Last Week in VIX – 5/17/2015

There was a fairly parallel shift lower in spot VIX and VIX futures pricing as there wasn’t much to get excited about last week. The May VIX future dropped a little more than the spot index as expiration is just around the corner. Despite the almost 5% drop in the May contract, the premium relative to spot VIX is about 1.30.

VIX Curve

The premium of the May futures contract relative to spot VIX got me looking into various puts that expire Wednesday morning. I copied down the closing offer prices for all May VIX puts that expire this week with strike prices from 13.00 to 17.00. I also included the intrinsic value for each option based on VIX at 12.38 (Friday’s close). The far right column shows the difference between this intrinsic value and the cost of each put. Note if VIX does not move at all into Wednesday expiration that each of these puts would be worth more than they cost on the close Friday afternoon. Please note, this is based on VIX not moving at all, but is an interesting exercise in see how VIX option pricing differs from other option markets.

VIX Puts

Sticking with looking at May expiration, on Friday it appears someone put on a calendar spread using VIX Put options. In two different transactions they bought about 6,000 VIX May 14 Puts at 0.55 and sold 6,000 VIX Jun 14 Puts for 0.41. I’m guessing this is a trade into May expiration with the June options acting as a sort of hedge in case there is some sort of volatility event that pushes VIX to much higher levels over the next couple of days.

Last Week in Volatility Indexes and ETPs – 5/17/2015

There was a slight shift in the VXST – VIX – VXV – VXMT term structure last week. VXST and VIX were down, VXV was actually up slightly and VXMT dropped. Relative to history, VXV and VXMT are higher than you would expect with the S&P 500 making all-time highs. I’m convinced the market is braced for a difficult end to 2015.


VXX and the other long oriented ETPs continue to grind lower as VIX stays at low levels and the futures maintain contango. SKEW stands out a bit to me on the table below along with VVIX creeping up a bit. This could be an indication of a little extra demand for tail risk protection. Also, TYVIX moved higher last week. For more color on that index check out a blog by Mark Sebastian at the follow link –

VIX ETP Table A few weeks ago I noted a buyer of 10,000 VXX Jan 2017 10 Puts for 0.93 when VXX was trading at 20.89. I checked in on that trade and so far so good as the bid side for those contracts was 1.05 on the close Friday. Something that caught my eye when getting an update on that trade was that the open interest is now over 30,000. While poking around I noticed that the Jan 2017 15 Puts have an open interest of over 100,000 contracts. The payout diagram below shows the payoff for each of these options based on the settlement price from Friday along with the percent drop to break even at expiration from Friday’s VXX close.


The Essence of VIX: What You Really Need to Know

What is the essence of VIX? This may seem like an abstract, philosophical question, but I can assure you it is not. It is a practical one, and if you can understand what makes VIX unique, you will know why this index matters so much.

Informed investors know that VIX:

  • Employs a wide range of options in its calculation, both calls and puts;
  • Maintains a constant 30-day maturity;
  • Is not based on an options pricing model such as Black-Scholes; and
  • Does not incorporate the S&P 500 price level in its calculation (VIX is negatively correlated to the S&P 500, but correlation does not translate to direct causation).

For most people, VIX is largely associated with the first two bullet points. But many indices use options prices and target certain maturities. The key attribute of VIX – the knowledge you need to take away from this post – comes from the final two bullet points. It has to do with how VIX measures implied volatility, and nothing else.

How is it that we can arrive at an implied volatility value without using an options pricing model like Black-Scholes? And how can it be that the VIX and the S&P 500 price levels are not directly related?

VIX and Variance Swaps

When institutional investors want to trade volatility, they often trade variance swaps. The magic of a variance swap is that by using a portfolio of options weighted in a certain way, the impact of other factors, such as the changing underlying index level, can be neutralized. The trader is left with exposure to volatility alone.

VIX uses the same processes employed in variance swaps to arrive at the same result: exposure to pure volatility. Though the math behind variance swaps is complicated, one simple technique, explained below, liberates VIX from the influence of other factors.

How Volatility is Isolated

A challenge in calculating a volatility index is that, as a general rule, options have higher sensitivities to changes in implied volatility (“vega values”) as their strike prices increase, as shown Figure 1. The bell curves in this graphic represent the sensitivities of options to implied volatility at different strike prices.

Figure 1

Vega increasing

This upward sloping effect links the price of the underlying index with the volatility exposure of the full portfolio. If the underlying index price is high, then the sensitivity of the options to changes in implied volatility will be high as well.

To offset this effect, the options need to be reweighted. The result of this reweighting is illustrated in Figure 2. The options demonstrate the same relative sensitivity to implied volatility in the portfolio regardless of the underlying index price.

Figure 2

Vega even

This is achieved through weighting the options by the inverse of their strike prices, squared. So, options with lower strike prices are given a higher weight to make up for the fact that they naturally have less sensitivity to changes in implied volatility.

This is the essence of the VIX calculation: a reweighting of the options so that exposure to implied volatility rises and falls independently of the underlying index price level. This is what allows VIX to be VIX, a pure measure of volatility, uncontaminated by other effects and factors.

For a deeper dive into this concept – and better charts! – I recommend reading a renowned paper published by Goldman Sachs in 1999. The ideas in this piece served as the foundation for the modernization of the VIX methodology, which took place in 2003.


The Big VIX Roll from May 11th – Part 2

I get to CBOE each morning about 7:15 and by 7:16 I was running around the floor trying to find out a little more about the VIX roll from yesterday.

First, I’ll start at the beginning. It appears this all began back on April 10th when the trade that got rolled forward yesterday was opened. Back in April about 180,000 VIX Jun 17 Calls were purchased for 1.74 and about 360,000 VIX Jun 23 Calls were sold at 0.82. I keep using ‘about’ as a hedge clause because the actual trade size is an odd number, but pretty close to 180,000 and 360,000 respectively. To break this down to a more manageable size and cost, the original trade was a 1 x 2 ratio call spread for a cost of 0.10.

Yesterday the trade was rolled out to July. To keep things simple I’m going to break out the closing transaction and the opening trade. First, the VIX Jun 17 Calls were sold for 1.20 for each of the two VIX Jun 23 Calls that were purchased 0.50. This results in a credit of 0.20 per spread and an unrealized profit of 0.10 on the June option position – they paid 0.10 to get into this spread and received 0.20 when they got out.

The July ratio spread involved the VIX Jul 17 Calls being purchased for 1.74 (some were at 1.73, but I’m using 1.89 to keep the math simple) and the VIX Jul 23 Calls were sold at 0.90 for a net cost of 0.09. Taking the running profits from the June trades (again 0.10) and some rounding, we can say this July 1 x 2 ratio call spread has no cost (excluding commissions). The payout below assumes no cost and that the trade is held through July expiration.

VIX Ratio PO

The best case scenario here is VIX at 23.00 at July expiration and all is well until VIX rises to 29.00 with losses being incurred above that level on a one for one basis with VIX.

Large VIX Ratio Call Spread Rolled from June to July Today

It appears one volatility trader believes a spike is on the horizon for VIX, but altered the timing of their outlook today. They were prepared for a move to the upside before June expiration, but rolled their position out to VIX options expiring July 22.

The specific position was long 180,000 VIX Jun 17 Calls plus short 360,000 VIX Jun 23 Calls (1 x 2) which was rolled out to long 180,000 VIX Jul 17 Calls plus short 360,000 VIX Jul 23 Calls in a big rolling trade at CBOE today. My hope is to visit the VIX pit tomorrow to get a little more color on this trade and report back with a little more color in the morning.

VIX option volume topped 1.5 million contracts today, aided by this large trade. The result is that despite a low volatility environment today was the busiest day of the year for VIX option trading and the eighth busiest on record.

PUT Index Tops 1500 and Hits All-time Daily Closing High – By Matt Moran

On Friday, May 8, the CBOE S&P 500 PutWrite Index (PUTSM) closed at 1501.08, its highest all-time daily close and the first time the index closed above 1500. PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500® Index (SPX) put options against collateralized cash reserves held in a money market account.

PUT-May 8The daily historical data for the PUT Index extends back to June 30, 1986. Since mid-1986 the PUT Index has had higher returns and lower volatility than the S&P 500 Index, the 30-Year Treasury Bond Index (Citi), and the S&P GSCI Index (that measures commodity performance).

PUT-SPTR line chart

Retu & SD PUT

In viewing the charts above, an astute investor might ask – if the markets are efficiently priced over the long term, how can one index have the highest returns and lowest volatility in a group of indexes?

There is evidence that suggests that, in most years since 1990, the markets for S&P 500 (SPX) options generally usually have been richly priced, and that consistent sellers of one-month SPX options have had the potential to achieve relatively strong risk-adjusted returns. Please see the chart below and the research papers at for more information on the topic of richly priced index options.

Implied minus realized

For the many investors today who are concerned about low interest rates for fixed income instruments, and high p/e ratios for stock indexes, it could make sense to explore the pros and cons of the PUT Index and the cash-secured put writing strategy. Later this year there may be a launch of an ETF that is designed to track the PUT Index. To learn more about the PUT Index, please visit

Last Week in VIX – 5/10/2015

VIX was slightly higher and the futures were mostly lower with a couple of exceptions last week. There was a bit of excitement in the middle of the week so I included an extra piece to the graph below and decided to show Wednesday’s highs for VIX and the futures market.  If I had not done that it would be pretty difficult to see there are two different lines showing VIX closing levels on the 1st and the 8th.

VIX Curves

We all know that Friday was the employment number with the stock market rallying in response and VIX dropping as would be expected. On Thursday there was a sizable trade I came across that appeared to be setting up for a spike in VIX. In several different lots at the same time on the tape there was a buyer of VIX May 14.50 Puts at 0.58, seller of VIX May 16 Puts at 1.60, buyer of VIX May 16 Calls at 1.00 who finished things up by selling VIX May 20.00 Calls for 0.49. The result of this buying and selling was a credit of 0.51 and a payout at expiration that appears below with where VIX and the May VIX futures were when the trade was executed.


The payoff above looks just like a vertical spread with the 14.50 (call or put) as the long leg and 20.00 (call or put). I believe this was done in four legs so there is more flexibility in trading around the position.

Finally, I have no way of knowing, unless I spoke directly to the trader, but my assumption was this trade went up in front of the employment number. I did go searching for what may have been exit trades on Friday and wasn’t able to find anything that looked like someone salvaging this trade as VIX moved lower. Any spike in VIX next week and I’ll be doing some detective work to see if this position is lighted up.

Last Week in VIX- 4/20/2015

We closed a chapter in VIX history with the April 2015 contract going off the board last week and May stepping in to be the new front month. May finished the week over a point closer to the spot VIX index as VIX rose over 10% and the May future only gained about 1.6%.

VIX Futures Curve

About 45 minutes into the trading day there was a volatility trader looking out to June and expecting VIX to remain below 18.00 or at least be under 18 at June settlement. The trader sold 9,200 VIX Jun 18 Calls at 1.63 and then purchased 9,200 VIX Jun 26 Calls for 0.63 and a net credit of 1.00. The payoff diagram below shows the result at expiration along with closing prices for VIX and the June VIX future.


June VIX futures finished the week at about a 3 point premium to the spot index. Remember that VIX option prices are derived from a level closer to the corresponding future than the spot index so VXM5 near 17 results in a 1 to 7 reward to risk trade with the spot index below 14.00.

Last Week in Volatility Indexes and ETPs – 4/20/2015

Despite an ugly Friday both VXST and VIX remains pretty low relative to recent levels. I again included the 2014 average closing levels to the chart below. This inclusion isn’t so much about noting VIX is lower, but that VXV (3 month volatility) moved above the 2014 average and VXMT (6 month volatility) remains higher than what was the average for last year.

Term Structure for Blog

Do note that VXV got some love this past week in a discussion by Adam Warner which then led to a story on CNBC.   The links below can take you to either story –

“Does the VIX Signal Indicate Trouble Ahead?” — Adam Warner, Schaeffer’s Investment Research
“This Obscure Indicator is a ‘Significant Concern’” — CNBC

In the ETN space the long funds put up a small gain while the short funds lost a little more than the gains seen for VXX.  The small rise in VXX is attributed mostly to the May VIX future which was over 90% of the composition of VXX for most of last week.  Despite the 10% gain in VIX, the May contract was up about 1%.

Index ETN Table

A VIX for the Energy Sector

As oil prices have fallen, many investors with exposure to energy companies have wisely kept an eye on VIX. But there is another volatility benchmark – one more suited to energy equity investments – which investors should also watch carefully: VXXLE.

VXXLE is the ticker for the CBOE Energy Sector ETF Volatility Index. This index has same methodology as VIX. However, instead of tracking S&P 500 options, it is based on options tied to the Energy Select Sector SPDR® Fund, a popular ETF known by its ticker, XLE.

VXXLE measures the 30-day implied volatility of XLE and by extension, the index it follows, the S&P Energy Select Sector Index. Just as VIX is inversely correlated to the S&P 500, VXXLE is inversely correlated to XLE, as the chart below shows (3-year correlation = -0.66).


Even though CBOE does not yet offer derivatives based on VXXLE, this index still has great value as a benchmark, particularly when coupled with other related information. As an example, some analysts compare the changing value of a volatility index with the price-to-earnings ratio of the companies in the underlying index.


Analysts say that when such a ratio is high, the market may be complacent and a prudent investor might want to scale back their exposure. On the other hand, if this ratio moves to a lower range – indicating prices are relatively low and anxiety is high – a “crash” may be under way and there could be an opportunity to take a contrarian position.

In the case of VXXLE, this ratio has moved drastically over the past year. As the chart above shows, this ratio has gone from its 3-year high to a record low. And in line with this, the S&P Energy Select Sector Index has tumbled, at one point losing approximately 25% of its value.

If you want to use VXXLE to inform your investment decisions, you can access more information on Chicago Board Options Exchange’s website. Also, a tutorial on VIX’s methodology, which VXXLE shares, can be found here.

*Author’s note: Due to data limitations, the second chart uses the P/E for the S&P 500 Energy Sector Index instead of the S&P Energy Select Sector Index. These indices share the same constituents but use different weighting schemes.


  • Recent Comments

  • Tags