BPVIX Hits Highest Level in 7 Years, So Let’s See the Skew and Term Structure for Listed Options

On Monday the CBOE/CME FX British Pound Volatility Index (BPVIX) closed at 22.59, its highest daily close since March 2009, and the BPVIX Index has risen 161.8% so far this year (through June 6). A number of news articles have noted that the implied volatility for British Pound has risen during the past month because of concern about the upcoming June 23 Brexit referendum.

1 Vola indexes Three

Recent headlines for news stories included (1) “Pound Falls, Volatility Jumps as Polls Show Momentum for Brexit” (Bloomberg on June 5), and (2) “Sterling volatility heads higher as Leave camp builds lead” (Financial Times on June 6). In addition, Timothy Edwards posted a VIX Views blog on “Divining Brexit.”

The BPVIX Index is not tradable and there are no BPVIX listed futures or options. As the vote on Brexit approaches, traders and investors could keep an eye on the volatility skew and term structure for key listed options.


Listed options are available on the CurrencyShares British Pound Sterling Trust (FXB). The FXB delivers exposure to changes in value of the British pound relative to the US dollar. At the end of last month the open interest for the FXB ETF options was 30,874 for the FXB put options, and 8,649 for FXB call options. The next chart below shows the volatility skew for the FXB options at the close on June 6 (when the FXB closed at 141.43). Note that the implied volatility for the out-of-the-money (OTM) FXB put options generally is much higher than the implied volatility for the OTM FXB call options, indicating high investor fear about possible future downside moves of the FXB.

2 FXB Skew

The two charts below show Bloomberg estimates of 30-trading-day impled volatility for five option classes. Note that for all the options classes (except VIX) in the charts below, the implied volatility at 90% moneyness is higher than the at-the-money (ATM) implied volatility, while the implied volatility for VIX at 110% moneyness is higher than the VIX ATM implied volatility.

4 - Skew US

A valuable tool to see long-term trends in SPX skew and investors’ concerns about catastrophic risk is the CBOE SKEW Index at www.cboe.com/SKEW.


CBOE offers SPX Weeklys that expire on Wednesdays and Fridays, and VIX Weeklys that expire on Wednesdays. Weeklys options can provide opportunities for investors to implement more targeted buying, selling or spreading strategies. Weeklys options can help investors efficiently take advantage of market events, such as earnings, government reports, voter elections and referenda, and Fed announcements.

A May 29 Business Insider post noted that Goldman Sachs options analysts issued a report that considers the messages volatility term structure is sending. The Business Insider post stated that —

Looking at the S&P 500 implied volatility term structure, a downward hook, or “kink” as the Goldman report says, is noticed just before the June 14-15 Fed meeting. Looking at term structure, markets are pricing in volatility around the June 23rd Brexit vote, but not necessarily the June 14-15 Fed meeting nor the U.S. Presidential election. “Elevated event risk creates “kinks” in term structures,” Gregory and Timcenko wrote. “The term structure of implied volatility is typically smooth and upward sloping. Excess hedging demand around specific expirations creates kinks in the term structure and provides clues as to how event risk is being priced.”

Below are CBOE-created term structure charts with Bloomberg estimates for select dates for OTM SPX puts and VIX calls at certain strike prices. With the Brexit vote scheduled for Thursday, June 23, it will be interesting to see how implied volatility moves around that date for the key index options. You can see the term structure for many more SPX standard expiration dates at www.cboe.com/VIXTerm.

5 - Term structure

Weekend Review – Volatility Indexes and ETPs – 6/5/2016

The whole curve shifted a bit higher last week. We have to attribute the rise to the three-day weekend effect. At least in the case of VXST and VIX. Typically, VXV and VXMT are not impacted as much as the shorter dated volatility indexes. I might attribute the rise of longer dated volatility to the expected date for the next rate hike being pushed down the road.


Despite the rise in VIX last week, the long volatility oriented ETPs were lower on the week. This is a function of the futures dropping as well.

VXX Table

SVXY has recovered nicely from the February lows and is now up over 27% for 2016. UVXY which was up over 100% for the year is now down over 64%.


With volatility up a bit on Friday morning someone came in looking for a long term grind lower in VXX. At least they expect VXX to work lower over the course of summer into standard September expiration. With VXX at 13.53 they purchased the VXX Sep 16th 12 Puts for 1.13 and then sold the VXX Sep 16th 10 Puts for 0.31 and a net cost of 0.82. If VXX is below 10.00 on the third Friday of September, the result would be a profit of 1.18. If VIX remains low for the summer VXX under 10.00 in three months is definitely a possibility. In fact, with VXX closing at 13.02 the execution of this trade appears to be well timed.


Weekend Review – VIX Futures and Options – 6/5/2016

The S&P 500 was slightly higher last week and so was VIX, but we put an asterisk next to that number based on the three-day holiday weekend. The futures tell more of the story and as you can see below as with the exception of the February 2017 contract all the futures moved lower.

VIX Curve Table

Friday morning the stock market was weak and VIX was higher in reaction to the employment numbers. With VIX at 13.93 and the Jun VIX futures contract at 15.10 someone came in and bought 2500 of the VIX Jun 15th 16 Puts for 1.40. If held to expiration this is a bet that June VIX settlement will be well below 14.60. By the end of the day on Friday this trade was looking pretty smart as VIX finished the week at 13.47 and the June standard futures contract settled at 14.725 which resulted in the bid side for the VIX Jun 15th 16 Puts to close at 1.55 for a small unrealized profit.


Divining Brexit

The markets’ view of the pending British referendum on EU membership displays the hallmarks of a low probability, high impact event.  Correlations, and volatility expectations, are the key indicators.

When macroeconomic risk is dominant, as a select few narratives come to preoccupy investors, correlations increase.  For example, in August and September 2015, markets worldwide were roiled in concert: on the changing winds of a collapsing oil price, and a loud “pop” in Chinese equity prices, correlations achieved multi-year highs.

The chart below shows the average monthly correlation among the constituents of the S&P United Kingdom index:

Pic 11

Compared to recent levels, and to longer-term averages, UK equity correlations remain reassuringly low.  This tells us that Brexit risk is not currently a major driver of equity pricing. 

But British equities include a number of global standard-bearers with disperse operations such as BP, Unilever and HSBC.  Conversely, the pound sterling has far more direct sensitivity to specifically British trade opportunities, economic growth and sovereign credit.  We can also assess Brexit risk with the CBOE/CME FX Pound Sterling Volatility Index, a measure of the expected movement implied by options on the pound / U.S. dollar exchange rate.

The pound’s volatility gauge is warning of considerable trouble ahead.  The index currently stands at 21.7, having more than doubled in the last few weeks – to its highest level since February 2009.

Pic 12

Note that the current spike in the chart began just as the June 23rd referendum date moved within the 30-day range measured by the volatility index.  Currency volatility shows investors’ Brexit fears.

How can we reconcile these two indicators?  Is the market unconcerned with Brexit, as equity correlations indicate?  Or should we infer, as currency markets seem to be doing, an impending disruption on a level not experienced since the financial crisis?

Correlations tell us when events have come to dominate, implied volatility indicates the magnitude of misfortunes which may never happen.  The key is to appreciate that Brexit is a low probability, high impact event.  The low probability means that minor swings in polling have had little impact on the day-to-day fluctuations in the British equity markets.  Meanwhile, the high impact is shown by the greatly increased cost of insuring against the possible disruption that a vote for “leave” might entail.

Weekend Review – VIX Futures and Options – 5/29/2016

With the strength in stocks last week VIX finished the week just 0.02 higher than the 2016 closing low of 13.10. Always remember that part of the equation on Fridays when looking at VIX performance relates to a weekend impact where the market is closed for two days. This is accentuated when we have a three day holiday weekend so don’t be surprised if VIX rebounds a little on Tuesday regardless of what the stock market is doing.

VIX Table Curve

About 20 minutes after the open on Wednesday last week someone came in and placed an order that has my attention. With VIX at 14.15 someone bought the VIX Jun 1st 16 Calls for 0.35 and then also sold VIX Jun 15th 18 Calls for 0.63 and a net credit of 0.28. Since we all know that the best underlying for a VIX option contract is the corresponding future I should note that the June 1st VIX future was at 15.10 and the June 15th contract was at 16.15. This may be a case of a trader taking advantage of the price difference between the June 1st and June 15th futures using options as a substitute.

Weekend Review – Volatility Indexes and ETPs – 5/29/2016

The S&P 500 rally along with the three-day weekend effect pushed VXST to finish Friday below 10.00 for the first time since July of last year. The VXST – VIX – VXV – VXMT curve moved lower and steepened a bit based on the calendar and the strength in the market.


Looking at the table below it is like several indexes and instruments are playing limbo seeing how low they can go. VXX and the unleveraged long ETPs lost 10% while the leveraged funds gave up almost 20%.


Check in on the ETP performance with the chart below I just amazed to think that UVXY was actually up 100% for 2016 about three months ago. Now the fund is down over 60%. I think there is a lesson on being short volatility in that statement, but I will save that for a non-holiday weekend.

VXX SVXY UVXY Comparison

VXX started out last week in the low 15’s and as the week got underway one trader decided that VXX was probably going to work lower over the course of the week. With VXX at about 15.10 they sold the VXX May 27th 15.00 Call for 0.30 and then used some of those proceeds to purchase the VXX May 27th 14.50 Put for 0.17 for a net trade credit of 0.13. Note on the payout diagram below that I marked the Friday close for VXX of 13.59 to demonstrate how this trade turned out.


VIX History Lesson – The Fiscal Cliff in 2012

I got a question on Twitter today about the potential for a volatility short squeeze. I think the question was rooted in how much activity and open interest there is in volatility oriented derivatives, but the instance I recall that felt like the move was overdone occurred in late 2012.

As the end of 2012 approached it appeared that the President and Congress were at an impasse over extending the Bush Tax Cuts from 2001. The pending result was commonly referred to as the ‘fiscal cliff’. Financial markets were very concerned and the S&P 500 lost 3% between December 18 and December 28. Over that same time period VIX rose over 30% from 15.57 to 21.79. The chart below shows VIX and the front month January 2013 VIX Futures contract from December 3, 2012 through January 16, 2013 (expiration date).

VIX Squeeze

Note the area I have highlighted with the purple box above. That is when the fiscal cliff news dominated the markets and caused a spike in VIX. Usually the front month futures contract, especially where there a couple of weeks remaining to expiration, will not move in sync with a spike in VIX. This was not the case with the fiscal cliff and one of the theories is that this piece of news coincided with the year coming to an end.

Here’s the theory. Make sure to use Billy Ray Valentine’ voice as your narrator. There’s a couple of days left to the end of the year and you work for a hedge fund. One of your strategies that worked so well in 2012 was being short VIX futures playing the drift down the curve to spot VIX into expiration. You look up at your screen on December 28th, and you see VIX moving higher, you are short January futures and the futures aren’t acting like they are ‘suppose to’, that is lagging the move in spot VIX. Your year-end bonus and performance is quickly going downhill. Maybe you jump in and cover your VIX futures short and salvage what is left of your year.

Weekend Review – VIX Options and Futures – 5/22/2016

The combination of VIX moving lower and June becoming the front month put some pressure on the June futures last week. I think maybe the lack of news flow expected over the next couple of weeks has something to do with that as well. Note the bifurcated futures performance from last week with many longer dated futures rising, which maybe could be the risk of higher rates or an ‘interesting’ presidential election hovering over the markets. Finally, I always like to periodically point out the ‘dip’ that is December futures. It’s already showing up and is due to the number of holidays that occur between December VIX expiration and the S&P 500 Index options (SPX) that are used to settle VIX in December. This year it may be also be function of the markets assuming the election uncertainty will be behind us.

VIX LT Curve Table

Midday on Friday someone came in and got some tail risk protection for real cheap. With spot VIX around 15.50 and the June VIX futures nearly two points higher around 17.50 there was a buyer of an out of the money call spread using the standard June 15th VIX calls. In a few different lots they purchased the VIX Jun 30 Calls for 0.18 and sold the VIX Jun 40 Calls for 0.07 and a net cost of 0.11 per spread. Any volatility event between now and the market open on June 15th could result in quite the payoff as seen below.


Weekend Review – Volatility Indexes and ETPs – 5/22/2016

With the S&P 500 zig zagging this week, but finishing up by just over a quarter of one percent the curve was little changed. With one exception, VXST dropped 10% after we got past the FOMC minutes and the markets started to look forward to nothing for the next couple of weeks. VIX and VXMT rose and VXV was lower. I can’t remember the curve shifting like this ever, but since three out of the four moves were pretty small I wouldn’t read too much into it.


The long VIX related ETPs came under some pressure as the front month moved to June and contango remained pretty steep. Even VVIX came down a bit last week, but I think we can attribute that to a lack of eminent and known potential market moving events until after the Memorial Day holiday.

VXX Table

SVXY topped the 10% year to date return level. Long term holders of SVYX (or those that have had the fund since the last day of 2015) earned that 10%.  What I mean by that is that at one point in 2016 SVXY was down just over 38%. Not only does SVXY give individuals a method of being consistently short volatility, but it also gives me a teaching example on how being short volatility is like picking up nickels in front of a steam roller.


I got a question about VIX and Fridays via twitter last week. Specifically, I was asked if VIX is more likely to be lower on a Friday than any other day. I knew the answer, but wanted to update the numbers before reporting back.

The numbers below show the one-day change for VIX based on the day of week from January 2, 1990 through May 20, 2016. I highlighted both Monday and Friday to make a point about the impact of weekends. VIX is calculated to show a 30-day outlook. However, this outlook is based on calendar days, therefore the weekend has a bit of an impact on VIX. In fact, there is a weekend impact for all implied volatility as the market adjusts for the weekend on Friday afternoons. Note that VIX is down just over 60% of Fridays while VIX is higher almost 65% of Mondays. The average, not taking days into account is 52% lower and 48% higher.

VIX Day of Week Update


Now the bad news. VIX futures traders adjust for this as well so the record of up versus down days for the index does not translate to the futures markets. I feel it was my duty to pass along that tidbit of news before closing out this blog.

Weekend Review – VIX Options and Futures – 5/15/2016

After starting the week off on a bullish note, the S&P 500 finished out down just over a half a percent for the week. VIX was up just a bit more than 2%, most likely being held back by weakness that was associated with the S&P 500 moving higher on Monday and Tuesday last week.

The spread between the May VIX future and spot index is pretty narrow finishing Friday at less than a point. Not only did the spread between the May futures and spot VIX index narrow, but a portion of the curve actually dropped. June through October futures were lower despite the rise in VIX. The result is a slight flattening of what has been a pretty steep curve over the past few months.

VIX Curve Table

With May expiration rapidly approaching, most traders seem to be looking beyond May to June. I saw someone Friday morning who seems to be looking out to July for a volatility spike. With VIX at 14.23 and the July VIX futures at around 18.60 someone came in and purchased 6700 VIX Jul 20th 21 Calls for 1.92 and went several strikes higher and sold the VIX Jul 20th 35 Calls for 0.42 and a net cost of 1.50. The payoff diagram below highlights all the important price levels.


The maximum profit on this trade comes to 12.50 per contract with July VIX settlement at 35.00 or higher. The break-even price is 22.50 and finally anywhere from 21.00 or lower the cost of the spread, 1.50, is equal to the maximum loss.


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