Last Week in the Volatility Markets – 2/22/2015

Usually it is pretty easy for me to come up with something new to say regarding what went on the volatility markets last week. However, it has been a lot of the same for a pretty long time now. We have now experienced three all-time highs for the S&P 500 in 2015, which is three more than some forecasters thought we’d see, and VIX is working down to levels we were accustomed to over the past couple of years.

Friday’s VIX close of 14.30 is just a tad higher than the average VIX close in 2014. On the shorter end of things VXST was down very little on the week, but last Friday’s close was in front of a three day weekend which always puts a little pressure on VXST. The average for VXST in 2014 was 13.69, so this 11.74 reading shows a lot of complacency over the near term for the equity markets. I quickly consulted the economic calendar and next week is pretty light on the new news which easily explains the low VXST. For comparison sake I decided to add the 2014 averages to the volatility term structure chart below.


In the ETP space SVXY and XIV benefitted from the two record setting S&P 500 days last week and managed to crawl out of the hole to positive for 2015. The long funds all took a dive and dug their respective 2015 performance holes a little deeper.


In the table above VVIX dropped 7.5% on the week to finish in the mid-80’s. VVIX is a volatility index based on VIX option pricing. The high – low range by year plus the average for each year going back to 2007 is highlighted below. Like the volatility indexes in the first chart, there appears to continue to be elevated risk perceptions in the VIX market despite the S&P 500 hitting new records.

VVIX by Year

Last Week in VIX – 2/8/2015

With a 17% drop in VIX, the week ended not just in contango, but pretty steep contango. Especially when looking at February versus the spot. Also taking into account there is a week and a half remaining until February settlement. February at almost a 2 point premium to VIX in a pretty good indication that traders are still worried about the health of the overall stock market and the possibility that February settlement comes in higher than current levels.

VIX Curve

I’m going to deviate a little and discuss Nasdaq-100 and Russell 2000 volatility. Although I have scaled back on the markets I cover each weekend, I do still update the week over week graphics. It was interesting to note that the April VXN future was actually up slightly last week despite VXN dropping almost 15%. I also noticed that on the RVX curve April is a little elevated relative to the May contract. One twitter response regarding graphic below has to do with the timing of an FOMC meeting (between March and April expirations). My first guess, at least in the case or VXN, was first quarter earnings. Feel free to tweet any thoughts to me at @RussellRhoads


Finally, I was interested to see a block trade go off on Friday that had me pondering the mind of the person behind this execution. In big size there was a seller of 2 VIX Mar 27 Calls at 1.00 who simultaneously purchased 3 VIX Jun 30 Calls for 1.48. I was traveling on Friday so I wasn’t able to head down to the VIX pit and ask if anyone had ideas about the motivation of this diagonal ratio spread. Here’s my guess – first they want VIX to remain under 27 through March settlement. After that, they may consider selling April or May calls against the remaining long position and then even sell June calls against this long position to continue to benefit from time decay. When I return to CBOE on Monday I may have more info, for now I welcome any ideas as to what was going on with this trade.

Last Week in Volatility Markets – 2/8/2015

A big up week for the S&P 500 resulted in the VXST – VIX – VXV – VXMT term structure curve returning to contango after going into backwardation to end the previous week. This sort of action is wearing thin for guys on the floor. I was even pulled aside and told that there seems to be a sort of ‘seller’s exhaustion’ when the market moves dramatically in one direction or another.   I’ll speak to that topic more after discussing the ETPs.


There was a reversal with VXX getting hit and the short funds benefitting from the drop in volatility.  Also the short funds got the benefit of a return to contango for the VIX futures. The performance was basically a gain of 7% for XIV and SVXY and a drop of about 7% for VXX, VIXY and VIIX. I do want to highlight the year to date numbers. The short funds are now down over 14% while the long funds are up almost 9%. That daily compounding that causes disconnects between the performance and inverse performance is more evident when VIX is whipping around as it has been for most of 2015.

Index - ETNs

Evidence of the lack of option sellers shows up in VIX as it has been pretty elevated for 2015. Another are that it is really showing up is in the volatility of VIX options as measured by VVIX. The chart below shows VVIX for all of 2014 and what there is in 2015.

VVIX Chart

For the longest time VVIX oscillated between 80 and 120 with an average of about 100. The average for 2013 and 2014 was much closer to 80.   So far in 2015 the average has been 105. As long as option sellers remain skittish or on the sidelines when we get big market moves higher or lower the moves will probably continue to be pretty dramatic like they have been so far this year.

Checking In on Oil Volatility

Oil was the headline grabbing market for the last few months of 2014. For months the price of oil has continued to violate any sort of support levels that technical analysts can come up with. January’s average OVX close was just over 55. This was the highest average for a month since the tail end of the Great Financial Crisis in April 2009. The chart below shows the average daily close by month for OVX since mid-2007 through January 2015.

OVX Avg Daily Close

The thing is, Oil has sort of vanished from the headlines. The price has sort of staggered in the mid to upper 40’s.   Despite being in a sort of a range the CBOE Oil ETF Volatility Index has remained at high levels. This second chart overlays OVX and crude oil futures prices from September 1st of last year through the end of January 2015. The trend to the downside appears to be slowing some.


So why is OVX still trading near recent highs even though some market participants think oil is reaching a bottom and others are not paying attention anymore. I did some digging and may have an answer. I took a look at where OVX closed on the last day of each month proceeding September through January. Then I calculated the annualized realized volatility for CL futures. The results appear in the table below –

CL vs OVX Table

Four of the five last months, OVX was lower that the realized volatility for that month. October’s numbers were basically in line with each other. OVX is nothing more than implied volatility which is the market’s prediction of what realized volatility will be in the future. In the case of OVX this is a 30 day forecast or one month and this forecast has been low more often than not recently. This may be price into the market until we have a month or two where realized volatility comes in lower than market expectations.

Dissecting VIX Volume in January

I was lucky enough to join The Options Institute at the Chicago Board Options Exchange in April 2009. This has been a wonderful place to work as each day is different and almost every day I learn something new. Back in high school, a discipline heavy all-boys school, the head football coach was my homeroom teacher for freshman year. Coach Nix would send us off with the same words each day, “If you learn one new thing each day this year you will know a lot of new things at the end of the year.” I always liked that.

One thing I have learned about trading VIX is that it is completely unique from any other listed market in the world. VIX, VIX Futures, VIX Options and the volatility oriented exchange traded products (think VXX) all have price behavior that leaves neophytes scratching their heads. For those that put in the effort to get a handle on how VIX trades there can be substantial rewards.

Something else that is interesting is what happens with VIX trading volumes. One would expect higher than average VIX results in higher trading volumes. That is initially true, but because a common use of VIX is having a long position to benefit from a volatility pop. That long position can either be a speculative trade to try to profit from a quick move to the upside or as a hedge. When VIX is already high, hedging with VIX calls may not appear as attractive. There are a variety of reasons for this. Before some explanations, take a look at the side by side charts below. On the left is the average VIX closing price by month for January and all of 2014. Do note that January’s average was higher than all months last year. On the right side is (unofficial) average daily VIX option volume by day over the same time period. Note the highest bars for both are October and then there is lighter VIX option volume for the following three months.

VIX Options

This drop in VIX option volume is common after a volatility event such as the market action in October the last time VIX made a move higher was August 2011 when VIX ran from 32.00 to 48.00 in a single day. The result was August 2011 average volume came in at 590,395 which was a record at that time. It took several months for a new volume record to be set, but the year over year averages continued to grow at impressive rates.

A similar, but not as dramatic impact shows up in VIX futures. The chart below shows the average close by month for VIX again but the right side is average daily volume in the VIX futures market by month. October was a strong volume month, but believe it or not February of last year is the record holder in daily volume for VIX futures.

VIX Futures

Again, unofficially as we do not have the final January tabulations, average daily VIX futures volume was just over 228,000 contracts last month. This is down from October, but actually 14% higher than the average daily volume in 2014 of just over 200,000 contracts. This is impressive in any environment, but even more so considering the historically normal drop in volume the comes after an extra volatile month like October 2014.

Finally, I want to shift gears a little. A common question I get when traveling around is, “Why should I hedge with VIX instead of SPX?” My initial response is, “you shouldn’t” which is followed by a quick, “it depends”. The short statement that follows is that SPX or VIX is an either – or question. The choice may depend on whether VIX is high or what sort of stock market pull back are you expecting. The more dramatic a drop in the stock market, the higher you would expect VIX to be as the dust settles. Another thought will depend on where VIX is trading. If VIX is at 13.00 the calls may make sense. VIX at 20.00 is another story, with VIX at 20.00 SPX options may be more attractive. Looking at (once again unofficial) average daily volume for SPX last month it appears that may have been the hedging choice of several market participants that would go through the either – or exercise.

SPX Options

Average daily volume for SPX was about 975,000 contracts a last month. This is a drop from 1.3 million in October, but about 10% higher than the average daily volume in 2014.

Light VIX option volumes over the past couple of months are a headline grabbing story.  However, buying calls on VIX is not necessarily an attractive trade with VIX hovering around 20.00. It does appear that traders are taking advantage of recent VIX gyrations through VIX futures trading, which was pretty strong last month and hedgers are turning to strategies using SPX options while VIX remains fairly elevated.

Last Week in VIX – 2/1/2015

The stock market continues to be jittery with the S&P 500 dropping almost 3% last week.  This price action resulted in a 25% move higher in VIX. I was in the classroom most of Friday so I wasn’t as focused as I would like to have been on the intraday price action. I was pretty surprised to see the February future settle at a premium to the index. With VIX over 20 we would expect at least a little backwardation. I could understand the shape of the curve below if February settlement were this coming week, but we’ve still got twelve more trading days until February VIX settlement is determined on the open on the 18th.

VIX Curve

The classroom at the Options Institute is just a few feet away from the VIX pit. Despite the market sell off the VIX pit was pretty quiet for the majority of the trading day. The audible volume picked up in the last couple of hours with a spread trade that expects lower VIX in the next couple of weeks.   With VIX around 20.50 there was a seller of 10,000 of the VIX Feb 19 – 22 Call Spreads who took in a credit of 0.96. The best case scenario is February VIX settlement below 19.00 which results in a profit equal to the credit taken in. On the other side of the coin, VIX over 22.00 will result in a loss of 2.04.


Last Week in Volatility Indexes and ETPs – 2/1/2015

Friday the S&P 500 sold off and broke below the psychologically significant 2000 level. Other than being a round number that’s about all the significance I would give to 2000.  If I were still a full time trader the number I would be more concerned with is 1990. The first chart this weekend is a daily closing chart for the S&P 500. I did write a book on technical analysis (like 9 years ago) but do not claim to be a master technician. However it sure appears to me that support for the first month of 2015 has been around 1990. To be specific the intraday low this year is 1988.12 and the closing low is 1992.67.

SPX Daily

I like to look to the volatility markets for some sort of sign as to what the mind of the market may be. Below is the term structure chart of S&P 500 volatility as determined by four volatility indexes – VXST (9 Day), VIX (30 Day), VXV (93 Day or 3 Month) and VXMT (184 Day or 6 Month). The blue line, which shows the curve as of Friday’s close is as flat as I have ever seen it. I have often equated a flat VIX futures term structure to balanced uncertainty among listed derivatives traders. Stated in laymen’s terms, “it appears the market’s outlook is as certain as a coin flip”.


With the VIX term structure all over the place, the long volatility oriented ETPs are had a great January. VXX was up just over 17% to begin the year with TVIX and UVXY putting up 28% gains in January, although for both the unleveraged and leveraged funds almost all the performance came last week.


At least one trader was pretty happy with the drop in the S&P 500 and gain in VXX. Last Friday (the 23rd) someone came in and bought 5,000 VXX Jan 30th 31.50 Calls at 1.16 and sold 5,000 VXX Jan 30th 35.00 Calls for 0.37 and a net cost of 0.79. All this was going on when VXX was trading around 31.46 which is highlighted on the payoff diagram below. The maximum loss was equal to 0.79 while the maximum gain, at expiration, comes to 2.79 which was the result as VXX finished Friday well above 35.00. This is highlighted in purple on the far right side of the chart.


Extended Trading Hours Planned for SPX and VIX Options – By Matt Moran

Investors from around the world have expressed interest in Extended Trading Hours (ETH) for key risk management tools, and, since June 2014, the trading hours for futures on the CBOE Volatility Index® (VIX®) have been expanded to nearly 24 hours a day, five days a week.


CBOE is planning to launch Extended Trading Hours for options on both the S&P 500 and the VIX indexes next month, contingent upon SEC approval.

CBOE Regulatory Circular RG15-014 (available at provides that —

“… [CBOE] has received [SEC] approval of its rule filing to introduce Extended Trading Hours (“ETH”) for options on the S&P 500 Index (SPX/SPXW) and on the CBOE Volatility Index (VIX). … CBOE intends to launch ETH following SEC approval of proposed rules of The Options Clearing Corporation (“OCC”) related to ETH, which is expected later this quarter. Assuming SEC approval of the pending OCC rules in mid-February, CBOE intends to commence trading in the ETH session on Monday, March 2, 2015 for VIX and Monday, March 9, 2015 for SPX/SPXW … Trading hours will be from 2:00 a.m. to 8:15 a.m. Central time (“CT”). …” (emphasis added).

In 2010 CBOE Futures Exchange (CFE) began offering futures on the VIX Index during select limited Extended Trading Hours. Beginning on June 22, 2014, VIX futures trading hours were expanded to nearly 24 hours a day, five days a week. The highest average daily volume for VIX futures during ETH in a month was 28,365 contracts in October 2014, and on October 15, 2014, the VIX Index closed at 26.25, its highest daily closing value in 2014.

ETH VIX Futures volume2-VIX Futures & VIX Index Jan 2015
In the year 2014 the average daily volume for VIX futures during ETH was 16,998 contacts.

For more information on ETH, please visit

Day One of 31st Annual Risk Management Conference Agenda

CBOE’s 31st Annual Risk Management Conference (RMC) will be held March 4 – 6, 2015 at the Park Hyatt Aviara in Carlsbad, California.  RMC is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products.  If you’re a financial professional interested in learning the latest risk management techniques and how to trade and hedge volatility, CBOE’s Risk Management Conference is an event you won’t want to miss.

The Park Hyatt Aviara is along the Pacific Ocean, 25 miles North of San Diego and 50 miles South of Orange County, California.  This year’s US conference has again drawn tremendous interest.  The CBOE RMC Europe in Dublin last September received high praise from attendees.


11:00 – 5:30:  Registration

12:30 – 1:45  Track One

Primer on Volatility Analysis and Trading Strategies

– Theory and practice of trading volatility by delta-hedging plain vanilla options versus trading in VIX-related products
– Stock index volatility skew and term structure and impacts on VIX-related products
– The design and performance of long, short and dynamic VIX-linked ETPs
– Utility for longer term investors and shorter term traders

Samuel Kadziela, Director of Education, Chicago Trading Company, LLC
Berlinda Liu, Director of Index Research and Design, S&P Dow Jones Indices

12:30 – 1:45   Track Two

Arbitraging Volatility Estimates

– Trading different estimates of volatility: Frequency arbitrage and beyond
– When is a volatility estimate tradable?
– A new tradable estimate based on High and Low

Bruno Dupire, Head of Quantitative Research, Bloomberg

1:45 – 2:00 Session Break

2:00 – 3:15   New Benchmark Indexes & Study on Use of Options by Mutual Funds and ETFs
– Beyond the BXM and PUT – Introducing new strategy benchmark indexes that use index options
– Presentation of a study with a novel list of dozens of ’40 Act funds that use options for portfolio management
– Discussion of issues such as, “Have options-based funds and benchmark indexes delivered lower volatility and higher risk-adjusted returns?”

William Speth, Vice President, Research and Product Development, CBOE
Edward Szado, Assistant Professor of Finance, Providence College

3:15 – 3:30   Coffee Break

3:30 – 4:45  The Evolution of Options Strategies on the Buy Side Trading Desk
– Selecting order channels for optimal execution
– The role of algos in options trading
– The benefits and challenges of extended hours trading
– Maximizing the value of the broker balance sheet
– The role of weekly options in institutional portfolios

Moderator: Andy Nybo, Principal, Head of Derivatives, TABB Group
Andrew Claeys, CFA, Director of Trading, Analytic Investors
Ken Kwalik, Vice President, Goldman Option Advisory Services
Mahsa Zeinali, Chief Operating Officer, Rosen Capital Advisors

4:30 – 5:30  Registration Continues

6:00 – 8:30  Opening Reception and Dinner

There is limited space available at CBOE RMC.  For more information about the full agenda, topics, speakers and registration forms, go to http://www.cboermc/agenda

We will be reporting from each presentation all three days with updates, Tweets, Blogs, CBOETV, etc. and will be talking to presenters and attendees.   To follow the conference go to

Last Week in VIX – 1/25/2015

The S&P 500 was strong and VIX was weak last week. We returned to contango in VIX world as the S&P 500 was up 1.6% for the week. This despite having a tough Friday. Note the February future is at a pretty nice premium to the spot index. This may be a function of the people of Greece going to the polls this weekend, a two day Fed meeting, and a slew of economic numbers coming out next week.

VIX Curve

Near the top of my weekend ‘must read’ list is Steven Sears’ Striking Price column in Barron’s. This weekend’s column discusses a topic that is always on my mind and what I write of at this very moment – VIX. Buzz Gregory at Goldman Sachs is calling for an average of 16.00 for VIX in 2015. For some perspective so far this year VIX is averaging 16.66 and going all the way back to 1990 the long term average daily close for VIX is 19.94 (or 20.00 for the VIX tourists that only speak of VIX when the market is under pressure).

VIX averaging around 16 does not bode well for stocks in 2015 or 2016 for that matter. The chart below is one of my favorites showing the rolling 1-year, 5-year, and 10-year average close for VIX from 2000 through 2014.

Long Term VIX Averages

Note VIX dipped for a couple of years (2005 and 2006 where it averaged 12.81) before 2007 where it averaged 17.54. The past two years appear to be somewhat of a repeat of those two years with VIX averaging in the low 14’s. If Buzz is correct, and he’s a sharp guy so there’s no reason to doubt him, then this may be the beginning of a couple of years of elevated VIX levels. Why should even the VIX tourists care? For VIX to average higher levels we will also need to see the S&P 500 under pressure.


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