 2016.  At least one trader is under the belief that the up move is not over for UVXY and expressed this opinion through purchasing 300 UVXY Feb 5th 42 Calls for 1.80.  A one week 14% move is needed to get to break even on this trade so someone really expects a resumption of weakness in the stock market to come back to life next week.


Block Trade Analysis – VIX Bull Call and Iron Condor Spreads

We had two big trades come through the VIX pit on Thursday and about the only thing they have in common is that they both used March VIX options.

First, there was an out of the money bull call spread.  With spot VIX around 22.60 there was a buyer of 80,000 VIX Mar 27 Calls at 1.95 who then sold 80,000 VIX Mar 35 Calls at 0.91 for a net cost of 1.04.  A spike to just over 28.00 gets this trade to the point of profitability.  This requires a closing high for 2016 in VIX since that current number for 2016 is 27.59.  If the trader is nimble, they may find a good exit opportunity if the intraday high for VIX in 2016 (32.09) is tested between now and March settlement.  Needless to say for this trade to pay off the equity market will need to take a dive from current levels and do it in a dramatic fashion.




What makes a market is people with different opinions and the second big trade from today has a different opinion from the first.  With VIX at 23.68 a trader constructed an iron condor using March VIX options.  They sold the VIX Mar 20 Puts at 1.40 and sold the VIX Mar 25 Calls at 2.62.  The spread was completed when they purchased the VIX Mar 18 Puts at 0.57 and purchased the VIX Mar 27 Calls for 2.19 with the result being a credit of 1.26.  The ultimate goal, if held to expiration, is for March VIX settlement to fall between 20 and 25.  So far in 2016 we have only eighteen trading days behind us, six of those days VIX has closed over 25.00 and only once VIX has closed lower than 20.00 so for about 2/3rds of trading days we have seen a closing price that the seller of this spread would consider a good place to be.



One final note – I know I didn’t include the March VIX futures in the payoff diagram, that’s because spot VIX and the March contract are trading almost in line with each other at this time, but always be aware the better of the two to value VIX options is the corresponding VIX future and not spot VIX.

Paper by Professor Bondarenko Has Intriguing New Analysis of PUT and WPUT Indexes

Jan. 27, 2016 – A new 10-page study examines both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 One-Week PutWrite Index (WPUT), comparing their performances with that of traditional benchmark stock and bond indexes. This is the first comprehensive published study that examines the performance of a benchmark strategy index that incorporates Weeklys options. Written by Oleg Bondarenko, professor of finance at the University of Illinois at Chicago, the study — “An Analysis of Index Option Writing with Monthly and Weekly Rollover”– analyzes the performance of the two indexes through the end of 2015.

The new paper discusses 19 Exhibits. In this Blog I highlight 5 of the Exhibits.


CBOE introduced Weeklys options in 2005. In the initial years of Weeklys trading, it appeared to me that some observers thought that Weeklys might be used primarily by retail speculators, but in recent years I have heard from multiple institutional investors that they are writing S&P 500 Weeklys options for the purposes of prudent income enhancement. The new study found that, from 2006 to 2015, the average annual gross premium collected was 24.1 percent for the PUT Index and 39.3 percent for the WPUT Index. While a one-time premium collected by the weekly WPUT Index usually was smaller than a premium collected by the monthly PUT Index, the WPUT Index had higher aggregate annual premiums because: (1) premiums were collected 52 times, rather than 12 times, per year, and (2) time decay (or theta) usually works in favor of the WPUT Index vs. the PUT Index.

1 - Premiums PUT WPUT

In the period from mid-1986 through the end of 2015 –

  • (1) The total % growth for benchmark indexes was 1622% for the PUT Index, 1499% for the S&P 500 Index, and 646% for the Citigroup 30-year Treasury Bond Index; (all of the indexes (except the VIX® Index) in this Blog are total return indexes), and
  • (2) The annual compound return of the PUT Index was 10.13 percent, compared with 9.85 percent for the S&P 500 Index.

2 - long-tern line PUT


From 2006 through 2015, the worst drawdowns were down 24.2 percent for WPUT, down 32.7 percent for PUT and down 50.9 percent for the S&P 500.

3 - Drawdown PUT WPUT

Over a period of 29½ years, the PUT Index had higher risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index) than the S&P 500, Russell 2000, MSCI World, and Citigroup 30-Year Treasury Bond Indexes. However, please note that many risk-adjusted return metrics assume a normal distribution with no skewness, but there was negative skewness for several indexes, including PUT (-2.09), S&P 500 (-0.79), and Russell 2000 (-0.89).

4 - Sharpe Sortino


An inquiring investor might ask – how could the PUT Index have higher returns and lower volatility over a period of almost three decades? A key source of returns for sellers of SPX index options has been the fact that, according to Exhibit 5, these options have been richly priced in all the years since 1990 (except in 2008).

5 - Rich Pricing


For links to the new paper and to several other options-based strategy papers, and to data and information on the PUT and WPUT indexes, please visit

VIX Options and Futures Review – 1/24/2016

The stock market rally on Friday put pressure on VIX and pushed the spot index down enough that the front month February future closed at a slight premium.  This is the first premium for the front month VIX futures relative to spot since January 4th.  I’ll discuss this a bit more toward the end of this blog.

VIX Long Term Curve


The generic short dated curve flattened out which I’m learning is the normal shape using the five consecutive weekly VIX futures contracts.

VIX Short Term Curve


As mentioned above, with Friday’s price action VIX is now at a discount to the front month future.  The result here is an end what goes down as the eighth longest streak of spot versus front month backwardation.

Friday Spot - FM


Another measure of backwardation and the one the VIX ETP traders care the most about involves the front month versus the second month futures.  February VIX actually closed higher than the March contract.  In fact every day in 2016 the front month has closed higher than the second month.  This run of backwardation is up to fourteen days.

Friday FM - SM


Finally, since VIX moved below February, this put an end to backwardation when comparing spot VIX, the front month, and second month futures price.  All the stars have to align for this measure of backwardation and this ended up being the third longest streak of backwardation on record.

Friday - Spot - FM - SM


Volatility Indexes and ETPs Review – 1/24/2016

The S&P 500 rebounded by about 1.4% last week and SPX option volatility moved a bit lower.  The VXST – VIX – VXV – VXMT curve shifted lower and flattened.  However for a bit of perspective I show where we ended 2015.  I think the comparison is a good indication that we may not be completely out of the woods, at least based on the expectations indicated by the various S&P 500 oriented volatility measures.



The rebound in the stock market put some pressure on VXX with fund losing over 6% last week.  Do not fret for anyone who purchased VXX at the end of 2015, as they are still up about 25% on the year.  Although few (if any) traders take a buy and hold approach with VXX.

A couple of other things on this table caught my eye.  VVIX remains pretty high, just a tad under 100.  In calmer times VVIX is usually in the 70’s (or lower).  SKEW in the 130’s indicates demand remains for out of the money SPX puts despite the strength of stocks this past week.

VXX Table


Mid-day on Friday the biggest VXX block trade of the day was executed.  With VXX at 25.74, 0.74 higher than the close of the day, there was a buyer of 10,000 VXX Jan 29th 21 Calls at 4.78 who sold the VXX Jan 29th 24 Calls for 2.14 paying 2.64 for this call spread.  The annotated payoff diagram appears below.



As long as VXX closes above 24.00 the result will be a profit of 1.36 and if VXX completely tanks, which would mean a huge rally in the S&P 500, and closes under 21.00 the result is a loss equal to the debit of 2.64.  Note I also highlighted where VXX was when the trade was executed and where it closed.  There is still a 1.00 cushion before the trader may consider their alternatives, but that is 0.74 less than when they executed the trade.

Be Cautious When Using VIX vs. Oil as a Market Indicator

I awoke this morning to an email from the matriarch of CBOE-TV Holly Goodhart.  She was preparing for her day with CNBC on in the background and something caught her eye.  The following comes directly from her email –

I have CNBC on this morning, and they just spent a segment discussing this headline:
“Markets bottom when VIX is greater than oil.”

This didn’t sound right to me for a few reasons, primarily because I recall many years with the price of oil in the teens.  Yes, I’m old.  However, since I love playing with numbers I got to work looking at the closing price of Oil versus VIX and gathered as much data as I possibly could get my hands on.  For the price of Oil I used the daily WTI Cushing, OK number from the EIA and for VIX I used VIX from 1990 to present and to get a little more history I used VXO for 1986 through 1990.

The result is daily data for 30 years.  As I was compiling and checking the data for errors I noticed that VIX and Oil were priced in line with each other on a pretty consistent basis.  This was going on even through parts of the 1990’s.  The table below shows that the average for VIX has actually been higher than for Oil several years and even as recently as 2002.  Years where the average price of Oil was lower than VIX are highlighted in red.

Oil VIX Average


This next table shows the number of days by year that VIX closed higher than Oil.  From 2004 to 2007 it never happened.   Then in 2008 VIX closed higher than Oil for the first time in year on October 22, 2008 with the S&P 500 at 896.  VIX remained at a higher level than Oil for 82 trading days (with some gaps) through March 11, 2009 when the S&P 500 closed at 721.

VIX Greater than Oil


After putting these tables together I decided to take a look at the CNBC article to see what they were saying.  The article notes that the last two times VIX closed higher than Oil were August 24, 2015 (big surprise) and March 11, 2009.

My first issue with this is if you are using VIX versus Oil as a signal for a market bottom then when this happened on October 22, 2008 you would have considered that a bottom, it’s easy in retrospect to say we should have bought in March 2009 since that was the last time VIX was greater than oil.  The price chart below is a daily two year chart of the S&P 500 beginning on the first day VIX closed higher than Oil.  I put a box around the time period where VIX was consistently higher than oil.

SPX 2008 2010


Note that using the first occurrence of VIX closing over Oil would have gotten you in pretty early.  Knowing that the last time this would happen was in March is great hindsight, but at the time would not have been a viable signal to trade on.

The other occurrence noted in the article was August 24th.  We had a one day VIX over Oil close and that was it.  The chart below is the daily price action from August 24th through last Friday.  We have basically done a round trip in the S&P 500 since then.

SPX 2015


With the markets in turmoil many market forecasters will try to call a bottom in the S&P 500.  When they cite data be cautious and do some work.  In this case long term history says that VIX higher than Oil doesn’t tell us much at all.

Current VIX Backwardation Streaks in Context

When VIX is relatively high the VIX term structure moves into what we commonly refer to as backwardation.  The way this may be defined varies among market participants, but most focus on the shorter end of the VIX curve.  That is what I’ve been doing lately as well.  It turns out, regardless of how you define VIX backwardation 2016 has experienced more instances of it than not for the first ten days of 2016.  The tables below rank the consecutive day streaks for VIX backwardation by using three different ways of defining the relationship between spot VIX and VIX futures or even between VIX futures contracts.

The simplest definition of backwardation might be when spot VIX closes higher than the first month future.  With the exception of the first two trading days in 2016 spot VIX has closed at a premium to the first month (January 2016 VIX) each day this year.  As of Friday the current streak is at eight days, which places this run in a tie for 12th place.

Spot FM


Many volatility derivative traders like to focus on the relationship between the first month and second month.  That is due to this relationship having an impact on the VIX oriented ETPs (VXX, SVXY, UVXY, etc).  Currently that is the January 2016 and February 2016 VIX futures contracts and January has closed higher than February for all ten days in 2016 which puts this ten day run just inside the top 10 of backwardation streaks.

Spot FM SM


Finally, a more rigorous definition of backwardation would involve spot VIX closing at a premium to the first month and the second month closing below the first month.  This has occurred each day since January 6th for a streak of eight consecutive days which is tied for 7th place among backwardation streaks.

Spot FM SM


I put up a ten minute video expanding on VIX backwardation and discussing these various streaks a little more.  You can view that at the link below and keep an eye on this blog site as we track the current streaks for each of these methods of defining VIX backwardation.

Checking on the Current VIX Backwardation Streak 1/15/2016


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