Video: CBOE Volatility Index – Fact & Fiction Part 3

Watch Part 3 of CBOE’s Fact & Fiction five part educational series, where Daniel Deming of Stutland Equities discusses the VIX as a 30-day forward looking measure of volatility and shares some of his strategies.

Recent Increased Interest in Risk Management with VIX-based Products

While the VIX Index has been below 24 so far in 2012, and the VIX closed at 16.80 last Thursday (Feb. 23), the trends in trading volumes in VIX-related products indicate that there could be more recent interest in using VIX-related products for purposes of risk management for investor portfolios.

The average daily volume for the VIX call options, VIX futures, and some of the VIX-based exchanged-traded products (ETPs) is more than 55% higher this month than it was in the previous four months (see table below)

This month the VelocityShares Daily 2X VIX Short-Term ETN (TVIX) had an average daily volume of around 21,887,000, but in the past week Credit Suisse announced that it had temporarily suspended creations of shares of the TVIX ETN.


The Tabb Group recently issued a 20-page paper “VIX Trading: The Structure of Uncertainty” (available for purchase). Tabb summaries of the paper on the CBOE Volatility Index® (VIX) noted that —

“ …VIX trading quite literally exploded over the past few years. The notional value traded of VIX products grew at an ear-piercing 5-year compound annual growth rate of 131% from 2006. … the S&P 500 volatility market reached an estimated 202 million average daily notional Vega (gross): SPX Options (75 million); VIX futures (48 million); VIX Options (39 million); VIX ETPs (30 million); and SPX Variance Swaps (10 million). …


A February 22 news story at noted:

“… current VIX levels also show that traders expect stocks to dart around far more in the future than they have over the last month. The realized volatility of the S&P 500 over the last 30 days stands at about 8%, its lowest level since May, according to data from Livevol. That means traders are paying more for portfolio protection despite the placid markets. …”

The chart below shows a large spread of 9.3 points on February 23rd between the VIX Index spot value (16.80) and VIX June ’12 Futures price (26.10)

The webpage provides a table delayed quotes with updates on the VIX and VIX futures values. Here is the table at mid-day on Feb. 24 —


The paper “VIX Futures and Options–A Case Study of Portfolio Diversification During the 2008 Financial Crisis” was published in 2009 by an author from the University of Massachusetts.The paper found that, for a traditional portfolio of stocks, bonds and alternatives during the five-month time period from August through December 2008, if an investor made a 10% allocation to CBOE VIX futures–

– Total returns were improved by 15.7 percentage points (improvement to -4.0% from -19.7%)

– Standard deviation was reduced by about one-third (to 16.3% from 25.3%)

Please visit the VIX microwebsite for the UMass study on use of both VIX futures and options.

The Volatility of Volatility: High

In a recent podcast, I was asked about the sharp spikes and steep drops in VIX levels and what that reflected; I was able to get through that with minor scars, but it got me thinking about the volatility of Volatility. Below are a couple of charts that tell the story.

Chart 1 displays the daily total returns of S&P 500, S&P 500 VIX Short-term Futures and VIX Spot indices. As is evident, it looks like white noise, but it also illustrates that swings in daily returns for the VIX Futures and VIX spot indices are more dramatic than those for S&P 500 and that implied volatility is more responsive to market sentiment.

Chart 2 illustrates the annualized rolling 21-day realized volatility for the three indices; demonstrating that the volatility of implied volatility is extremely high. In fact, over this time period (Dec ’05 thru Jan’12) the VIX futures index was 3 times as volatile as the S&P 500 and the VIX spot over 6 times.

Video: CBOE Volatility Index – Fact & Fiction Part 2

Watch Part 2 of CBOE’s Fact & Fiction five part educational series, where Jamie Tyrrell of Group One Trading discusses the VIX, whether it indicates fear or uncertainty and what it means when the VIX “heads down.”

Managing Brazilian Volatility with Futures and Options on the VXEWZ Index

Over the next five years, some projections indicate that the annual GDP of Brazil could surpass that of both France and the United Kingdom, and that Brazil could rise to become the fifth largest economy in the world.

More investors now are concerned with the issue of managing Brazilian volatility.

Today CBOE Holdings announced today that the following products will be launched in the coming weeks:

  • CBOE Brazil ETF Volatility Index security futures (VXEW) – Tuesday, February 21 on CFE
  • CBOE Brazil ETF Volatility Index options (VXEWZ) – Tuesday, March 6 on CBOE


Since February 2001, the average 30-day historic volatility has been about 25.6 for the MSCI Brazil Index and 18.9 for the S&P 500 Index.


Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

CBOE calculates and disseminates the CBOE Brazil ETF Volatility Index (ticker VXEWZ), which reflects the implied volatility of the EWZ ETF.

The price history for the VXEWZ Index begins in March 2011. The peak daily closing value for the VXEWZ Index was 63.49 on Oct. 3, 2011.

At mid-day today (Feb. 17), the VXEWZ Index was at 30.89 and the VIX was at 18.14.

Delayed quotes table is updated at


As noted in the table below, the daily changes in the VXEWZ Index had a negative 0.85 correlation to those of the EWZ ETF during the time period covered.


If you believe that the VXEWZ Index is mean-reverting, and you believe that there is a good chance that VXEWZ might rise significantly in upcoming weeks or months, four strategies that you might consider in the future include –

  1. Long VXEWZ call options
  2. Long VXEWZ call spreads
  3. Short VXEWZ put credit spreads
  4. Long VXEWZ futures.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products. You can visit for some information regarding pricing, and for more information on the VXEWZ Index.

Is Crude Oil More Volatile Than Stocks? Check Out the OVX Index

In recent years I often have heard the following questions:

  1. Are there other indexes that use the VIX® methodology to create implied volatility indexes for options on other asset classes and other stock indexes?
  2. How does the volatility of the S&P 500® Index compare to the volatility of other asset classes?

The answer to question number 1 above is that there now are dozens of indexes worldwide that are legally authorized to use the proprietary VIX methodology (for a sampling of some volatility indexes created by CBOE, including the CBOE Crude Oil ETF Volatility Index (OVX), please visit

An answer to question number 2 above is that crude oil prices often have been much more volatile than the S&P 500 Index.


The 30-day historic volatility for crude oil peaked at over 125 in January 2009, but it has fallen to around 20 this month.

Here is the average 30-day historic volatility since January 1993 for three key barometers —

  • 36.5    Crude oil spot (WTI)
  • 17.0    S&P 500 Index
  • 14.9    Gold spot


Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

The CBOE Crude Oil ETF Volatility Index (OVX) has a price history back to May 2007, and its peak daily close was 100.42 on December 11, 2008. The OVX Index is designed to reflect the 30-day implied volatility of USO ETF options

The average daily closing values from May 10, 2007 through February 14, 2012 were –

  • 41.9 CBOE Crude Oil ETF Volatility Index (OVX)
  • 26.5 CBOE Volatility Index (VIX)

There were three days in August 2011 in which the USO ETF fell by more than 6% and the OVX Index rose by more than 26%.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products. You can visit for some information regarding pricing, and for more information on the OVX Index.

For a more-detailed, longer version of this blog with ten charts, please click here.

The Relationship of the VIX Index and the Monthly Gross Premiums Generated by the BXM Index; Introducing the “Rule of 10”

Some investors who are new to options have asked these questions:

  • How can I determine how much premium will be generated by a covered call strategy?
  • Is a high VIX level related to high option premiums?
  • If VIX is at a high level, does that mean that a covered call strategy will perform well?

Many factors can influence the premiums generated by different covered call strategies, and a high VIX level does not guarantee that covered calls will have great performance. (For more general options education, please visit

The CBOE S&P 500 BuyWrite Index (BXM) sells one-month S&P 500 index options at mid-day on the third Friday of every month, while the CBOE Volatility Index® (VIX® ) is designed reflect market expectations of 30-day volatility conveyed by S&P 500 stock index option prices.

One could use a “Rule of 10” to try gain the following approximation — if you take the VIX and divide by 10, the resulting number should give you an approximate estimate of the BXM gross monthly premium as a percentage of the S&P 500 Index.  Please see the two charts below for more details.

The two charts above used the term “Gross Premiums” because the numbers shown are not net returns.  Please see the table below to see some relationships between VIX levels and the annual percentage change in value of the BXM and S&P 500 indexes.  Note that in 2008, for example, (1) the VIX had its highest average daily closing values, (2) even though the BXM generated relatively high gross premiums that year, the BXM was down 28.8% that year.  The premiums generated by the BXM Index helped the BXM avert the 37% loss endured by the S&P 500 Index in 2008.


This week the investment advisory firm Asset Consulting Group published a new six –page paper “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns” (available at

Exhibit 12 of the paper notes that the BXM call premiums sold averaged about 1.8% per month since June 1988.

Exhibit 13 of the paper notes that “the average value for implied volatility (as represented by VIX) was 20.27 and the average value for realized volatility was 16.38. A number of studies have shown that the implied volatility inherent in index options prices generally has exceeded subsequent realized volatility over multi-year periods (see Richly priced index options could provide advantages to the option seller.”

Visit for (1) links to several papers that discuss implied and realized volatility, and (2) more information about risk disclosures (e.g., past performance is not a guarantee of future returns).

Video: CBOE Volatility Index – Fact & Fiction Part 1

Watch Part 1 of CBOE’s Fact & Fiction five part educational series, where Dominic Salvino of Group One Trading explains what the VIX measures and why it is often referred to as the “fear gauge”.

The Other Side of VIX

The last three months saw the VIX spot dropped quickly from 30-ish to 10-ish. No wonder XIV, the inverse ETN to the S&P 500 VIX Short-Term Futures Index, was among the top performing ETPs in January. Its return was 30.88% in January 2012 and 14.02% in December 2011.

S&P Indices General Disclaimer

XIV collects daily roll yield when: 1) the VIX futures curve is in contago, and 2) the VIX spot remains flat or down.

The backwardation we saw in Q3 of 2011 was reversed by the end of last November. Contango is back.

S&P Indices General Disclaimer

For investors who expect the equity market to move sideways or up in the near term,  XIV is an interesting investment opportunity. The potential risk is, when catastrophe hit the market, long XIV investors have to pay. In this sense, buying XIV is similar to selling insurance policies.

Click here for more details on contango and roll of the S&P 500 VIX Futures Indices.

VEQTOR & Other Volatility Reduction Indices

Today I’m going to discuss three prepacked investment solutions that seek positive exposure to the equity market with different volatility reduction approaches:

S&P 500 Low Volatility Index: uses stock selection and alternative weighting to minimize portfolio volatility without the use of derivatives or active hedge. PowerShares has issued an ETF (ticker SPLV) that tracks this index.

S&P 500 Dynamic VEQTOR Index: uses a market timing mechanism that dynamically allocates between the 500 and the one-month VIX futures. It continuously monitors the implied volatility and realized volatility of the 500 index to adjust its allocation. Barclay’s has issued an ETN+ (ticker VQT) that tracks this index.

CBOE VIX Tail Hedge Index: uses one-month 30-delta VIX calls to hedge its equity exposure. First Trust will issue an ETF to track this index.

Strictly speaking, the Low Volatility Index has no hedge by design. Its low volatility is achieved by overweighting defensive stocks. When the market falls, the index falls less, but still falls.

The VIX Tail Hedge index uses VIX options as a hedge to its equity exposure. This is a more expensive hedge than using VIX futures. Also, this index does not have any dynamic allocation mechanism that is driven by market signals.

The VEQTOR index uses the most aggressive risk reduction approach among the three. When the market is down, it allocates up to 40% to volatility and expects the gain from the volatility component will more than compensate the loss from the equity component. When the market is up, it reduces its allocation in volatility to as little as 2.5% in order to reduce the hedging cost. It also has a stop-loss function that goes full cash if the index is down by more than 2% over any five-day period.

The performance history shows that VEQTOR outperforms the other two indices in general and tails in returns during a continuously rising market. It has the lowest volatility among the three.


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