VIX Options and Futures Review – 1/24/2016

The stock market rally on Friday put pressure on VIX and pushed the spot index down enough that the front month February future closed at a slight premium.  This is the first premium for the front month VIX futures relative to spot since January 4th.  I’ll discuss this a bit more toward the end of this blog.

VIX Long Term Curve


The generic short dated curve flattened out which I’m learning is the normal shape using the five consecutive weekly VIX futures contracts.

VIX Short Term Curve


As mentioned above, with Friday’s price action VIX is now at a discount to the front month future.  The result here is an end what goes down as the eighth longest streak of spot versus front month backwardation.

Friday Spot - FM


Another measure of backwardation and the one the VIX ETP traders care the most about involves the front month versus the second month futures.  February VIX actually closed higher than the March contract.  In fact every day in 2016 the front month has closed higher than the second month.  This run of backwardation is up to fourteen days.

Friday FM - SM


Finally, since VIX moved below February, this put an end to backwardation when comparing spot VIX, the front month, and second month futures price.  All the stars have to align for this measure of backwardation and this ended up being the third longest streak of backwardation on record.

Friday - Spot - FM - SM


Volatility Indexes and ETPs Review – 1/24/2016

The S&P 500 rebounded by about 1.4% last week and SPX option volatility moved a bit lower.  The VXST – VIX – VXV – VXMT curve shifted lower and flattened.  However for a bit of perspective I show where we ended 2015.  I think the comparison is a good indication that we may not be completely out of the woods, at least based on the expectations indicated by the various S&P 500 oriented volatility measures.



The rebound in the stock market put some pressure on VXX with fund losing over 6% last week.  Do not fret for anyone who purchased VXX at the end of 2015, as they are still up about 25% on the year.  Although few (if any) traders take a buy and hold approach with VXX.

A couple of other things on this table caught my eye.  VVIX remains pretty high, just a tad under 100.  In calmer times VVIX is usually in the 70’s (or lower).  SKEW in the 130’s indicates demand remains for out of the money SPX puts despite the strength of stocks this past week.

VXX Table


Mid-day on Friday the biggest VXX block trade of the day was executed.  With VXX at 25.74, 0.74 higher than the close of the day, there was a buyer of 10,000 VXX Jan 29th 21 Calls at 4.78 who sold the VXX Jan 29th 24 Calls for 2.14 paying 2.64 for this call spread.  The annotated payoff diagram appears below.



As long as VXX closes above 24.00 the result will be a profit of 1.36 and if VXX completely tanks, which would mean a huge rally in the S&P 500, and closes under 21.00 the result is a loss equal to the debit of 2.64.  Note I also highlighted where VXX was when the trade was executed and where it closed.  There is still a 1.00 cushion before the trader may consider their alternatives, but that is 0.74 less than when they executed the trade.

Be Cautious When Using VIX vs. Oil as a Market Indicator

I awoke this morning to an email from the matriarch of CBOE-TV Holly Goodhart.  She was preparing for her day with CNBC on in the background and something caught her eye.  The following comes directly from her email –

I have CNBC on this morning, and they just spent a segment discussing this headline:
“Markets bottom when VIX is greater than oil.”

This didn’t sound right to me for a few reasons, primarily because I recall many years with the price of oil in the teens.  Yes, I’m old.  However, since I love playing with numbers I got to work looking at the closing price of Oil versus VIX and gathered as much data as I possibly could get my hands on.  For the price of Oil I used the daily WTI Cushing, OK number from the EIA and for VIX I used VIX from 1990 to present and to get a little more history I used VXO for 1986 through 1990.

The result is daily data for 30 years.  As I was compiling and checking the data for errors I noticed that VIX and Oil were priced in line with each other on a pretty consistent basis.  This was going on even through parts of the 1990’s.  The table below shows that the average for VIX has actually been higher than for Oil several years and even as recently as 2002.  Years where the average price of Oil was lower than VIX are highlighted in red.

Oil VIX Average


This next table shows the number of days by year that VIX closed higher than Oil.  From 2004 to 2007 it never happened.   Then in 2008 VIX closed higher than Oil for the first time in year on October 22, 2008 with the S&P 500 at 896.  VIX remained at a higher level than Oil for 82 trading days (with some gaps) through March 11, 2009 when the S&P 500 closed at 721.

VIX Greater than Oil


After putting these tables together I decided to take a look at the CNBC article to see what they were saying.  The article notes that the last two times VIX closed higher than Oil were August 24, 2015 (big surprise) and March 11, 2009.

My first issue with this is if you are using VIX versus Oil as a signal for a market bottom then when this happened on October 22, 2008 you would have considered that a bottom, it’s easy in retrospect to say we should have bought in March 2009 since that was the last time VIX was greater than oil.  The price chart below is a daily two year chart of the S&P 500 beginning on the first day VIX closed higher than Oil.  I put a box around the time period where VIX was consistently higher than oil.

SPX 2008 2010


Note that using the first occurrence of VIX closing over Oil would have gotten you in pretty early.  Knowing that the last time this would happen was in March is great hindsight, but at the time would not have been a viable signal to trade on.

The other occurrence noted in the article was August 24th.  We had a one day VIX over Oil close and that was it.  The chart below is the daily price action from August 24th through last Friday.  We have basically done a round trip in the S&P 500 since then.

SPX 2015


With the markets in turmoil many market forecasters will try to call a bottom in the S&P 500.  When they cite data be cautious and do some work.  In this case long term history says that VIX higher than Oil doesn’t tell us much at all.

Current VIX Backwardation Streaks in Context

When VIX is relatively high the VIX term structure moves into what we commonly refer to as backwardation.  The way this may be defined varies among market participants, but most focus on the shorter end of the VIX curve.  That is what I’ve been doing lately as well.  It turns out, regardless of how you define VIX backwardation 2016 has experienced more instances of it than not for the first ten days of 2016.  The tables below rank the consecutive day streaks for VIX backwardation by using three different ways of defining the relationship between spot VIX and VIX futures or even between VIX futures contracts.

The simplest definition of backwardation might be when spot VIX closes higher than the first month future.  With the exception of the first two trading days in 2016 spot VIX has closed at a premium to the first month (January 2016 VIX) each day this year.  As of Friday the current streak is at eight days, which places this run in a tie for 12th place.

Spot FM


Many volatility derivative traders like to focus on the relationship between the first month and second month.  That is due to this relationship having an impact on the VIX oriented ETPs (VXX, SVXY, UVXY, etc).  Currently that is the January 2016 and February 2016 VIX futures contracts and January has closed higher than February for all ten days in 2016 which puts this ten day run just inside the top 10 of backwardation streaks.

Spot FM SM


Finally, a more rigorous definition of backwardation would involve spot VIX closing at a premium to the first month and the second month closing below the first month.  This has occurred each day since January 6th for a streak of eight consecutive days which is tied for 7th place among backwardation streaks.

Spot FM SM


I put up a ten minute video expanding on VIX backwardation and discussing these various streaks a little more.  You can view that at the link below and keep an eye on this blog site as we track the current streaks for each of these methods of defining VIX backwardation.

Checking on the Current VIX Backwardation Streak 1/15/2016

VIX Options and Futures Review – 1/17/2016

Two tomatoes are walking down the street, momma tomato and baby tomato.  Baby tomato can’t keep and momma tomato keeps getting angrier and angrier.  Finally she stops, turns around and stomps on baby tomato.  She then states, “Catch up”.

That’s what the VIX futures did this past week, with the stock market playing the role of baby tomato and getting stomped on.  When the dust settled this week VIX was actually up by 0.01 with VIX futures narrowing the gap.  January, which settles on the open this Wednesday, gained 4.75% closing at a slight discount to spot VIX.

VIX LT Curve


The theme for the short term VIX chart below is “The Twist” as the generic charts were lower or higher depending on the time frame.  In general the angle of the curve remained pretty much the same.

VIX ST Curve

Mid-day Friday there was a trader who came in and purchased about 25,000 of the VIX Jan 35 Calls for 0.33.  This occurred with VIX around 28.10, higher than where we finished the week.  The payout at January settlement, which again is this Wednesday morning shows up below.



Volatility Indexes and ETPs Review – 1/17/2016

In an interesting twist VIX was the underperforming index across the VXST – VIX – VXV – VXMT curve rising only 0.01 last week. It is unusual for VIX to be an outlier like this, but even more so when we experience a three day weekend which one would expect to put some pressure on VXST relative to the longer dated volatility indexes.

VXX rose about 7 ½% last week despite the paltry 0.01 gain in VIX. We all know that VXX is not VIX or even any sort of direct exposure to spot VIX. VXX is a consistently rebalanced portfolio focusing on the front two month VIX futures contracts which until this coming Wednesday consists of the January and February contracts. January VIX rose 4.75% last week and February was higher by 5.53%. However, January closed at a premium relative to February every day last week which added to the VXX performance as what is called the roll yield (and is usually a negative experience for VXX performance) was very much a positive.

SKEW and VVIX finished the week at elevated levels, although VVIX was down slightly. Both are indicators of concern about downside for the equity market so both are showing many market participants believe there is more to come despite the worst ten day start for the stock market on record.

VXX Table

What has been good for the long ETPs has been a catastrophe for the short funds, for example SVXY is down more than 28% in 2016. It appears to me that someone may be expecting more downside from SVYX. Late Friday with SVXY at 36.01 there was a seller of 500 of the SVXY Mar 18th 25 Calls for 12.50. This trade took in 1.49 of time value but for the most part is a short play on short volatility (negative times a negative is a positive so it’s a play on long volatility as well). It is possible the trader also holds a large long position in SVXY and is hedging the trade by selling a deep in the month call. Either way this shows worry that what we have experienced to start 2016 may be expected to continue, at least for the next few weeks.


VIX January 22 / 30 1 x 2 Call Spread from Monday

Today, while I was teaching at the Options Institute, a roar came up from the VIX pit about an hour into the trading day.  Despite the tumultuous market activity that we have experienced to begin the year, the audible volume from the open outcry pits has been fairly tame.  What got the guys going today was a very large ratio spread using January VIX Calls that expire on the open next Wednesday.

The specific trade sold well over 100,000 of the 22 Calls and purchased twice as many of the 30’s.  To bring things down to a workable visual let’s just say they sold 1 VIX Jan 22 Call at 3.35 and then purchased 2 VIX Jan 30 Calls for 0.95 each.  This results in a credit of 1.45 for each 1×2 spread.  At the time VIX was near 25.50 and the January futures trading at a small discount to spot VIX.  The payout at January 20th VIX settlement appears below.

VIX 1 x 2


This trade works if one of two things happen – either a drop below 22.00 where all options expire out of the money or a big rally to the upper 30’s.  Of course a big move in either direction may result in this trade being taken off early.  I’ll be watching those two strikes for the next week or so to see how this one may be managed.

VIX Options and Futures Review – 1/10/2016

The VIX curve moved from flat to backwardation as the S&P 500 dropped almost 5% to begin the year.  We finished the previous week with the curve pretty flat which is often considered an indication of uncertainty among volatility traders.  As a stretch of a visual I think about a flat volatility curve replicating a ‘fair coin’ which is the proper academic way to introduce a true 50 / 50 prospect.  That coin toss turned out to be extremely bearish for the equity markets this past week.

VIX Curve + Table


The short term VIX curve is often very flat since the near dated VIX futures tend to follow the performance of spot VIX fairly closely.  That has been the case except when we get a spike in volatility like last week.  Just like the more established VIX curve above, the short dated futures are in backwardation.

VIX ST Curve + Table


We have short dated futures on VIX and short dated options as well.  Both have caught on very quickly, and the trade from this past week uses two of those expiration series to create a VIX put calendar spread.  The biggest block trade on Friday involved a seller of the VIX Jan 27th 16 Puts at 0.11 who the purchased the same number of VIX Feb 3rd 16 Puts for 0.18.  A payoff diagram is tough for this trade since both options have different underlying pricing instruments.  My thinking is the trader expects one of two things.  Either they expected the Feb 3rd contract to maintain enough value at Jan 27th expiration so this trade turns a small profit or they are trying to thread the needle expecting Jan 27th VIX settlement over 16.00 and Feb 3rd VIX settlement below 16.00.  In this case I am leaning more to the first thought than the second though.

Volatility Index and ETPs Review 1/10/2016

The S&P 500 experienced the second worst week in performance since 2011.  For those with short memories, the worst week came about four months ago in late August.   What both these weeks have in common is China which continues to experience financial market woes and, despite their leader’s best efforts, there seems to be no end to the volatility coming out of that part of the world for the foreseeable future.


The market action pushed all four S&P 500 related volatility indexes higher last week and into a state of backwardation that is often associated with broad concern among equity market participants.  It is worth noting that all four are well under the levels reached in August.



In 2015 all the volatility oriented exchange traded products lost value.  Both the long and short ones came under pressure due to increased volatility experienced by the futures contracts that these products are designed to track.  That was not the case this week as the leveraged longs put up a 50% week, the long funds were up about 23%, and those poor short guys lost about 20%.

VXX Table


The last big trade of the week in VXX options was an interesting one.  It appears a trader purchased 10,000 of the VXX Jan 29th20 Puts for 0.29 and sold 20,000 of the VXX Jan 29th 19 Puts for an average of 0.115 (0.23 per spread) for a net cost of 0.06 per spread.  The payoff if held to Jan 29th appears below.



Personally I like to receive a credit for such trades so if I am wrong the result is a small profit.  In this case VXX in the 20’s results in a loss of 0.06.  The best case is a 0.94 gain if VXX closes right at 19.00 and things get hairy below 18.06.

VIX Weekly Futures Prices Rose 42% in First Week of 2016 – By Matt Moran

The first week of 2016 was a challenging one for many financial markets worldwide, as (1) It was the worst opening week of the year in history for both the S&P 500® (SPX) and the Dow Jones Industrial Average, (2) The Shenzhen Composite Index of Chinese stocks fell 14.2%, (3) Crude oil futures (Feb. WTI) fell 10.5%, and (4) The U.S. dollar posted its biggest weekly loss vs. the yen since August 2013.

Were there investable instruments that had diversification potential with double-digit increases last week? As shown in both the table and graph below, the Week 2 Weekly futures on the CBOE Volatility Index® (VIX®) (with an expiration date of January 13th) rose 42.1% last week. (The VIX Index spot value is not directly investable).

1 - Table for VIX Views2 - Line charts VIX futures
As shown in the chart below, over the three trading days ending August 24, 2015, the VIX Weekly Week 34 futures rose 147%.

3 - VIX fut Aug 2015

Extended trading hours are provided for VIX futures and options, and on SPX options.
4 - ETH options5 - ETH VIX futures
More information on use of VIX futures and options (including delayed price quotes) is available at and


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