CBOE Risk Management is One Week Away

One the best parts of my job as Director of Education at The Options Institute is getting to attend each of the Risk Management Conferences offered by CBOE.  Back in the Fall the running theme at both the European and Asian versions of RMC seemed to be how the markets were shifting from a low to high volatility regime.  Early 2016 price action has confirmed this.

There are five things that have me particularly excited about heading to Bonita Springs, FL next week for the 32nd Annual RMC Conference in the US.

1) First and foremost I look forward to hearing how traders and portfolio managers have been approaching the markets in 2016.  At the Asian RMC conference late last year one strategist stated that making forecasts for 2016 was one of the most difficult tasks he had faced in his career.  There are many things about the markets that have made 2016 a unique year for the markets and RMC will be a great place to hear how market participants have been dealing with it.

2) CBOE often announces new product initiatives at RMC when either Ed Tilly or Ed Provost gives the welcome address to kick off the first day.  The information is embargoed until then and I find out what’s new along with everyone else.  Ed Provost, President and COO at CBOE Holdings will offer the Welcome and CBOE Update address which I’m sure will lead to things that I will dive into almost immediately following his presentation.

3) Leo de Bever, PhD will be giving the keynote address on Tuesday morning with a discussion titled Long-Termism:  An Opportunity Work Seizing.  Until December 2014 de Bever was the CEO for the Alberta Investment Management Corporation.  Some of my academic work is centered on focusing on longer term investment results and trying to filter out the noise of short term market swings.  I hope to gain some insights from this discussion.  Also, as a side note, I am not alone among people at CBOE that are excited about this pending keynote address.

4) As I make this list I continue to go through the schedule and cannot narrow down the list of presentations.  I’m just going to say I’m just looking forward to every presentation I will get to attend.  I can’t clone myself, so I will miss presentations when we split into two tracks.  I have a game plan where I will be able to get color on the presentations I miss from Mark Sebastian of Option Pit who will be covering Risk Management for TheStreet.com.

5) Finally, we have to include the weather.  An early look shows 75 and sunny in Bonita Spring for all three days of RMC.  Although my free time is limited with blogging and tweeting along with CBOE-TV and Option Insider Radio Network duties, I do plan on trying to spend at least a few minutes outdoors.  For the golfers attending Wednesday afternoon looks like it will be perfect for networking and getting in a round of golf.

If you want to participate there is still time to register for CBOE’s Risk Management Conference.  Check out www.cboermcus.comfor all the details about speakers, the venue, and how to attend in person.

Weekend Review VIX Futures and Options 2/21/2016

VIX managed to stay in the 20’s despite the most resilient performance from the S&P 500 in 2016.  We did finally give up on the last bastion of backwardation (month 1 versus month 2) as March became the front month with February going off the board Wednesday on the open.

VIX LT Curve


The generic short dated VIX curve constructed using Weeklys futures flattened and then some last week based on the drop in VIX and a fairly light economic calendar over the next couple of weeks.  We can probably throw the end of earnings season in there as another reason volatility expectations have moved lower.

VIX ST Curve


It appears at least on trader expects VIX to remain below 23.00 for the next few weeks.  The last big VIX trade of the day on Friday was a seller of the VIX Mar 23 Puts at 2.56 who purchased the VIX Mar 24 Puts for 3.27 and a net cost of 0.71.  Usually bearish vertical spreads show up using call options, but in the world of cash settled index options it is not unheard of for a trade like this to show up on tehp ut side of the screen.  As long as standard March VIX settlement comes in below 23.00 this trade will result in a profit of 0.29, a renewal of higher volatility and settlement over 24.00 results in a loss equal to the cost of 0.71.

VIX PO Fixed

Weekend Review Volatility Indexes and ETFs 2/21/2016

VXST dropped dramatically last week and closed on the lows of 2016.  VIX managed to hold up a little better and looking at the economic calendar for next week I can kind of see why.  VXST often leads VIX so a move below 20.00 next week may not be out of the question.  After I typed that sentence I realized we are only 0.53 away from the teens so it wasn’t the most daring of market predictions.



This is the year I am going to focus more on the disconnection in performance between VXX, SVXY, and UVXY.  We all know that SVXY and UVXY offer daily inverse and leveraged performance that is offered by VXX and that over time UVXY does not return two times and SVXY does not offer the opposite of VXX.  Last week VXX was down a tad shy of 11%, while SVXY was up closer to 12%, and UVXY was down about 21%.  There was not much of a disconnect last week as the action wasn’t all that choppy.  Other things of note on the table below is SKEW rising while VVIX dropped dramatically, sort of a divergence of market reactions.

VXX Table


Despite the return to contango on trader put on a bullish VXX trade late Friday.  With VXX at 25.38 there was a buyer of the standard VXX Mar 28 Calls at 1.17 who sold the VXX Mar 33 Calls for 0.47 and a net cost of 0.60.  A home run for this trade would involve VXX over 33.00 on the close March 18th and the payoff equaling 4.40.  Anywhere over 28.60 and this trader will probably be content with stepping up during a period of backwardation to get long exposure to VXX.


Is VIX Approaching a Death Cross?

began my week updating charts and tables as I am heading to Tampa, FL to speak on options and then I’m off to Trader’s Expo in New York to deliver a couple of presentations.  The chart below, depicting the rolling 1 year and 5 year average closing prices for VIX is a favorite of mine.  I consider it a good depiction of the equity market shifting from a low to high volatility regime as the 1 year average approaches the 5 year average.  However, I noticed today that the 1 year average is very close to moving above the 5 year average and the last time this happened was in November 2007.  We all know how the markets acted in 2008 so I did some digging on the numbers.

VIX Death Cross


The specific day that the 1 year average last moved above the 5 year average was November 16, 2007 and the S&P 500 closed at 1458.74.  I took a look at where the S&P 500 closed 3, 6, 9, and 12 months after November 16, 2007.  Those numbers appear in the table below.

Death Cross Performance


Note that the S&P 500 was lower over all four of these arbitrary time frames after the 1 year average moved above the 5 year average.  In the stock world I have heard when the 50 day moving average close for the S&P 500 moves below the 200 day moving average it is referred to as a ‘death cross’.  If the VIX 1 year average moves above the 5 year and we experience the same sort of market that we did in 2008 I want it to be on record that I coined the term “VIX Death Cross”.

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 www.cboe.com/benchmarks.


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