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.

Last Week in Volatility Indexes and ETPs – 1/25/2015

Last week was another roller coaster ride for the equity market and subsequently the volatility markets. The VXST – VIX – VXV – VXMT volatility curve shifted back into contango and shook off a mild market drop on Friday to stay that way. With VIX having a 16 handle, I am beginning to wonder if traders are reaching an exhaustion point from reacting to dramatic down days in stock prices.


The long volatility funds such as VXX had a tough week losing around 9%, again despite the market drop on Friday. Even VXZ came under some pressure as the longer end of the volatility curve lost value as well.

Options ETNs

Late Friday, as I was looking for something to write about this weekend, someone came in with an interesting trade in VXX for next week. There was a buyer of VXX at 32.10 who sold the VXX Jan 30th 33 Call at 0.80. I am well aware that covered calls are not exactly the most exciting trade going, but looking to next week and some stats about VXX, the logic makes some sense.

This weekend there are elections in Greece which is an area of the world that has caused market volatility over the past few years. In addition there is a two day Fed meeting that ends on Wednesday and there are several economic numbers over the course of the week. Finally, next week represents the busiest part of the fourth quarter earnings reporting season.

VXX PO Fixed

So why I find this trade interesting starts with the downside. The break even for this trade is 31.30 or down 2.5%. A couple of strong days for VXX and 31.30 could be far in the rear view mirror. The upside is capped at a gain of 1.70 which is close to 5%. If we get a big move to the upside in VXX the time value for the VXX 33 Call will move down to close to nothing allowing the trade to be exited for a profit by the end of the week. Finally, if VXX comes in quickly, the trader can always roll down their short call to try to salvage something from the trade. A covered call is considered dull by many traders, but like everything else in the volatility space it can be pretty dynamic.

Block Trade Analysis – VIX Jan 20 Calls from 1/20/2015

Yesterday as the trading day got started I heard a shout to my right (which is the direction of the VIX pit) as a big trade came into the VIX arena. It turns out all the hubbub was about a buyer of 80,000 VIX Jan 20 Calls who paid 0.75 for 8,370 and 0.80 for 71,630 of those options. Being the day before January VIX settlement this trade was a bit of a surprise, but also got a lot of attention. Later in the day, with VIX higher, a (maybe the same?) buyer returned purchasing about 70,000 of the VIX Jan 20 Calls. This time they paid 1.05 and 1.10 for those options. The net result of these two orders was a purchase of close to 150,000 VIX Jan 20 Calls at an average price of about 0.93. I put together a 5 minute chart of VIX from yesterday and highlighted where the index was when these two orders were executed.

VIX Chart Fixed

Trade 1 is the purchase at 0.75 and 0.80 and Trade 2 is the purchase at 1.05 and 1.10. Note after the second order is done VIX also seems to be done for the day, at least to the upside. Of course that’s pretty easy to see with the rest of the day shown on the chart.

So now that January VIX contracts have gone off the board and settled at 0.97 I decided to take a look at some numbers and gain clarity into what went on here. Was this trade a one day hedge against a catastrophe in the markets? Did someone expect the State of the Union address to push equity prices lower on the open today? Was someone expecting Putin to do something last night to expand breathing space for the ever growing Russian population? I’m pretty certain the answer is no to all these questions. The answer is much less exciting than exciting than any of these assumptions…

It appears that a fund was short a large number VIX Jan 20 Calls and didn’t want to hold the position into expiration. The open interest in these options dropped from 334,000 to 193,000 overnight which is pretty close to the size of the trade.  I know that’s not exciting and there’s not much of a story to tell here. The execution probably could have been better and VIX settlement was only 0.04 higher than the cost of getting out of this position. However, I am pretty sure one fund manager slept a little better last night after getting out of that position.

Last Week in VIX – 1/18/2015

If the January VIX futures could speak they probably would say something like, “I told you so”. Of course the contracts can’t speak, but the point behind this is a week ago the January contract closed at a pretty substantial premium to VIX relative to recent history. A week later both the January contract and spot VIX are higher. Remember VIX futures are priced based on a risk premium associated with being short volatility or the anticipation that VIX make move up in the near term.   A wide spread doesn’t always mean VIX is going to move higher, but the Monday morning quarterback in me sees it now.

VIX Curve

January VIX options and futures expire this coming Wednesday on the close. At least one trader expects VIX to make a big move higher or lower between now and settlement date. The specific trade was a buyer of the VIX Jan 16 – 22 – 30 Iron Butterfly. This involved selling the VIX Jan 16 Put and VIX Jan 30 Call then buying the VIX Jan 22 Put and VIX Jan 22 Call. All these trading legs were combined for a net cost of 2.65. The payoff diagram below shows how this trade will turn out if held to expiration on the open Wednesday.


For this trade to work January VIX settlement needs to be either lower than 19.35 or higher than 24.65. To the downside the potential profit is capped at 3.35 while settlement at 30.00 or higher would result in a profit of 5.35.

Last Week in Volatility Indexes and ETPs – 1/18/2015

Despite Friday’s rally, the S&P 500 was down four of five days and gave up about 1.25% last week. At the worst point the S&P 500 was down over 3% on the week and then of course it shook off the dip and rallied to end the week. You can’t keep a good market down nor does it appear can the bears keep this market down either. All four of the S&P 500 oriented volatility indexes were higher for the week. And the curve became slightly inverted.


VXST is higher than the three other indexes even in front of a three day weekend. For those new to VXST, the index is more or less a nine day version of VIX with those nine days representing calendar days. An extra day off like we have this Monday places a bit of a headwind in front of VXST which will recover some of that value on Tuesday morning. Of course the stock market action will dictate just how much of that value is recovered. Something that stood out to me on the term structure diagram above was where VIX is relative to VXV. The slight discount may be partially attributed to the impact of a three day weekend, but regardless of the circumstances VXV higher than VIX is a bit unusual when VIX is up almost 20% on the week.

The long volatility oriented exchange traded notes and funds had a great week rising 10% with the leveraged funds rising about 22%. Both the short dated inverse funds and longer dated inverse fund (ZIV) were lower by 10% and over 4% respectively.

ETPs - Index Table

Finally I want to give a little more love to VVIX which continues to trade at levels above recent and longer term averages. VVIX over 110 indicates demand for VIX options (mostly calls) remains strong which can be taken as concern regarding a stock market drop still being persistent among volatility traders. The chart below shows the daily closing prices for VVIX from the first day of 2014 through this past Friday. For a longer term perspective CBOE has VVIX data going back to the first day of 2007. The long term average for VVIX is just over 86 or about 24 points lower than Friday’s close.

VVIX Daily

Fear of Fear Itself Reaches Crisis Levels

Franklin Delano Roosevelt would be disappointed. The US fear index, officially named the CBOE Volatility Index (VIX), has ticked up, averaging 16.4 since the beginning of Q4 2014, compared to 13.5 in the first three quarters of last year. If the story stopped there, we might still be able to look FDR in the eye. But we are in an even worse condition. Contrary to his advice, we are fearing “fear itself,” and doing so at levels typical of major crises, including the financial meltdown of 2008.

How do we know we are this anxious? The “VVIX” tells. The VVIX is an index that measures the volatility of VIX – in other words, the volatility of volatility.

I have seen people shake their heads in disbelief that the quants at CBOE would afflict us with an index so perplexing. If you think the same, it’s worth putting your reaction aside and getting to know this index. It says something interesting.

Here’s what you need to know about VVIX:

  1. It uses the same methodology as VIX, but instead of communicating the 30-day implied of volatility of the S&P 500, it tells you the 30-day implied volatility of VIX itself.
  2. Instead of using options based on the S&P 500 in its calculation, this index uses VIX-based options.
  3. In terms of performance, VVIX and VIX are not as closely tied as VIX and the S&P 500. VVIX has spiked at different times when VIX has jumped, but when VIX is low, VVIX bounces around more than you would expect.
  4. Like VIX, VVIX is mean reverting, but it reverts to a much higher level. The average for the VVIX since 2007 – the first year when VVIX posted values for every trading day – is 86.1, compared to 21.8 for VIX for the same period.

With all this in mind, let’s take a look at a chart.


What jumps out is that VVIX in recent weeks and months is significantly up, even as VIX has stayed near its average. Why would this be? My honest answer is that I don’t know, but it could stem from the nature of the issues we are facing.

In many of the past crises, we have encountered challenges that were difficult to resolve but easy to define, in terms of timetable and influencing factors. An example would be the US government debt crisis of 2011. We were caught between two familiar political parties butting heads and creating uncertainty around the US national budget. Though we didn’t know the outcome at the time, the source of the uncertainty and the decision points that would determine what would happen in this crisis were widely known.

The challenges we are facing now are different. The drop in the oil price and the tensions between Russia and Ukraine are open ended – there is no known timetable for resolving these two issues – and they are much more complex in nature. The actions of many governments, companies, and individuals will determine how these crises evolve. To channel Donald Rumsfeld, all of this ambiguity creates worry about “unknown unknowns” and fear of fear itself.


New Study Presents First-Ever List of 119 Funds That Use Options – By Matt Moran

A groundbreaking new study — “Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs” — analyzed SEC-regulated investment companies that focus on use of exchange-listed options for portfolio management (options-based funds). Key highlights of the study are summarized below, and for more analysis please visit

CO-AUTHORS of the CBOE-commissioned study (on behalf of INGARM) are Keith Black, Ph.D., CAIA, CFA, Managing Director of CAIA (Chartered Alternative Investment Analyst Association) and Edward Szado, Ph.D., CFA, Assistant Professor of Finance, Providence College.

GROWTH IN NUMBER OF FUNDS. The study found that the number of options-based funds grew from ten in 2000 to 119 in 2014, and it presents a first-ever publicly available list of names and ticker symbols for those options-based funds.

001-Number of Funds
OPTIONS-BASED FUNDS OVER 15 YEARS. The study analyzed the equal-weighted performance of a subset of the options-based funds — those that focus on use of U.S. stock index options and/or equity options, and during the 15-year period from 2000 through 2014, found that these funds had –
(1) had similar returns as the S&P 500 and higher returns than the MSCI EAFE Index;
(2) had lower volatility and a lower maximum drawdown than the S&P 500 and S&P GSCI indexes

002-Cumulative Growth OpBFds

The average annual distribution yield for Options-Based Funds was more than 5% in each of the last nine years. While this distribution yield does not guarantee a positive performance by the funds, the distribution yield feature may appeal to investors who are discouraged by low interest rates for traditional fixed income products.

BENCHMARK INDEXES SINCE MID-1988. The study also found that the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY) both produced higher returns and lower volatility than the S&P 500 and S&P GSCI indexes during the period from mid-1988 through the end of 2014. A key source of strong risk-adjusted returns for index-option-writing strategies has been the fact that index options usually have been richly priced. A chart in the study shows the average gross monthly premiums for the BXM Index.


GROWTH IN NOTIONAL VALUE. Institutional investors often inquire about the notional capacity of markets in financial instruments. The estimates for notional value of average daily volume in SPX options rose from $13 billion in 2000 to more than $170 billion in 2014. Some investors do use a delta-weighting adjustment to develop a more conservative estimate of notional value of options trading, and the bid-offer spreads for many instruments can widen in time of high anxiety.


CONFERENCE. The study will be included in one of many presentations at the 31st annual CBOE Risk Management Conference (RMC) on March 4 – 6, 2015, at the Park Hyatt Aviara in Carlsbad, CA.

MORE INFORMATION. For more information on the new study, and testimonials and videos by fund managers, please visit



Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at The information in this paper is provided for general education and information purposes only. No statement within this paper should be construed as a recommendation to buy or sell a security or to provide investment advice. The BXM, BXY, CLL and PUT indices (the “Indexes”) are designed to represent proposed hypothetical options strategies. The actual performance of investment vehicles such as mutual funds or managed accounts can have significant differences from the performance of the Indexes. Investors attempting to replicate the Indexes should discuss with their advisors possible timing and liquidity issues. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for strategies such as the Indexes could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors should consult their tax advisor as to how taxes affect the outcome of contemplated options transactions. Past performance does not guarantee future results. This document contains index performance data based on back-testing, i.e., calculations of how the index might have performed prior to launch. Backtested performance information is purely hypothetical and is provided in this paper solely for informational purposes. Back-tested performance does not represent actual performance and should not be interpreted as an indication of actual performance. It is not possible to invest directly in an index. CBOE calculates and disseminates the Indexes. Supporting documentation for any claims, comparisons, statistics or other technical data in this paper is available from CBOE upon request. The methodologies of the Indexes are the property of Chicago Board Options Exchange, Incorporated (CBOE). CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index® and VIX® are registered trademarks and BXM, BXY, BuyWrite, CLL, PUT, PutWrite and SPX are service marks of CBOE. S&P® and S&P 500®are registered trademarks of Standard and Poor’s Financial Services, LLC and are licensed for use by CBOE. Financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in such products. All other trademarks and service marks are the property of their respective owners. The Indexes and all other information provided by CBOE and its affiliates and their respective directors, officers, employees, agents, representatives and third party providers of information (the “Parties”) in connection with the Indexes (collectively “Data”) are presented “as is” and without representations or warranties of any kind. The Parties shall not be liable for loss or damage, direct, indirect or consequential, arising from any use of the Data or action taken in reliance upon the Data. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without the written permission of CBOE. Copyright © 2015 CBOE.  All Rights Reserved.


Last Week in VIX – 1/11/2015

This past week was one of those where the week over week change in the VIX term structure does no justice whatsoever to the price action. The S&P 500 dropped 0.65% from Friday to Friday. However, at the worst point the S&P 500 was down 3.2% and at the highest point the S&P 500 was up 0.30% from the previous week’s closing price. In response to the rollercoaster of a week I’ve added a third curve to the graphic below. The purple and inverted line shows the term structure for the VIX futures market on the close Tuesday. Adding this third line gives traders a bit more perspective on how tough things were in the markets last week.

VIX Curves

One other point I’d like to make about the curve above is how spot VIX dropped a tad, but the futures were all higher. Keep in mind the level of VIX futures is determined by an outlook of where VIX will be in the future along with a risk premium as to the possibility of a ‘spike’ in VIX. If VIX moves lower and the futures move up it can be an indication that traders are less reluctant to be short volatility in the current market environment.

Looking over trading activity on Friday I came across a trade that is looking for VIX to stay over 17.00 between now and January settlement. Shortly after the open on Friday there was a seller of the VIX Jan 17 Puts at 0.93 who also purchased the VIX Jan 19 Calls for 0.98 and finished up the trade by selling the VIX Jan 24 Calls for 0.40. The net result of these three trades was a credit of 0.35 and a payoff that is illustrated by the diagram below –


Note where the risk is for this trade – to the downside. I included all prices down to 10.00 as that is about as low as VIX has gotten over the past 25 years, but always keep in mind theoretically VIX could go much lower. This trade turns into a loser if held to expiration and January VIX settlement comes in at any price below 16.65. Profits can run to 5.35 where any settlement over 24.00 results in payoff being capped at this level.

Last Week in Volatility Indexes and ETPs – 1/11/2015

When we have volatile weeks like last week I will alter the various term structure of volatility charts included in these blogs. The first graphic is an example of this where I added Tuesday’s closing levels for VXST, VIX, VXV, and VXMT to the typical week over week curve. Something that really stands out to me on this graphic is the shape of the Tuesday close. There is no inversion with VXST moving to a premium relative to VIX and the levels at the far end of the curve (VXV and VXMT) are at a slight premium to near term volatility. Stated more plainly despite elevated volatility the shape remains normal which can also be interpreted as displaying minimal panic.


The lack of panic showing up in the term structure curve can be interpreted two ways. First, the market is somewhat mentally prepared for extra volatility. The other idea behind this activity is that the market was expecting a rebound which it got the next two days before dropping again to finish the week down.

I came across an article this past week discussing the high level of the VIX of VIX (VVIX) as of late. This positing actually referred to VVIX being at ‘panic levels’. Using a long term history of VVIX that’s not really true. The chart below shows VVIX for all of 2014 and the first few days of 2015. The average over this full time period has been about 84 with the average since October 1st coming in at 99.

VVIX Daily

When I first started looking at VVIX over four years ago the historical range was 80 to 120 with an average of about 100. For the past three years this range was pretty low with VVIX visiting the 60’s. I think we are back to a ‘normal’ level for VVIX based on long term history and not necessarily panic levels.

It’s early in 2015, but so far so good for VXX and the long oriented VIX related ETPs. The opposite may be said for the short funds which have been feeling the impact of the various moves up in VIX. Note the short funds gave up over 4% with VXX and the other long funds gaining closer to 3% last week. The market continues to demonstrate how inverse funds will not match the opposite performance of their long counterparts since the inverse funds match a daily performance while the long funds match the direct performance of the strategies they are created to follow.

Option ETP Table

BXY Index Highlighted by Rampart and by Goldman Sachs

What do portfolio managers say about investments to consider in times of high price/earnings ratios for stocks and low interest rates for bonds? One money manager, Ronald Egalka, President and Chief Investment Officer, Rampart Investment Management Company in Boston, has noted –

“Market experience ranks among our most valuable assets. Since 1983 Rampart has responded to different market scenarios with systematic and disciplined options solutions, helping clients generate incremental yield, soften downside risk and dampen volatility. Over a decade ago, Rampart recognized the need for an options benchmark to help investors appreciate the special risk-reducing, return-enhancing characteristics of buying a portfolio of stocks and systematically selling calls on that portfolio. In 2003 Rampart became the first licensee of the CBOE S&P 500 BuyWrite Index or ‘BXM.’ Other important benchmark indexes that sell one-month S&P 500® (SPX) options include the CBOE S&P 500 2% OTM BuyWrite Index (BXY) and the CBOE S&P 500 PutWrite Index (PUT). Over the past 25 years, all of the foregoing CBOE indexes have had less volatility than the S&P 500 stock index.”


A Barron’s Striking Price column on November 22, 2014, by Steven Sears – “An Options Play for a Low-Return Market” – stated that Goldman Sachs reps —

“… note that CBOE’s S&P 500 2% OTM BuyWrite Index (BXY), which tracks the performance of monthly 2% out-of-the-money call sales, has historically outperformed in periods of low S&P 500 returns. They think the options strategy will be attractive during the second half as the market slips at the time of the Fed hike. ‘The potential incremental return generated by call overwriting is significant,’ Goldman is telling clients. Indeed, when S&P 500 returns have been between 0% and 5%, investors implementing the BXY overwriting strategy have outperformed the index by an average of 264 basis points (2.64 percentage points)…”


As shown in the charts below, since the late 1980s the BXY Index had higher returns and lower volatility than the S&P 500 and S&P GSCI (commodity) indexes. A key driver of the strong performance by BXY is the fact that index options usually have been richly priced in past years. Past performance is not a predictor of future returns. To learn more about portfolio managers and CBOE benchmark indexes, please visit

BXY line ch Dec 2014 for VVAnnlz Ret BXY Dec 2014Stand Dec BXY Dec 2014

No statement in this blog should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Past performance does not guarantee future results. This webpage contains index performance data based on back-testing, i.e., calculations of how the index might have performed prior to launch. Backtested performance information is purely hypothetical and is provided on this webpage solely for informational purposes. The inclusion of statements by non-CBOE representatives in this Blog should not be construed as an endorsement or an indication of the value of any product, security, fund, service, or other website.


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