Is The Fed’s CCAR Pushing Up the SKEW Index and Driving More Demand for O-T-M SPX Puts? By Matt Moran

In a December 8 Bloomberg news report – “Who’s the Bear Driving Up the Price of U.S. Stock Options?” – Joseph Ciolli wrote – “For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks.”


The levels of the CBOE SKEW Index indicate increased demand for out-of-the-money (O-T-M) SPX puts during the past couple of years. The average daily closing levels of the CBOE SKEW Index have been —

(a) 118.0 since its start date in January 1990,
(b) 129.8 in 2014 (the all-time high for any year), and
(c) 126.9 in 2015 (through Dec. 8).

1-SKEW Index thr Dec 8

The value of the SKEW Index increases with the tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. Historically, SKEW has varied in a range of 100 to 150 around an average value of 118. The FAQ on the SKEW Index notes that – “The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.”


The volatility skew charts below show that Bloomberg’s estimates for SPX 30-day implied volatility on recent dates were quite a bit higher for SPX options at 80% and 90% moneyness when compared with SPX options with moneyness at 100 or higher. Reports have indicated that O-T-M SPX put options usually have had higher implied volatilities than at-the-money SPX options and O-T-M SPX call options since 1987.

2-Volatility Skew two dates SPX

At his comprehensive December 1 presentation at the First Annual CBOE Risk Management Conference (RMC) Asia in Hong Kong, Buzz Gregory of Goldman Sachs discussed skew –

  • (1) The skew for the S&P 500 is the highest of any major market in the world, and
  • (2) The S&P 500 skew may remain high because of regulatory pressure on big banks to hedge big downside risks. Regulatory initiatives include – (a) Comprehensive Capital Analysis Review (CCAR), an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress, (b) Dodd-Frank Act stress testing is a forward-looking component conducted by the Federal Reserve and financial companies supervised by the Federal Reserve to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.


In his December 8 Bloomberg news report, Joseph Ciolli wrote about the possible reasons for the higher S&P 500 skew levels —

“… While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank AG says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. ‘Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,’ said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. ‘The way the marketplace has compensated for that is by driving up S&P skew.’”


If you expect that the SPX skew levels will be relatively high in upcoming months or years, what are some options strategies that an investor might consider? One of the most straightforward strategies to consider would be the sale of O-T-M cash-secured SPX put options.

On the writing of SPX put options, the website has links to a number of papers on and these two benchmark indexes that write cash-secured SPX puts that are only slightly out-of-the-money – CBOE S&P 500 PutWrite Index (PUT) and CBOE S&P 500 One-Week PutWrite Index (WPUT).

Some mutual funds now are engaging in the sale of cash-secured puts; for a listing of more than funds that engage in a variety of options strategies, please visit for a 2015 paper on “Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs” – Slide Presentation (30-page PDF) and Highlights (4-page PDF). (CBOE does not endorse mutual funds). According to the analysis in the paper, the number of ’40 Act funds that use options rose from 10 in 2000 to 119 in 2014.

3 - options based funds chart

VIX Last Week – 11/29/2015

The S&P 500 was hardly changed on the week last week and the same may be said for VIX and the monthly term structure.  The lines don’t overlap, but if I am not wearing my reading glasses the chart below almost looks like the same line.

VIX Table

The only thing of interest to report about the short term futures chart is the dip that shows up on the orange line below.  That’s the contract that expires just before Christmas which may be discounting several holidays which will figure into implied volatility of SPX options expiring after three market holidays.  We always would witness a little discount in the traditional December contract and now it is showing up in the Weeklys as well.  Note that this is a generic chart and last week (the black line) this contract was Week 5.  It’ll be interesting to watch it move across the chart from week to week.

VIX ST Curve Table

One trader is betting that no black swans show up over the next few weeks.  On Friday there was a seller of the VIX Dec 26.00 Calls at 0.22 who purchased (for protection?) the VIX Dec 37.50 Calls at 0.04 for a net credit of 0.18.  All is well with this trade as long as standard VIX settlement is not over 26.18.  Things get pretty ugly if VIX returns to the upper 30’s for the holidays though.


Volatility Indexes and ETPs Last Week – 11/29/2015

Very quiet holiday week.  There really isn’t much else to say, but it is interesting that VIX remains over 15.00.  I’m also attributing the rise in VXST to getting a holiday shortened week behind us.  Man I’m glad it’s not my job to fill up a business network with programming which must have been a heck of a challenge last week, especially on Friday.


The funds were quiet as well, but you have to snicker when a 2.7% change (see VXX below) is considered nothing to get excited about.  SKEW continues at very high levels which means tail protection in the SPX arena isn’t cheap as the out of the money implied volatility continues to be bid up.

VXX Table

Someone is either looking for a big directional move out of VXX next week or possibly planning on trading around two long VXX option positions.  Whatever the motivation, just after lunch time on Friday there was a buyer of the VXX Dec 4th 19 Put at 0.80 and VXX Dec 4th 19 Call at 0.60 for a net cost of 1.40.  This all happened when VXX was trading at 18.81.  If held to expiration VXX needs to be over 20.40 or below 17.60 for the trade to turn a profit.  Based on the 18.81 pricing at the time of the trade VXX needs to rise about 8.5% or drop around 6.5% to break even.


After I put this trading example together, I spent some time thinking about different reasons to put on a VXX straddle.  I’m thinking out loud and major league jet lagged, but it occurred to me that this could be a ‘cheap’ hedge against a black swan event.  When I say cheap, I mean if the market is quiet next week the Put will have some value which offsets the cost of the call option which probably would expire out of the money.  Usually when you want to offset the cost of an option you sell another option.  For instance to lower the premium for the Dec 4th 19 Call a call option with a strike that is farther out of the money could be sold.  However, in that case a trader is giving up some upside.  Any thoughts are always appreciated –

VIX Last Week – 11/22/2015

The VIX term structure returned to normal from slight backwardation last week as the S&P 500 rose over 3%.  Two years ago a 3% move in the S&P 500 probably would have resulted in VIX under 12.00, but these are different times and with a rate hike looming down to the mid 15’s is the best we can expect.

VIX Curve with Table

The short dated term structure ended the week in slight contango which has been the norm when VIX drops since the futures were launched back in July.  The curve tends to be flat when VIX moves up slightly and has gone into backwardation during periods like late August.

ST VIX Curve with Table

Earlier this week I wrote a blog about some large trades in VIX Weeklys Options that expire on the open next Tuesday.  One of the trades was a seller of about 17,000 VIX Nov 24th 16 Puts.  That blog can be read at Block Trade Analysis – VIX Weeklys Option Trades.   So yesterday either that seller added to their position or someone decided that November 24th VIX settlement would come in over 16.00 and about 20,000 more VIX Nov 24th were sold at 0.30.  VIX finished the week at 15.47, but the November 24th VIX Future finished the day at 16.325.  I think there are one or two traders hoping that spot VIX moves toward the future early next week.


Volatility Indexes and ETPs Last Week – 11/22/2015

The shift for the VXST – VIX – VXV – VXMT curve was dramatic, but sort of what we have become use to in this buy on the dip culture.  VIX finished the week under 16.00, which voids a prediction that I had for the rest of the year.  I felt concerns about a December rate hike and the impact on stocks into 2016 would keep VIX elevated for the final few weeks of the year.


VXX and the other long funds came under pressure based on the drop in VIX and VIX futures last week.  The leveraged funds also got hit pretty hard as would be expected.  What stands out to me below is that VVIX remains pretty high despite the drop in VIX last week.  Demand has remained high reflecting demand for out of the money VIX calls.

VXX Table

On Friday one of the biggest VXX option trades seems to have a two-step mentality behind it.  In order for the trade to be successful VXX needs to run to the 30’s in the beginning of 2016.  The trade is a VXX calendar spread selling VXX Dec 18th 30 Calls for 0.21 and buying VXX Jan 15th 30 Calls for 0.56 and a net cost of 0.35.  The payout diagram below is based on pricing at the market close on December 18th.


Note how much VXX can ‘over shoot’ 30.00 and the trade still results in a profit.  However, I think the trader would be much happier if VXX runs up after December 18th but before January 15th as shown in the diagram below.  Assuming VXX finishes under 30.00 on December 18th and the short leg of this calendar spread expires out of the money, here’s the payoff for the long VXX Jan 15th 30 Calls at expiration.


Block Trades Using VIX Weeklys

Tomorrow is November VIX settlement, but that hasn’t stopped some short term VIX traders from putting on new positions, in fact it may have encouraged them to do some trading.

I ventured down to the trader floor late today to see what may be going on in the VIX Weeklys options set to settle on the open next Tuesday.  For those that know VIX well, you know that VIX futures and options normally settle on a Wednesday, 30 days before an expiration Friday.  However, December 25th is a Friday (and a holiday) so we have SPX options expiring Thursday the 24th of December.  Backtrack 30 days and we get a VIX Weeklys settlement on the open next Tuesday.

With about 30 minutes to go in the trading day I noticed the VIX Nov 24th 17, 18, 19, and 20 Calls all had traded about 7,000 contracts.  On the other side of the board over 17,000 VIX Nov 24th 16 Puts had traded.

I investigated further and it appears the Nov 24th 16 Puts traded in several lots over a 2 minutes period early in the day at an average price of about 0.28.  It appears it was paper selling.  The payoff on the open next Tuesday appears in the diagram below.  Note I’m only putting spot VIX on the diagram, which was at about 18.40 when the trade went off, since there’s a good chance this trade is to be held to settlement.

VIX PO 16 Put

The call trades were a little more perplexing.  But I did figure out that there was a seller of the VIX Nov 24th 18 Calls at 1.15 who purchased the VIX Nov 24th 20 Calls for 0.64 (net credit of 0.51 when VIX was at 18.00) and a seller of the VIX Nov 24th 17 Calls at 1.57 who paid 0.82 for the VIX Nov 24th 19 Calls (net credit of 0.75 when VIX was at 18.10).  For brevity sake I combined these two payouts into a single diagram below with the purple line representing the 17 – 19 spread and the red line below showing the payout at expiration for the 18 – 20 call spread.


It appears there were both bullish VIX and slightly bearish VIX players in VIX Weeklys today.  Also, it appears that everyone is happy with November 24th VIX settlement between 16.00 and 17.00.

Finally – if you want to know more about VIX Weeklys you can always visit

VIX Last Week – 11/15/2015

VIX managed a finish over 20 as Friday’s market action raised the level of concern among market participants.  You have to wonder if Friday August 21st and the follow through on the 24th is still fresh in trader’s minds.

VIX LT w Table

The short term curve flattened out which seems to be the norm when VIX move higher, since VIX Weeklys are relatively new.

VIX ST w TableMid-day on Friday while VIX was still under 20.00 (19.60 to be exact), there was a buyer of the VIX Dec 25 Calls who paid 1.10 and now has exposure that benefits from a repeat of late last August.  Less than two minutes later someone came in and bought the same number of VIX Dec 20 Calls and paid 2.10 for those options.  Both trades were 7500 lots and come darn close to a ‘call stupid’ which is a spread trade where two calls are purchased.  The origin of calling this stupid trade relates to no selling, just buying options which means paying double premiums.  However, if we experience a sell-off in the S&P 500 between now and mid-December we will not be allowed to make disparaging remarks about the traders behind these trades.

Volatility Indexes and ETPs Last Week – 11/15/2015

The S&P 500 took a dive last week in what turned out to be the second worst weekly performance of 2015.  As of Friday the S&P 500 is down 1.7% for the year which would be the first noticeable loss (2011 was down less than 0.01%) since 2008.  The four volatility indexes that use S&P 500 as the underlying all shot higher.  What stands out to me is the high levels for VXV (3-month) and VXMT (6-month) on the chart below.  We are in the midst of high SPX implied volatility and the market expects this to continue into 2016.


All things VIX and VIX related rose last week with a couple of exceptions.  Of course the short funds were lower and TYVIX also lost a little value last week.  UVXY put up an exceptional week, rising about 45%, which is expected in such situations.  Those long funds get all kinds of flak until we have a week like last week and then you have traders wishing they had owned the funds.

VXX Table

In the middle of the afternoon on Friday, as VIX was flirting with 20 and UVXY was just over 35 (35.02) a trade came to the UVXY option market that is look for UVXY to give up the tremendous gains (and then some) realized last week.  The time frame for this trade goes out to just before the official start of summer, or June 17, 2016.  The specific trade was a buyer of the UVXY Jun 2016 25 Puts for 9.67 who sold the UVXY Jun 2016 20 Puts for 6.34 and a net cost of 3.33.  A payoff diagram for this long term bearish UVXY trade shows up below.


The break-even level for this trade is 21.67 or 42% below Friday’s closing price of 37.41 (note UVXY rallied 2.39 after the trade was initiated).  A full profit will be realized if the trade is held to expiration and UVXY is under 20.00 at the close on June 17th of next year.  This involves a drop of about 47%, which is a distinct possibility in the world of leveraged volatility oriented exchange traded products.

Skew Charts to Prepare for CBOE Conference in Hong Kong – By Matt Moran

This month I am planning to travel to the First Annual CBOE Risk Management Conference (RMC) Asia, which will be held on November 30 – December 1 at the JW Marriott Hotel, Pacific Place, 88 Queensway, Hong Kong. In my preparations for the trip, I am analyzing the skew charts for a number of option classes, including options on the S&P 500®, the CBOE Volatility Index® (VIX®), and the FXI ETF.


As noted in the White Paper on the CBOE SKEW Index, after 1987 the SPX options smile “has lost its symmetry and it is biased toward the put side.” Out-of-the-money (OTM) SPX put options generally have higher implied volatilities than out-of-the-money SPX call options, because in the United States there is heavy demand for downside protection with stock index put options.

1 - SPX Skew on Nov 12

The three charts in this Blog are from Livevol Pro, which is structured around proven, real-world decision-making processes of traders and market makers with long-term, profitable trading careers. The full range of data, calculations, alerts, and visualizations needed to execute successful trades is woven seamlessly into a single web-based tool with no download or install needed. You can sign up for a free 15-day trial of Livevol Pro at


The VIX Index often moves in the opposite direction of the SPX Index, and some investors buy OTM VIX call options for some portfolio downside protection in times of market stress.

2 - VIX Skew for review


It is interesting to note that there is more symmetry in the skew chart below for the FXI options than there is in the two skew charts above. At RMC Asia I plan to learn more about differing slopes in the skew charts for worlwide options.

4- FXI Skew


Information on the CBOE SKEW Index is at

On Twitter RMC updates are available at #CBOERMC.

Much more information on RMC Asia is available at


VIX Last Week – 11/8/2015

VIX finished the week closer to 14 than 15 based on a muted response to the employment number and a lack of known potential volatility events on the horizon.  The fear index did manage to spend a little time on Monday and Tuesday under 14.00 which is a level that many consider the new ‘floor’ for VIX since we are about to enter a period of increasing interest rates.    The futures all followed the index lower which would be expected with smooth sailing for the stock markets to be the consensus near term expectation.

VIX Curve - Table

I continue to plot the front five week VIX futures expirations in a generic format as shown below.  My goal is to get a handle on what we should consider a ‘normal’ short term VIX curve.  Flat to slight contango is what pops up when VIX is low.  The bump between the Week 4 (December 1st) and Week 5 (December 9th) futures had me checking the economic calendar, but I couldn’t find a good reason for that slight drop off on the right side of the chart below.

VIX Weeky Curve - Table

I went poking around on Thursday evening looking for trades that were executed in VIX options, but appeared to be focused on the pending Non-Farm Payrolls Number that came out this past Friday.  The only thing that popped out at me was a pretty large buyer of VIX Nov 11th 25 Calls for 0.05.  Considering spot VIX was around 15.00 when this buyer was in the market, I think they either expected a truly horrendous employment report, at least with respect to the impact on the equity market or they believe a market calamity is pending this weekend or at least before next Wednesday’s settlement.

What did catch my eye on Thursday was a couple of bull call spreads focused on December.  It’s a bit early to see such trades, but a lightbulb sort of went off Friday morning when I heard the odds of a rate hike in December increased after the release of the employment number.  If this anticipation starts to hang over the equity market as December 16th (which is both standard December VIX settlement in the morning and the FOMC announcement in the afternoon) approaches a rise in VIX is very possible.  Two trades, that both look to the 20’s for VIX, went off late Thursday.  One trader went long the VIX Dec 16th 19 Calls at 1.36 and sold the VIX Dec 16th 29 Calls for 0.37 for a net cost of 0.99.  The payoff at December VIX settlement appears below.


The other trade that looked to a higher VIX in the middle of December purchased the VIX Dec 16th 20 Calls at 1.19 and sold VIX Dec 16th 25 Calls at 0.61 for a net cost of 0.58 and a December payoff settlement that looks like the diagram below.



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