Last Week in VIX Options and ETPs – 3/2/2014

I haven’t been monitoring the VXST – VIX – VXV – VXMT curve for too long, but this is the first instance of VXST and VIX moving in opposite directions in a week.  I’m sure it has happened in the past, I just do not have any recollection of such.  Three of the four of the volatility indexes that are calculated using S&P 500 Index option pricing were higher on the week.  If you only watch VIX you would believe that implied volatility dropped, but for near dated and longer dated SPX options that was not the case.



Despite VIX dropping on the week, one trader seems to be looking for a spike in volatility between now and the middle of April.  On Thursday there was a buyer of just over 9,800 VIX Apr 18 Calls at 1.10.  Normally a single option trade is nothing to really get excited about, but in the VIX world is has a bit more meaning.  Typically larger trades are part of some sort of spread where some of premium on the long side is offset by selling an option.  Of course generally downside risk is taken on or upside performance is given up when a trader does a spread trade.  Buying a VIX call option outright is a pretty aggressive trade.  The payout diagram below shows the payout at April expiration along with where VIX and the April VIX futures closed on Thursday.



In the ETN space VXX was higher based on the rise in the front month VIX futures contracts.  As the week came to an end VXX was comprised of about 57% March VIX Futures and 43% April VIX Futures.  Each day that weighting changes as VXX is focused on a 30 day average.

Options ETNs

VIX – The Enforcer

Your portfolio is like a hockey team.  You don’t think so?  It is.  And VIX plays a key role.  Stay with me while I explain.

Equities are your guys playing at center and on the wings.  You expect production from them.  Your team largely lives and dies by how consistently they score.  Bonds are your defensemen.  They come forward to create some additional offense at times, but their key responsibility is minimizing downside risk.  The goalie?  Perhaps not a perfect analogy, but let’s liken him to cash.  Your last line of defense.

Where does the CBOE Volatility Index (VIX) fit in all this?  Yes, if VIX were a hockey player, it would likely be on defense.  But VIX is a special type of defensive player.  In hockey parlance, VIX is an enforcer.

Someone took the time to write up a great description of what a hockey enforcer is.  “An enforcer’s job is to deter and respond to dirty or violent play. . .the enforcer is expected to respond aggressively. . .”  Further, “Enforcers are typically among the lowest scoring players on the team and receive a smaller share of ice time.”  In other words, most of the time you can’t expect much from an enforcer and you may not want to have him on the ice much.  But when it’s time for the enforcer to come to the rescue and protect the team, he does it in a big way — aggressively.

In your portfolio, VIX is your enforcer. 

  You would want to be selective as to when to allocate to VIX. But when things get really rough, you want to have VIX in the mix so it can aggressively defend your portfolio’s value, when every other asset class slinks away.

Below is a chart showing the performance of major indices during the last half of 2008, when the equivalent of a major hockey brawl broke out.  You remember it – broken teeth and blood on the ice everywhere.  VIX came to the rescue.  Those who allocated even a small portion of their portfolio to VIX linked instruments got some serious protection.

The 2008 crisis wasn’t the only time VIX stepped up.  Time after time, VIX and the instruments linked to them have responded quickly and in a pronounced way to violent market moves.
We are still in turbulent times.  If you feel under threat, you may want to hire an enforcer.

Last Week in VIX – 2/23/2014

VIX was up despite a fairly flat week over week performance for the S&P 500.  Part of this goes with the three day weekend effect, but there is also a nervousness that seems to be creeping into the market.  Depending on your market outlook this could either be considered bullish or bearish – bullish if you believe the market climbs a ‘wall of worry’ or bearish if you think that higher volatility can be a precursor to a bearish equity market.

One trade on Friday in VIX options caught my eye.  There was a buyer of VIX Mar 17 Calls at 0.74 who sold twice as many of the VIX Mar 22 Calls at 0.30 each creating a ratio spread at a net cost of 0.14.  A moderate spike in volatility (ideally the March future at 22.00) would be a positive in this case, while a volatility ‘event’ that pushes VIX to the upper 20’s could be a problem.  The payoff diagram below shows just how this would work –



As far as the curve goes, VIX climbed 8% and the March future rose 0.45.  Beyond that the rest of the VIX futures curve was pretty inactive last week.


Last Week in Gold and Oil Volatility – 2/23/2014

I have been giving entirely too much love to gold in this space so this week I’m going to start off discussing oil.  Oil futures moved over 102.00 this past week in what has been a pretty orderly march higher.  I’m not sure if global economic recovery, global political uncertainty, or everyone in Chicago trying to keep warm is the primary factor.   Despite a 2% rise in the United States Oil ETF (USO – 36.69) the CBOE Crude Oil ETF Volatility Index (OVX – 17.90) hardly moved last week.

Gold continues a bullish move to the upside, but this move was a bit muted last week with the SPDR Gold Shares ETF (GLD – 127.58) rising about 1/3rd of 1%.  GVZ is pretty close to the 2014 closing low which signals complacency on both sides of the bullish / bearish fence.


Last Week in Russell 2000 and Nasdaq-100 Volatility – 2/23/2014

Ever since CBOE launched trading on the CBOE Russell 2000 Volatility Index (RVX – 19.20) I have been focused on the relationship between the S&P 500, Nasdaq-100, and Russell 2000.  The Russell 2000 was a champ in 2013 beating the S&P by almost 10%, but had been lagging the S&P 500 in 2014.  The key part of that statement is the word ‘had’ as the Russell 2000 was up over 1% while both the S&P 500 and Nasdaq-100 lost ground last week.   Despite the good week RVX is still slightly above the average spread relative to VIX over the last year or so.  I always believe there is a story behind the numbers and in this case I’m guessing risk perception for the US versus the rest of the world continues in a heightened state for 2014, despite the good week for the Russell 2000.


Last Week in Emerging Market Volatility – 2/23/2014

The iShares MSCI Brazil Capped ETF (EWZ – 40.76) gained 1.3% on Friday which moved the weekly performance from down 1% to up 0.3%.  The Brazilian equity market has been under pressure due to some concerns that are specific to Brazil and some concerns that could be referred to as guilt by association (think Argentina – even though the two countries are in two very different situations).  Whatever the reason, despite an up week for EWZ implied volatility climbed as well and the VXEWZ curve is showing signs of backwardation.

The more developed of the emerging markets were under pressure relative to EWZ and the iShares MSCI Emerging Markets ETF (EEM – 39.43) posted a loss for the week, but go figure, VXEEM was actually lower and that curve is in contango.  Despite the underlying performance being of a contrary opinion this past week the volatility players see more risk in Brazil than the overall emerging market sector.  I’ll be interested to see the relative EEM / EWZ performance for the next few weeks to see who is right.


Last Week in VXST – 2/23/2014

Futures trading on the CBOE Short-Term Volatility Index (VXST – 13.04) is a little over a week old and the volume is still gaining traction.  As noted in an earlier blog, VXST gapped higher on Tuesday morning due to the impact of a three day weekend on the index calculation.  The difference between the index and futures price changes this past week shows that a good portion of the 20% gain in VXST last week may be attributed to the index adjusting before and after a long weekend.

VXST futures expire every week starting with this coming Wednesday.  They are AM settled which means that they cease trading Tuesday afternoon and will settle based on the relevant opening S&P 500 Index option prices.  I have penciled in on my calendar to post more on the process Wednesday evening.


Last Week in VIX Options and ETPs – 2/23/2014

The S&P 500 posted a slight loss this past four day week and VIX reacted by climbing over 8%.  Some, but not all, of this gain for VIX can be attributed to the calendar impact of a three day weekend.  For those that are not aware of this anomaly, the spot VIX index is calculated to determine a 30 day implied volatility measure with the 30 days being calendar days.  When there is a long weekend it can put extra downside pressure on VIX which then goes away when the market reopens after the long weekend.  VIX closed last Friday at 13.57 and opened Tuesday at 13.95 despite the S&P 500 opening slightly higher as well.  Wednesday was a particularly tumultuous day that pushed VIX to 15.50.  However as the week drug along VIX drifted lower as the S&P 500 traded in somewhat of a trendless manner.

The calendar impact is much more dramatic with respect to the CBOE Short-Term Volatility Index (VXST) which gapped open by almost two points on Tuesday morning.  CBOE has historical data compiled going back to the first day of 2011 for VXST and over that time period there have been seventeen Monday holidays.  VXST has been higher all 17 of the Tuesdays that have come after a three day weekend.  The week over week change for the VXST – VIX – VXV – VXMT curve appears below.



In the ETN space the funds did as expected with the long oriented funds climbing and the short funds dropping a bit.  The big news a week or two ago in this space was that XIV had overtaken VXX as the largest of the VIX related exchange traded products.  A quick check of their respective websites shows the market cap for XIV at $822 million as of Friday’s close and a market cap of $930 million for VXX as of Thursday’s closing price.  Since VXX was higher on Friday and XIV was lower I’m going to make the assumption that VXX has regained the top spot among the VIX ETNs.


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


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