Last Week in VIX – 11/23/2014

With the S&P 500 achieving several new highs last week VIX managed to drop back into the tweens finishing out the week at 12.90. Despite making record highs 42 through 45 this week VIX continues to trade at premium to normal levels from 2014 when records are being set.


The curve is pretty darn steep for this time of year. December at 2.05 relative to spot VIX can be taken as a little nervousness still remains regarding the equity market despite higher stock prices.   If you think the market is going have smooth sailing to finish out 2014 then you can look at December futures giving you an opportunity take advantage of that nervousness.


Since many traders may be looking to 2015, I’m going to do the same and point out a trade I came across on Friday morning. Looking to February a trader came into the relatively quiet VIX pit on Friday and bought several VIX Feb 18 Calls at 1.92 then selling VIX Feb 30 Calls for 0.62 and a net cost of 1.30. VIX in the 20’s at that time would result in a partial profit and a February VIX settlement over 30 would turn that 1.30 into 10.70.


Last Week in Emerging Market Volatility – 11/23/2014

At The Options Institute we travel extensively and the travel is very seasonal. Between Labor Day and Thanksgiving each of the instructors are on the road almost once a week. Just for the heck of it, I scanned my airline frequent flier account and I’ve racked up 19,825 miles between those two holidays this year on behalf of CBOE. My point behind this is not that we log a lot of frequent flier miles, it is that this is a difficult time of year to keep up with what is going on in the markets.

When I see headlines about Brazil I make a mental note since each weekend I like to have something to say about that market in respect to VXEWZ. This past week I saw a couple of what would be considered very bearish comments regarding Brazil. Needless to say, I was shocked when I saw that the iShares MSCI Brazil Capped ETF (EWZ) was up almost 12% last week. That shock turned into a little confusion when I saw VXEWZ rose over 5% as well last week.


Before moving on to the futures price action, I came across a EWZ trade on Friday that expects a pretty big move to the upside for EWZ over the next few weeks. On Friday there was a buyer of 20,000 EWZ Dec 52 Calls for 0.08 that also sold 20,000 EWZ Dec 54 Calls at 0.04 and a net cost of 0.04. Note the payoff diagram below – for EWZ to reach the break-even point a move of 18.4% will be needed. A rally or 22.9% or more between now and December 19th would result in a profit of 1.96.


VXEEM didn’t get any love or attention above so I’ll talk about the term structure for VXEEM first. It is normal and dull. Now on to the exciting market, VXEWZ is still in backwardation which usually can be taken as uncertainty with a focus on the downside for the underlying market. At least that is normally the case in the equity index world. However, in this instance is could be taken as EWZ is either going to rally or fall apart (again) into the end of the year. At least one trader (see above) is hoping for a big move to the upside.


Last Week in Gold and Oil Volatility – 11/23/2014

Gold and Oil both rose last week, but the market perceptions of each market are very different. Oil volatility rose last week while gold volatility managed to drop. First OVX was up a little over 5% as risk perceptions continue to elevate.


Gold began moving higher two weeks ago and followed through nicely over the past week. The idea that a support level may have been put in recently may be resulting in lower GLD option volatility. GVZ reflects this as it dropped over 9% last week.


Despite OVX and GVZ moving in opposite directions, the curves both remain in backwardation which is just about always associated with increased uncertainty regarding the next market move. In the case of commodity markets, this is non-directional volatility outlook.

GVZ OVX Curves

Last Week in Nasdaq-100 and Russell 2000 Volatility – 11/23/2014

The Nasdaq-100 was up less than the S&P 500 this past week, but managed a gain of 0.26% which places the tech heavy index up over 18% on the year. VXN was down about 3% on the week with a good part of that drop coming toward the end of the week.


The Russell 2000 was down last week despite a gain of over 1% for the S&P 500. Despite the drop in RUT, RVX was lower by 1% on the week.


The curves both moved in a twisting type motion last week. VXN was lower, the December future was flat, and the contracts expiring in 2015 moved up. In the case of RVX, the index and December contract were both lower with farther dated contracts moving up.

VXN RVX Curves

Last Week in Short-Term Volatility – 11/23/2014

VXST came under a bit of pressure to end the week due to the S&P 500 reaching more new highs.  The stock market strength combined with the impact of this coming week being a holiday shortened week.  For those new to VXST the explanation behind the previous sentence is the index is based on calendar days and when there is a market holiday a little downside pressure is placed on VXST.


Despite the spot index moving lower, the future that expires this Wednesday on the open is actually a little higher than this time last week.  Pretty interesting with the holiday in front of us and record SPX closing prices just behind us.

VXST Curve

Option trading continues to attract increased interest in the VXST arena.  Despite the S&P 500 moving higher, the VXST pit saw bullish demand for Dec 10th Calls this past week.  On Tuesday, with VXST around 11.30 and the Dec 10th VXST future around 15.35 there was a buyer of 500 of the VXST Dec 10th 20 Calls for 1.00.  The trader in this case is hoping for a quick move up in VXST and hence a quick drop in the S&P 500.


Last Week in Volatility Indexes and ETPs – 11/23/2014

Four out of five days last week the S&P 500 hit a new record high. In reaction to the S&P 500 climbing to what some traders consider nose bleed territory three of the four volatility indexes based on SPX option trade dropped in value. The move lower in VXST was a bit overdone and the 7.93% move gets a little bit of an asterisk in this situation since holiday weeks put some extra pressure on this measure of nine-day implied volatility. VXST - VIX - VXV - VXMT

As I have done for three weeks I also included the average term structure close on for the 45 days that the S&P 500 closed on an all-time high in 2014. Sticking with the three out of four theme – VIX, VXV, and VXMT all remain at interesting premiums relative to the average for SPX record days.

Note the long ETPs on the table below. The long funds focused on the near dated futures were lower, but VXZ which gives traders exposure to the fourth through seventh month (February – May) VIX futures managed a small gain on the week.

Indexes ETPs

There was one trader thinking short term and thinking volatility spike late Friday afternoon. The method they choose to get long volatility is a great example of how many alternatives there are in the volatility trading space to put on a position. The trade was based on the ProShares Short VIX Short-Term Futures ETF (SVXY – 74.34) which will lose value if we get a ‘volatility event’ next week. Specifically a trader bought SVXY Nov 28th 75 Puts for 1.80 a little over an hour before the market closed. The payoff diagram below shows the potential outcome if the trade is held through the close next Friday. SVXY fell from the mid 70’s to the mid 50’s in a very short period of time in October. A repeat of that next week and someone will be having a happy holiday season.


Gauges for Tools for Portfolio Protection – VIX, SPX, SKEW, and Term Structure – By Matt Moran

Nov. 17, 2014 – When I deliver presentations on portfolio risk management to groups of financial professionals, one of the most frequent questions is “What is a better hedge for a portfolio – VIX calls or SPX puts?” A 30-page paper by Morgan Stanley in June 2014 suggested that “VIX calls are best used to hedge large selloffs, while SPX puts outperform in moderate declines. …”

I recently received a call from an institutional investor who is using VIX products for tail risk management, but he requested an overview of available metrics to gain a better idea of how gauges related to volatility skew and term structure can impact costs related to risk management strategies.


The CBOE Volatility Index® (VIX®) is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future 30-day expected stock market volatility. In the first three quarters of 2014 I did hear questions about whether the level of the VIX Index was somewhat low in light of worldwide geopolitical concerns. Since the inception of VIX daily closing price history in January 1990, the long-term average of the prices is around 20 and the long-term median of the prices is around 18.5. So far in 2014, average of daily closing prices for VIX is 14, but the average for the fifth-month VIX futures is 16.9 (in part because many investors believe that VIX tends to be mean-reverting).

1-VIX futures VIX Nov 17Note in the chart above that for most of this year (except mid-October) the VIX has been in contango (with the spot index priced lower than the VIX futures), and that the fact that it has been in contango can have a negative impact on the costing of rolling a VIX futures position. While some ask if VIX is low, I believe an important point is the fact that the 20-trading-day historic volatility of the S&P 500 Index has averaged 10.8 this year. A Nov. 15 report by Callie Bost of Bloomberg noted that the S&P 500 Index “rose or fell less than 0.1 percent on four consecutive days during the week, the longest stretch for moves of that size since May 1979.” In 2014 the VIX usually has not been “low” in 2014 when compared to the SPX historic volatility. Today the VIX closed at 13.99 (near its average for the year), and some people might say that with VIX at around 14, it could be a good time to buy SPX puts, VIX futures, or VIX calls for portfolio protection, but let’s explore more metrics to gain a better picture of costs associated with hedging tools.


For investors who wish to gain a better idea of the term structure related to S&P 500 options, real-time indexes to explore include the CBOE Short-Term Volatility Index (measure 9-day expected volatility), VIX Index (30-day expected volatility), CBOE 3-Month Volatility Index (VXV), and CBOE Mid-Term Volatility Index (6-month expected volatility). Note the close relationships of the charts immediately above and below.

2-VXMT VXV Nov 17


In 2014 some observers have focused on VIX values and perhaps have assumed that all hedging strategies are relatively inexpensive. However, the CBOE SKEW Index and VVIX Index also can provide valuable information related to the costs of hedging strategies.

CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence. The value of SKEW increases with the expected tail risk of S&P 500 returns. If there were no tail risk expectations and concerns, SKEW would be close to 100.

The CBOE SKEW Index hit 146.08 on Sept. 19, 2014, its highest level since 1998.

The average daily closing levels for the CBOE SKEW Index were –

> 129.4 in 2014 (through November 17),

> 117.2 in the 24 years from 1990 through 2013.

3-SKEW VVIX Nov 17The CBOE VIX of VIX Index (VVIX) is an indicator of the expected volatility of the 30-day forward price of the VIX®. The highest daily close for the VVIX Index was 131.57 on October 13 (two days before the VIX Index hit its highest closing value of the year).
The volatility skew graph shows 30-day implied volatility estimates at different moneyness levels. Note that slopes of the lines differ. The implied volatility for SPX options at 80% moneyness, and for VIX options at 120% moneyness is greater than the implied volatility for the corresponding (at-the-money) options at 100% moneyness. One explanation for the steepness of the SPX line chart is the fact that after the 1987 stock market crash, many investors had heightened concern about left tail risk and there is great demand for out-of-the-money (O-T-M) protective SPX put options as hedging instruments, even if the implied volatility for OTM SPX puts is higher than recent SPX historic volatility and the implied volatility for ATM SPX puts. There also appears to be great demand for O-T-M VIX calls for portfolio protection.
Term structure charts related to SPX options are updated regularly at Note that in section 2 above, today both the VXV and VXMT indexes closed higher than the VIX Index, and so it is not surprising that the term structure chart below is upward sloping.
4-VIX Term on Nov 17

For more information on tools for portfolio protection, here are some key links –

• Volatility Indexes               

• S&P 500 (SPX) Index Options

• Options and Volatility Strategies

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 Futures trading is not suitable for all investors, and involves risk of loss. No statement within this post 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.

Last Week in VIX – 11/16/2014

A week ago I discussed what VIX was doing when the S&P 500 set recent records relative to SPX record highs set earlier in 2014. At that time there were 38 days where the S&P 500 had closed at a new all-time high, now the number is up to 41 with three records being set last week. The week closed with the S&P 500 at an all-time high and VIX at 13.31, slightly up on the week. I think each of us can interpret the VIX action in our own way, personally I think a lack of quantitative easing in the market place has heighted the risk perception associated with owning stocks.

VIX on SPX Records

The spot VIX index was slightly higher last week while the futures curve shifted lower. November contracts just have two more trading days until settlement on Wednesday morning. November VIX finished last week at 14.35 which is an interesting premium with so little time left until contract settlement.

VIX Curve

VIX option traders are starting to focus more on December and I saw a trade come across late Friday that expects VIX to remain relatively high, but not run to the 20’s. There was a seller of 5,000 VIX Dec 16 Puts at 1.83, who also sold 5,000 VIX Dec 16 Calls at 1.28 and then finished the trade out by purchasing 5,000 of the VIX Dec 23 Calls for 0.43 (and protection against an unexpected volatility ‘event’) .  All that trading comes to a net credit of 2.68 The best of all worlds, and a great Christmas for this trader, occurs if VIX settlement comes in right at 16.00 at expiration. Partial profits may still be realized with VIX between 13.28 and 18.72.

VIX PO Fixed

Last Week in Emerging Market Volatility – 11/16/2014

The iShares MSCI Emerging Markets ETF (EEM) was up about a half percent last week despite the performance of the Brazilian market. We shall get to Brazil in a moment. EEM is down down 0.03 for the year for a loss of 0.07% which is close enough to say flat on the year. The result of the relatively quiet week for EEM was a quiet week for VXEEM which managed to drop 0.20 or about 1% to finish the week at 18.55.


The Brazilian market continues to be an adventure. For a couple of months it was all about the national election, not it is about the future of the Brazilian economy which appears shaky. The result of uncertainty is always higher implied volatility and that’s where VXEWZ is – high.


The curves tell two different stories as well. VXEEM depicts sanity and smooth sailing ahead. VXEWZ, continues to be in backwardation which means uncertainty about what is next for Brazilian stock prices continues to prevail.


Last Week in Gold and Oil Volatility – 11/16/2014

Friday was a pretty slow day on the floor at CBOE. I hosted groups from a couple of different colleges mid-day on Friday and there were very few large open outcry trades coming into the SPX or VIX pit while we were on the trading floor. Apparently all the Friday action was in the gold market. GLD finished the week up 1.3% with most of that move coming on Friday. What also resulted from that move in gold was a spike in the CBOE Gold ETF Volatility Index (GVZ) which rose 11.3% on Friday alone. The implied volatility of commodity markets is always unique to the underlying market, but generally it will move up based on a rally or a big drop in the underlying market. GVZ has demonstrated just that over the past few weeks as gold and broken support and then put in a small rally.


The oil market continues to be in free fall with USO having dropped seven consecutive weeks. This persistent downtrend, with no support in sight, has resulted in the implied volatility of options on USO indicating elevated risk. In layman’s terms, that means the market expects continued excessive price moves, either through a quick short covering rebound or prices continuing to drop. The direction of the outlook doesn’t necessarily impact OVX, just the potential magnitude. The level of OVX remains over 30.00 which may indicate that some large price swings are being anticipated by the market.

USO Weekly Chart

Both curves are in well-defined backwardation which just reinforces the views from above. As long as these shapes persist expect headlines decrying new lows in gold or oil or a quick rebound from the recent downtrends.



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