The VIX Factor

After a strong 2013, the US equity market took a dive in January 2014 and dropped more than 3%. Is it a temporary market correction or something more substantial? Everyone has his own answer. Regardless of your outlook of the market, January has reminded us that market volatility is still one of the major risks that investors have to take care of.

To directly hedge against equity market risk, investors traditionally buy put options to protect their downside. In recent years, more and more investors include VIX derivatives in their portfolio to manage their market risk, including VIX futures, options, exchange traded products and other OTC products. The main benefits of using VIX derivatives are: 1) VIX is negatively correlated (~ -77%) with the S&P 500 Index historically, and 2) this negative correlation is convex, meaning that VIX shows more reaction to large decrease in the equity market than to market increases. Exhibit 1 shows that rises of the S&P 500 VIX Short-Term Futures Index were usually higher than the losses of the equity market when the market was in stress.

Daily Returns of VIX Spot and Futures on the 10 Biggest Market Drops

Isn’t convexity a nice feature of VIX futures? Unfortunately it is no free; VIX futures can lose money even if VIX does not change. All futures have fixed expiration days; hence the S&P 500 VIX Short-Term Futures Index has to roll from the first month futures contract to the second month futures contract prior to the expiration on the first month contract. Since Dec. 2005, for the majority of the time (~ 83%), the longer term VIX futures were more expensive than the shorter term futures and a roll cost was incurred.

This roll cost of VIX futures is equivalent to the upfront premium for equity put options. It is the price of the downside protection. The only difference is that the roll cost is distributed throughout the month as the futures price converges towards the spot while the put option premium is paid up front.

Exhibit 2 shows that the roll cost has led to significant performance drag in the S&P 500 VIX Short-Term Futures Index.

Exhibit 2: Performance History of S&P 500, VIX and S&P 500 VIX Short-Term Futures Index

Performance History of S&P 500, VIX and S&P 500 VIX Short-Term Futures Index

To avoid paying too much for downside protection, investors have to adjust their allocation to VIX futures wisely and implement “just-in-time hedging”. To help investors to dynamically allocate to VIX, S&P Dow Jones Indices launched the S&P 500 Dynamic VEQTOR Index (“VEQTOR”) as a prepackaged investment solution. The Index monitors two market signals, implied volatility trend and realized volatility, and allocates dynamically to equity and volatility. It also has a “stop-loss” feature that moves 100% to cash when the index has experienced more than 2% loss in the past five business days.

Compared to S&P 500, VEQTOR shows lower maximum drawdown and faster recovery. On 3/9/2009, the S&P 500 dropped 55% since its previous peak (2447.08 on 10/9/2007). It took 1120 calendar days to recover (2449.08 on 4/2/2012). VEQTOR saw its maximum drawdown on 9/15/2008 when it dropped 18% since its previous peak (137005.24. on 10/9/2007). It took only 31 calendar days to restore that level (140308.26 on 10/6/2008). See Exhibit 3.

Performance History of S&P 500 and S&P 500 Dynamic VEQTOR Index

As all volatility reduction products, VEQTOR outperforms in bear market. It also participates in the growth but underperforms in strong bull market.

For more information, please join us during our webinar on Thursday.

Trading in VXST Futures Begins Thursday

Back in October at the CBOE Risk Management Conference in Europe the CBOE Short-Term Volatility Index (VXST – 14.51) was introduced as a compliment to the widely followed CBOE Volatility Index (VIX – 15.29).  VXST uses the same calculation methodology as VIX, but uses shorter dated SPX options which results in a nine day volatility measure as opposed to thirty days for VIX.  The chart below shows the daily closing prices for VXST and VIX since VXST was introduced on October 1, 2013.  For those that want to dig more into VXST’s history you can find closing prices since January 2011 at - VIX

A next big step for VXST was when CBOE began disseminating real time quotes for VXST in November. With respect to any volatility index quoted by CBOE real time refers to every 15 seconds.  Since going real time many traders have put VXST and VIX together on their trading screens to monitor intraday changes in nine and thirty day implied volatility as indicated by SPX option pricing.  This coming week we can take things a step further.

Trading for VXST Futures contracts is scheduled to begin this coming Thursday on the CBOE Futures Exchange (CFE).  Now traders that monitor the difference between these two volatility measures can takes positions based on their outlook for volatility.  VXST Futures will be AM settled contracts and will expire on a weekly basis, nine days prior to the following week’s expiration date for short dated option contracts.  On a non-holiday week this means VXST Futures will expire on the open on a Wednesday (ceasing trading the day before) which is nine days prior to the following week’s option expiration date.

We have been discussing VXST frequently on the CBOE Options Hub and instead of rehashing the same topics I’m providing some links to blogs about VXST and VXST Futures trading –

VXST vs. VIX – Some Differences, Some Similarities from February 6th

CBOE Rolls Out VXST Component Volatility Indexes from February 3rd

VXST Futures Launch Date Announced from January 30th

Big SPX Term Structure Shift Today from December 11th – (display of VXST and VIX relative price action)

Short-Term Volatility Index’s First Real Time Day from November 18th

CBOE Introduces Short-Term Volatility Index at RMC Europe from October 1st

And of course all information on VXST and VXST Futures can be found at

Last Week in VIX – 2/9/2014

VIX has gotten a lot of attention as of late.  It’s almost like the only time there is love for VIX is when the market is in turmoil.  However, there are opportunities in low volatility environments as well.  It was mentioned broadly that the assets under management for the VelocityShares Daily Inverse VIX Short Term ETN (XIV – 30.33) have surpassed the iPath S&P 500 VIX Short-Term Futures ETN (VXX – 45.46).  I read this in several places, so I visited the VelocityShares and iPath websites to get confirmation.  As of Friday XIV has a market cap of $817,444,820 while VXX has a market cap of $763,246,754.  As mentioned, typically the popular press is all over VIX when it peaks above 20.  Note that the money seems to be flowing to a fund that focuses on short volatility.  Just to be clear, this is no recommendation on my part, just showing where the money has flowed in this recent VIX spike.

This past week VIX dropped almost 17% as calm returned to the equity markets.  Specifically the return to contango occurred on Friday as the employment report was taken positively by the equity market.  Note the February VIX Futures settled at a slight premium to VIX on Friday (15.50 vs. 15.29) after being at a discount of 0.81 points this time last week.


Last Week in Gold and Oil Volatility – 2/9/2014

Gold resumed positive weekly performance with the SPDR Gold Shares ETF (GLD – 122.71) rising almost 1 ¾ percent (I miss trading in fractions).  The result was a drop in GLD option volatility.  GVZ was down 10.90% and the February GVZ futures lost 10.44%.  The scare of the slow grinding uptrend that has been in place for a couple of weeks seems to have subsided.  For a few weeks I have been showing the GLD weekly price change chart with an uptrend that has been in place as GLD consistently makes higher lows.  However, GLD is not making those higher highs that technically minded traders like to see.  Therefore I have added a resistance line just above recent highs.  Resistance can always be broken and GVZ in the teens may be a signal that the line I drew on this chart may be short lived.

GLD Weekly Chart Updated


In the oil space, USO was higher and the Oil futures rallied last week as well.  OVX dropped which is an indication of no real expectation of any price shocks (higher or lower).


Last Week in Russell 2000 and Nasdaq-100 Volatility – 2/9/2014

The Russell 2000 was down on the week while both the S&P 500 and Nasdaq-100 were higher.  Despite the underlying market dropping, the CBOE Russell 2000 Volatility Index (RVX – 21.43) was lower as well losing 6.42%.  On Friday RVX closed at a premium of 6.14 narrowing from 7.05 on Thursday.  Based on recent history RVX is at pretty significant premium to VIX.  In 2013 the average closing spread (based on subtracting VIX from RVX) was 3.89 and the widest premium in 2013 was 6.12.  Also, the narrowest spread was 2.12.  Checking the near month futures February RVX settled on Friday at a premium of 5.90 to February VIX and March RVX closed at a premium of 5.50 to March VIX.  The chart below shows the daily close for RVX, VIX and RVX – VIX from January 2013 through this past Friday.



The Nasdaq-100 was the winner in upside performance last week rising 1.14% which resulted in almost a 12% drop in VXN and a curve shift from backwardation to something that looks more like contango.


Last Week in Emerging Market Volatility – 2/9/2014

With the exception of the Russell 2000 (my personal favorite index) all equity markets that have listed volatility trading available were higher last week.  The leader of the pack was Brazil putting up a gain of just over 3.5%.  The result was a 4% drop in the CBOE Brazil ETF Volatility Index.  Also, the futures were lower across the board, but the curve is still in a bit of backwardation.  You would think after a three and a half percent week we would be looking at contango, I guess the fear hasn’t completely gone away but those that have not bought into tapering impacting emerging markets negatively were rewarded nicely last week.

The collective emerging market sector was up 1.41% based on performance of the iShares MSCI Emerging Markets ETF (EEM – 38.73) and VXEEM was down over 8%.  The VXEEM curve is a bit more inverted than VXEEM so there’s a specific emerging market (China?) that’s causing a bit more concern there.  Another indication of a little EEM bearishness came in the form of a bearish spread trade I heard about on Thursday.  There was a seller of the EEM Feb 39.50 Calls that then purchased the EEM Feb 40.50 Calls for a net credit of 0.20.  This trade risks 0.80 for a potential profit equal to the credit of 0.20 if held to expiration on February 21st.


Last Week in VIX Options and ETNs – 2/9/2014

Average daily volume for VIX option trading was 568,402 in 2013, so far in 2014 the average daily volume has been 912,975.  In 2013 there were 14 days where VIX option volume topped one million contracts while this year there has already been 11 days where VIX option volume has topped a million contracts.  Finally, we have a six day streak of VIX option volume topping a million contracts.  It has been a pretty busy year so far for the guys in the VIX pit.

The term structure chart below that shows the week over week change for VXST, VIX, VXV, and VXMT shows just why volumes have been so high.  Implied volatility of the equity market has been pretty volatile this year (I just can’t think of another way to say it).  VXST dropped almost 25% last week and VIX was down just under 17%.



In the ETN space the long oriented funds gave back the recent price gains as VIX and VIX futures all came in hard toward the end of the week.  Apparently there was a lot of anticipation around that VIX would come back in.  The VelocityShares Daily Inverse VIX Short Term ETN (XIV – 30.33) reportedly surpassed the iPath S&P 500 VIX Short Term Futures (VXX – 45.46) in assets under management to become the largest VIX related ETN last week.  Also, this was before the big drop in VIX on Friday.

Options ETNs

Comparing VXST and VIX

Next Thursday, just in time for Valentine’s Day and pending regulatory approval, the CBOE Futures Exchange will roll out trading on the CBOE Short-Term Volatility Index (VXST).  VXST has created a lot of buzz ever since introduction back in October at the CBOE Risk Management conference in Portugal and I know of many volatility traders that are pretty fired up for VXST trading next week.  For those that are still getting up to speed on VXST here are a five similarities and differences between the CBOE Short-Term Volatility Index and the CBOE Volatility Index.


1. Measures of Expected Volatility –

What’s the same –

Both VXST and VIX are standard measures that indicate a market expectation of volatility over a consistent time period and both are based on S&P 500 Index option prices.

What’s different –

VXST indicates the market’s expectation of volatility for the S&P 500 over nine days.  VIX takes a longer term look and is an indication of expected market volatility over the next thirty days for the S&P 500.

2. Calculation Methodology –

What’s the same –

Both VXST and VIX use the same calculation methodology.  Each is calculated through the combination of two S&P 500 Index (SPX) option series.  The result is a consistent expected volatility measure.  Both VXST and VIX are updated every 15 seconds during the trading day.

What’s different –

The difference between VXST and VIX is the expiring series of options that are used in the calculation.  The VXST calculation uses the next two consecutive SPX option series that have at least one day remaining until expiration.  These two expiration series are combined to calculate a nine day expected volatility outlook.   VXST is the first volatility measure to use SPX Weeklys in the calculation.  Depending on where the market is in the expiration calendar one or both of the series used for the VXST calculation may be SPX Weeklys.

The level of VIX is determined by combining the next two standard (third Friday) SPX option expiration series that have at least eight days remaining until expiration.  The results of this calculation is a thirty-day implied volatility measure.

3. Relationship with the S&P 500 –

What’s the same –

Even casual market observers are aware of the historical inverse relationship between VIX and the S&P 500.  VXST has a very similar relationship with the S&P 500.  The correlation of daily price changes between VXST and the S&P 500 from 2011 to 2013 has been -0.7212.  Over the same time period the correlation between VIX and the S&P 500 has been -0.8126.

What’s different –

The difference is the magnitude of price changes from VXST relative to VIX.  VXST had tended to rally to higher highs and drop to lower lows.  In January 2014 the S&P 500 lost about 3.5% and volatility markets were very active.  During that month the closing low to high range for VXST was 9.97 to 20.84.  The low to high range for VIX in January 2014 was 12.14 to 18.41.

4. Underlying Contract Settlements –

What’s the same –

Both the anticipated VXST and current VIX derivative contracts are AM settled, typically on a Wednesday.  Also, both VXST and VIX will be settled based on open trades in SPX options, not based on the mid-point of the bid – ask spread.

What’s different –

Since VXST is a nine day volatility measure the contract settlement value will be calculated using options that expire nine days in the future.   On a non-holiday week this would be the following week’s Friday.  VIX is a thirty day measure and settlement is calculated using SPX option prices from the standard expiration series of the following month.  That standard series is 30 days from the VIX settlement date.

5. Historic Performance –

What’s the same –

Both VXST and VIX have historically reacted to price changes in the equity market as indicated by the S&P 500.  A dramatic drop in the S&P 500 has resulted in a quick move to the upside in both VXST and VIX.

What’s different –

The difference in the past has been the realized volatility of VXST and VIX.  From 2011 to 2013 the 20 day realized volatility for VXST has been around 175% while the realized volatility for VIX was close to 109% over the same time period.  Realized volatility is the amount of price movement that occurs over a time period – for VXST and VIX this means the average realized annualized price change over a 20 day period.

Looking Forward -

Next Thursday we will start to get an idea of how futures on VXST are going to price relative to the underlying index and then a bit later we should have options trading on VXST as well.   The price behavior of VIX futures and options has been unique relative to other markets, I have a funny feeling VXST is going to have some trading similarities and differences as well.  I am really looking forward to finding out just how VXST derivatives behave.


Record Volume Month for SPXW and VIX Options, and VIX Futures – By Matt Moran

In the month of January 2014, monthly volume records were established by S&P 500 Weekly options (SPXW), and by both options and futures on the CBOE Volatility Index® (VIX®).
SPXW options had average daily volume of 278,537 in January.

SPXW volume th Jan 14

S&P 500 Weekly options are PM-settled on the last trading day, typically a Friday. As with other PM-settled index options, the exercise-settlement value is calculated using the last (closing) reported sales price in the primary market of each component stock. On the last trading day, trading in expiring SPX Weeklys closes at 3:00 p.m. (Chicago time). All non-expiring SPX Weeklys continue to trade until 3:15 p.m. (Chicago time). In January 2014 CBOE issued Regulatory Circular RG14-010 re: “Expansion of Number of Expirations Listed in S&P 500 Index Weekly Options (SPXW).” The circular provides that CBOE will list out and maintain six consecutive SPXW expirations at once, not counting the current expiration.  More information on SPXW options, including the current listings and expiration dates, is at



VIX options average daily volume was a record 791,978 contracts, and VIX futures was a monthly volume record totaling 4.40 million contracts.

VIX fut opt volume thr Jan 14


Recent volume records are related to big changes in volatility indexes.  The CBOE Short-term Volatility Index (VXST) rose from 9.97 on Jan. 10 to 23.95 on Feb. 3.  The planned launch date for new futures on the VXST is February 13, pending regulatory review.

VXST Feb 4


Institutional investors who wish to learn more about the SPXW, VIX and VXST contracts are urged to explore the 30th Annual CBOE Risk Management Conference, which will be held March 17-19, 2014, at Hyatt Regency Coconut Point Bonita Springs, Florida.


What’s a Normal VIX Level?

Someone asked me this last week: “What’s a normal or typical VIX level?” That’s a good question. Here is the answer: 20.2.

And 17.1.

And also 13.0.

Before I go into why it takes at least three numbers to answer this question, let me remind you that the history of the CBOE Volatility Index (VIX) looks like this:

VIX Daily Levels

Figuring out the normal VIX level is akin to figuring out how high Alaska, my home state, is above sea level. A skilled topographer could determine an average for the whole state, but this statistic would be skewed by Mount McKinley and the other huge mountains in the Last Frontier. But an average is still useful to know. For VIX, the average daily closing value for the 10 years ending December 2013 was 20.2.

When people worry about outliers skewing the average, they often turn to the median. This is the second number I introduced: 17.1. If you were to order the 2,517 trading days over the last 10 years by their closing VIX value, 17.1 would be next to the 1,259th observation, the middle one.

Finally, you may want to know the mode. The closing VIX value that showed up most – after rounding to the nearest whole number – was the last number I introduced, 13, followed by 12 and other levels just higher than those (see chart below). This surprised me. I would’ve guessed higher.

Closing VIX values - Jan 2004 - Dec 2013

To go back to the Alaska analogy, if you were to trek across that state, you would spend most of your time trudging through tundra, navigating lakes and rivers, and hiking small and medium sized mountains. You would want to prepare mostly for this. On rare occasions, though, you would come across a breathtaking mountain that would lodge itself in your memory and define your experience.

VIX works in a similar way. Lots of the mundane, but then peaks you won’t soon forget.


Related posts:
You’ve seen VIX. Now finally learn what it means
Turn VIX into information you can use
Where VIX comes from

*By the way, the mean elevation of Alaska is 1,900 feet. Mount McKinley is 20,320 feet.


  • Recent Comments

  • Tags