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

Five Takeaways from 2015

2015 is behind us and the S&P 500 dropped (more than a rounding error) for the first time since 2008.  If you want to put a positive spin on the year you can say with dividends the S&P 500 was higher.  It was a fun year to be a market participant as we experienced some things that could be considered new or at least different relative to recent market history.  Since everyone loves lists, or gets easily sucked into them, here are five takeaways from the volatility markets in 2015.

1. VIX Average Closer to Historical Norms

Last year VIX averaged 16.67 which was over 2 points higher than the average for both 2013 and 2014.  As I write this I note there was very little of the “is VIX broken” stuff coming out of the media in the second half of 2015.  The chart below shows the range and average by year going back to 1990.  The technical analysts will note 2015 had a higher high, higher low, and higher average (trend change?).



One other chart with respect to the VIX average shows up below which shows the rolling 1, 5, and 10 average closing prices for VIX since 2000.  Note the 10 year average remains pretty steady around 20 which is the number that is often cited as a long term average for VIX (because it is the long term average for VIX).  To maintain that long term average VIX is going to need to be elevated over the next few years.



2. Russell 2000 Volatility Was Relatively Low

Russell 2000 implied volatility as indicated by the CBOE Russell 2000 Volatility Index (RVX) was relatively low in 2015.  The average for the year was 19.39 which was actually down a bit from 2014’s average of 19.42.  Also, many of us volatility watchers like to compare RVX to VIX.  The chart below takes the closing level of RVX and divides it by VIX.  Until 2015 there had only been one trading day where RVX closed lower than VIX.  This past year is happened several times as indicated by the ratio closing below 1.00.



3. SKEW High for the Second Year

In 2014 the average for the CBOE SKEW Index was 129.75.  I personally brushed that record aside thinking it was a function of VIX being at relatively low levels (I was wrong).  Last year SKEW averaged 127.50, despite VIX averaging a higher level than in 2014.  I’m hearing rumblings that there is a structural market change with respect to institutions using out of the money SPX put options to hedge against any dramatic drop in the stock market.  The thinking is due to regulatory restraints many institutions are judged on their ability to weather any sort of dramatic financial market weakness (think the stress test).  Holding out of the money SPX puts is an efficient and relatively cheap way to pass a stress test which increases the demand for those puts and results in elevated out of the money implied volatility when compared to historical levels.



4. VIX Backwardation Lives!

The table below is my own method of determining whether the shorter part of the VIX curve is in contango or backwardation.  For VXX traders the column showing where Month 1 closed higher than Month 2 is most significant.  About 1 in 5 days last year the front month was at a premium relative to the second month which benefits the performance of VXX.  Despite this VXX was down about 36% last year.


Contango - Backwardation

5. Long and Short Volatility ETP Performance

As noted in the previous point VXX was down 36% last year, despite a little more backwardation that we have seen in years.  There are also some ETPs that offer the inverse return of VXX, but on a daily basis so compounding may result in one of the inverse funds not having the inverse performance of the long fund over time.  In a choppy year, like 2015, there can be a dramatic disconnect and there was.  There are a couple of short funds, but I focus on SVXY as it has an active option market.  SVXY was not up 36% in 2015 as VXX was down 36%.  In fact SVXY lost value as well dropping 17.5% for 2015.  If anything this is a great lesson in how inverse funds do not return the opposite of their long fund counterparts and the more volatility the underlying market the bigger the possible disconnect.

VIX Last Week – 12/20/2015

VIX gave up 15% last week, despite the S&P 500 losing a little and this index trading in a range of greater than 80 points for the second consecutive week.  Consensus thinking is that with the Fed finally hiking rates a little uncertainty came out of the markets.  Of course Janet Yellen’s press conference was still in full swing when market pundits started discussing when the next potential rate hike may occur.

VIX plus Table


The curve depicting the short dated VIX futures contracts flattened out and the Dec 23rd bump moved to the forefront.  The Dec 23rd contract was the only one on the board to settle below 20.00 this past week.  However, there was a trader lurking around both Thursday and Friday who seems to think settlement will be in the 20’s on the open this Wednesday.

VIX ST plus Table


On Thursday morning I came across a buyer of the VIX Dec 23rd 20 Calls at 0.80 who was also selling the VIX Dec 23rd 22 Calls at 0.40.  This was all going on while VIX was around 19.00 and near the low of the week.  On Friday the 20 Calls that settle on the open this coming Wednesday were continuing to get some love as almost 24,000 traded.  Some were pure purchases and other trades consisted of selling the 23 Calls.  Regardless of the structure someone is looking for volatility to remain high, at least for the first part of the coming holiday week, despite this being a holiday week.



As a final note the call open interest for VIX Weeklys is truly impressive.  Doing quick math the open interest for the Dec 23rdCall side of the board was over 130,000 contracts.  That’s impressive, but even more so when we are entering the holiday season which is supposed to be a time of focusing on family and not volatility.

Volatility Indexes and ETPs Last Week – 12/20/2015

Finally, the Fed raised rates.  I’m reading Ben Bernanke’s book and it is interesting that this was being debated when he was still the chairman.  The equity market loved it and then hated it with the result being a roller coaster of a week.  The VXST – VIX – VXV – VXMT curve was on heightened alert this time last week and returned to normal to end the week.  It is rare, but we seem to have experienced an earnings like volatility crush in SPX volatility in reaction to the Fed announcement.



Despite all that volatility last week the short funds were up (SVXY +4.52%) and the long funds dropped.  This is a function of VIX futures finishing the week lower and these funds now moving on to own January and February VIX futures.

VXV Table


On Tuesday I was looking for trades in front of the Fed and came across a couple that actually were looking for volatility to remain high to finish the week.  The trades I’m going to talk about are both 2500 lots so I’m guessing it is the same guy or girl on the other end.  Early Tuesday with VXX at 20.85 there was a seller of VXX Dec 18th 20 Puts at 0.63 who purchased the VXX Dec 18th 19 Puts for 0.27 and a net credit of 0.36.  VXX went up and then came back down and near the end of the day another trade in the same options of the same size took in a credit of 0.41.  The price action for the full week in VXX shows up below.

VXX Chart


About 24 hours after the second lot the Fed did its thing and VXX dropped as the stock market rallied.  VXX did bottom out for the week and finished at 21.77, safely in a place where all options expired with no value.


It is no secret that I am a big fan of vertical spreads.  This week’s trade is a great example of how defined risk and reward that is associated with a bull put spread makes it easy for a trader to stick with a conviction.  A player long VXX, with no hedge, may have panicked as VXX broke 19.00.  A seller of a put spread may not be particularly happy, but they have a defined loss and it is easier to stick this out.

New Risk-Off: More Fear Today Than Tomorrow

It has been over nine years since the Fed raised interest rates, but today, the Fed raised rates just as expected. While the Fed actions have been well telegraphed, and interest rates are probably the least of worries for commodities, there is one measure that might be worrisome.

Although since 1991, rising rates seem not to have been a decisive factor in equity performance, and have clearly not been a negative force (as shown in the chart below from this paper,) there is more uncertainty about the stock market today than tomorrow. 

Rising rates Stocks

One indicator of extreme market stress can be seen when the price of futures contract on the CBOE Volatility Index® (VIX) with a nearby expiration is more expensive than one later dated. This condition is called backwardation (it sounds like a bad diagnosis and usually is) but it is relatively rare, happening in only 17% of days since Mar. 29, 2004.

The futures contracts are now reflecting this condition for five days straight. This has happened a number of times before but one of the interesting things about today is that the market seems not only uncertain but downright jittery. It looks a bit like in 2007, soon after the Fed starting raising rates, when the market felt noticeable fear by the measured backwardation. It’s not the fear alone but the persistence. Just a few months ago, from Aug. 20 – Oct. 7, the Chinese stock market crash sent chills through the market. Backwardation appeared again from Nov. 13 – 16 with one of the biggest weekly stock market drops in months that crashed the S&P 500’s 200-day moving average, a bearish signal for many investors. Again, ahead of the Fed decision – which should not have been surprising – backwardation appeared and is present. The chart below shows the history of VIX backwardation with the S&P 500 index levels. The green triangles represent when the Fed raised rates in 2006 and when they started quantitative easing in 2008.

Source: S&P Dow Jones Indices

While the interest rates alone have not influenced stock prices, the unprecedented quantitative easing started a vicious cycle of risk-on/risk-off (RORO) that was the result of a binary outcome for risky assets – either the easing works OR it doesn’t. Since commodities are a risky asset, they are a class where the returns are noticeably impacted by fear before the financial crisis and after, when quantitative easing began. Pre-crisis, there was no relationship between a high VIX and commodities, but the relationship turned negative post-crisis.

Source: S&P Dow Jones Indices. Data from Jan 1990 to July 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance

The RORO environment meant investors either felt they were, or were not getting paid for taking the risk to invest in risky assets. This drove up the correlation of commodities with stocks to unprecedented levels, just over 0.7. By 2013, the Fed started to taper and the correlation fell back to zero, and stayed below its average of 0.26 until Aug., 2015, precisely when VIX backwardation appeared. In just slightly more than one month, the correlation doubled from 0.22 (Aug. 20, 2015) to 0.44 (Sep. 28, 2015). Since then, it has increased slightly more to 0.46, its highest level in over two years, since Aug. 20, 2013.

The one thing to worry about is the combination of higher than average VIX backwardation with high risky-asset (stock/commodity) correlation. This only happened three times before now. Once in the financial crisis, once in 2011 just following the debt ceiling crisis and U.S. downgrade, and for a very short time in the 2010 flash crash. This is illustrated in the chart below where the S&P 500 represents stocks and the S&P GSCI represents commodities.

Source: S&P Dow Jones Indices

Source: S&P Dow Jones Indices


Now Might Be the Time for VIX®

An alarming picture is being painted by an economically frail global economy: the threat of a U.S. Fed rate hike and renewed credit weakness driven by falling oil prices.  The S&P GSCI® (TR) was down 30.8% YTD, with all sectors in the index reporting negative returns for the year, but the S&P 500® and the U.S. stock market have not collapsed yet.  In fact, U.S. equities are on pace to outperform commodities for the eighth consecutive year, which would set a new record.  If this cycle changes, investors may need a way to protect themselves.

Historically, the CBOE Volatility Index® (VIX), which many investors know as the “investor fear gauge,” tends to spike when markets are tumultuous.  VIX measures the expected 30-day volatility of the S&P 500.  When implied volatility is high, the intraday moves can be large, and when implied volatility is low, intraday ranges tend to be narrow.

Since 1990, the S&P 500 has dropped in 37% of months (115 out of 300) and on average, when it fell, it lost 3.5%.  When VIX gained, it gained an average of 16.4%.  In October 2008, the S&P 500 lost 16.9%, its worst month on record, while VIX gained 52.0% in the same period.

Exhibit 1 shows VIX and S&P 500 returns when equities are in negative territory.  It can be seen that in most cases where S&P 500 returns are negative, VIX returns are positive.


Since the current commodity crash has played a major role in slowing global growth, it is important to note that VIX could also protect against drops in commodity prices.  Since 1990, the S&P GSCI has fallen in 46% of months (142 out of 311).  In those months, on average, commodities fell 4.7% and VIX gained 3.4%.  Exhibit 2 shows VIX and S&P GSCI (TR) returns; when commodities are in negative territory, it can be seen that in most cases VIX returns are positive.


Volatility indices like the S&P/ASX 200 VIX, the S&P/JPX JGB VIX, and the S&P/TSX 60 VIX could offer similar protection globally.

Is The Fed’s CCAR Pushing Up the SKEW Index and Driving More Demand for O-T-M SPX Puts? By Matt Moran

In a December 8 Bloomberg news report – “Who’s the Bear Driving Up the Price of U.S. Stock Options?” – Joseph Ciolli wrote – “For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks.”


The levels of the CBOE SKEW Index indicate increased demand for out-of-the-money (O-T-M) SPX puts during the past couple of years. The average daily closing levels of the CBOE SKEW Index have been —

(a) 118.0 since its start date in January 1990,
(b) 129.8 in 2014 (the all-time high for any year), and
(c) 126.9 in 2015 (through Dec. 8).

1-SKEW Index thr Dec 8

The value of the SKEW Index increases with the tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. Historically, SKEW has varied in a range of 100 to 150 around an average value of 118. The FAQ on the SKEW Index notes that – “The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.”


The volatility skew charts below show that Bloomberg’s estimates for SPX 30-day implied volatility on recent dates were quite a bit higher for SPX options at 80% and 90% moneyness when compared with SPX options with moneyness at 100 or higher. Reports have indicated that O-T-M SPX put options usually have had higher implied volatilities than at-the-money SPX options and O-T-M SPX call options since 1987.

2-Volatility Skew two dates SPX

At his comprehensive December 1 presentation at the First Annual CBOE Risk Management Conference (RMC) Asia in Hong Kong, Buzz Gregory of Goldman Sachs discussed skew –

  • (1) The skew for the S&P 500 is the highest of any major market in the world, and
  • (2) The S&P 500 skew may remain high because of regulatory pressure on big banks to hedge big downside risks. Regulatory initiatives include – (a) Comprehensive Capital Analysis Review (CCAR), an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress, (b) Dodd-Frank Act stress testing is a forward-looking component conducted by the Federal Reserve and financial companies supervised by the Federal Reserve to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.


In his December 8 Bloomberg news report, Joseph Ciolli wrote about the possible reasons for the higher S&P 500 skew levels —

“… While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank AG says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. ‘Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,’ said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. ‘The way the marketplace has compensated for that is by driving up S&P skew.’”


If you expect that the SPX skew levels will be relatively high in upcoming months or years, what are some options strategies that an investor might consider? One of the most straightforward strategies to consider would be the sale of O-T-M cash-secured SPX put options.

On the writing of SPX put options, the website has links to a number of papers on and these two benchmark indexes that write cash-secured SPX puts that are only slightly out-of-the-money – CBOE S&P 500 PutWrite Index (PUT) and CBOE S&P 500 One-Week PutWrite Index (WPUT).

Some mutual funds now are engaging in the sale of cash-secured puts; for a listing of more than funds that engage in a variety of options strategies, please visit for a 2015 paper on “Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs” – Slide Presentation (30-page PDF) and Highlights (4-page PDF). (CBOE does not endorse mutual funds). According to the analysis in the paper, the number of ’40 Act funds that use options rose from 10 in 2000 to 119 in 2014.

3 - options based funds chart


  • Recent Comments

  • Tags