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Weekend Review of VIX Futures and Options – 10/15/2017

On a week over week basis VIX hardly budged, but we did have a couple of days with closes over 10.00 both Monday and Tuesday.  In fact, we would have had a double digit VIX highs each day if it weren’t for Friday’s price action falling short by 0.02.  The curve moved lower than VIX as October played catch up with VIX going into this week’s settlement.

 Weekend Review of VIX Futures and Options – 10/15/2017 at vixtrade.com

Worth noting is the volatility of VIX options.  Specifically, the level of VVIX, which ticked higher last week and has been at the higher end of the 2017 range lately as well as well over the long-term average with is about 88.00 using the history we have going back to 2007.  VIX may be low, but VIX option buyers are willing to pay up for options.

 Weekend Review of VIX Futures and Options – 10/15/2017 at vixtrade.com

Another great example of using VIX Weeklys, with VIX at 10.05 and the November 1st VIX future quoted about a point higher a trader bought 7500 VIX Nov 1st 14 Calls for 0.63 and then sold 7500 VIX Nov 1st18 Calls for 0.31 and a net cost of 0.32.

 Weekend Review of VIX Futures and Options – 10/15/2017 at vixtrade.com

 Weekend Review of VIX Futures and Options – 10/15/2017 at vixtrade.com >

Four Facts to Help Address the Issue – Is the VIX “Low” This Year?

In the past year a number of news reporters and others have asked if the CBOE Volatility Index® (VIX®) was at an unusually “low” level in light of all the worldwide geopolitical uncertainties. The average daily closing levels for the VIX Index are 19.4 since January 1990, but only 12.8 since June 2016.

  • At the 70th CFA Institute Annual Conference in May 2017, Richard Thaler of the University of Chicago opined that the “low” level of the VIX Index was one of the biggest financial mysteries of our time. (Today it was announced that Professor Thaler won the Nobel Prize in economics for his research on how human traits affect individual decisions as well as financial markets.)
  • Early in 2017 the minutes of the Federal Reserve “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook” for President Trump to deliver on pro-growth campaign policies.

Some observers have questioned whether there is too much complacency in the markets, and too little interest in protecting against downside risk in equities. Below are charts and four key facts to help address issues the current levels of VIX Index and perceived complacency in the markets.

SPX HISTORIC VOLATILITY HAS BEEN LOWER THAN THE VIX INDEX

Since June 1, 2016, the avg. daily closing levels were 12.6 for VIX Index, and 8.6 for 20-trading-day historic volatility of the S&P 500 Index (SPX). The S&P has not had huge moves over the past year, and with an average SPX historic volatility of 8.6, an average VIX level above 15 might be difficult to maintain.

1 VIX SPX H V 2 Four Facts to Help Address the Issue – Is the VIX “Low” This Year? at vixtrade.com

VIX FUTURES USUALLY PRICED HIGHER THAN VIX INDEX

Since June 1, 2016, the avg. daily closing levels were 17.2 for the VIX 5-month futures, and 12.6 for VIX Index. Over the past year, the VIX usually has been in contango and the forward expectations of VIX levels usually have been higher than the levels of the VIX Index.

2 VIX futures 1 Four Facts to Help Address the Issue – Is the VIX “Low” This Year? at vixtrade.com

SPX IMPLIED VOLATILITY OFTEN DIFFERS FROM VIX INDEX

 Since June 1, 2016, the avg. daily closing levels were 31.8 for implied vol of SPX options at 80% moneyness (thus higher implied vol for out-of-the-money SPX protective puts), and 12.6 for VIX Index. While the early-2017 Federal Reserve minutes  “expressed concern [about] the low level of implied volatility in equity markets,” it is worth noting that the SPX implied volatility levels at both 80% and 90% moneyness (corresponding with out-of-the-money puts used for portfolio protection) generally were much higher than the VIX levels. It appears that some investors have quite a bit of interest in vehicles that can be used to hedge big downside risk.

Since June 1, 2016, the avg. daily closing levels were 12.6 for VIX Index, and 10.0 for the 30-trading-day implied volatility of at-the-money SPX options. While some people question whether VIX is too low, it is worth noting that the average levels for Bloomberg’s estimate of A-T-M implied volatility were 2.6 points lower than the VIX Index.

3 VIX implied 1 Four Facts to Help Address the Issue – Is the VIX “Low” This Year? at vixtrade.com

 

CBOE SKEW INDEX RECENTLY IS HIGHER

The avg. daily closing levels for the CBOE SKEW Index are 118.9 since January 1990, but a much higher 132.0 since June 1, 2016. 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 tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. www.cboe.com/SKEW Implied volatility for O-T-M SPX puts (used for portfolio protection) generally recently has been much higher than implied vol for A-T-M SPX options.

4 SKEW Oct 6 Four Facts to Help Address the Issue – Is the VIX “Low” This Year? at vixtrade.com

VIX EVENT IN CHICAGO ON OCT. 19

An upcoming event on Current Dynamics of the VIX Market will be held at 4:00 p.m. CT on Thursday, October 19, at CBOE. For more information and to register, please visit http://bit.ly/VIX-Oct-19 – the event is for financial professionals only.

MORE INFORMATION

More information on how VIX-related products can help with management of your portfolio is at www.cboe.com/VIX and www.cboe.com/volatility.

 

 Four Facts to Help Address the Issue – Is the VIX “Low” This Year? at vixtrade.com >

Weekend Review – VIX Options and Futures – 10/8/2017

Despite closing at an all-time low on Thursday and the S&P 500 gaining over 1% last week, VIX was slightly higher when the dust settled Friday.  The same cannot be said for the VIX futures curve where all contracts lost value last week.  It should be noted that despite the low level (or because of the low level of VIX), VVIX close just shy of 100 last week.

 Weekend Review – VIX Options and Futures – 10/8/2017 at vixtrade.com

VIX Weeklys continue to become a bigger part of the VIX story with non-standard expirations continuing to experience volume growth.  On Tuesday last week a fairly sizable trade using the November 1st VIX Weekly options came into the pit on the 3rd floor at CBOE.

With VIX around 9.55 and the November 1st VIX Future at 11.70 there was a buyer of 2,780 VIX Nov 1st17 Calls at 0.40 who sold 5,460 VIX Nov 1st 21 Calls for 0.24 each resulting in a net credit of 0.08 per 1 x 2 spread.  The payout at expiration and half way to expiration appears on the diagram below.

 Weekend Review – VIX Options and Futures – 10/8/2017 at vixtrade.com

It’s hard to see, but anywhere below 17.00 at November 1st settlement results in a profit equal to the credit taken in on this trade.  Things improve from 17.00 up to 21.00, then work lower until over 25.08 where the trade will result in a low.  The purple line shows the payoff with 10 days remaining to expiration based on the price level of the November 1st future.  Note that line moves up even before the long strike is reached.

 Weekend Review – VIX Options and Futures – 10/8/2017 at vixtrade.com >

Fed Survey Touches on Equity Volatility Instrument Usage

Every three months the Federal Reserve conducts a survey titled, “The Senior Credit Officer Opinion Survey on Dealer Financing Terms”.  This report comes in summary form as well as specific responses to 79 questions that are asked each quarter.  Periodically there are some extra questions placed at the end of the survey, needless to say the academic in me got pretty excited when I saw questions 81 through 89 were titled Special Questions on Client Trading in Equity Volatility Products.

As a precursor to the results it was noted that volatility has been low and that the financial press has been reporting that investors that may have been net long volatility were now net short.  The volatility oriented questions were divided into two general types.  There were four questions about the use of volatility by client types (Hedge Funds, Exchange Traded Products, Mutual Funds, Pension Plans, Insurance Companies, Separately Managed Accounts, and Non-Financial Corporations).  The remained of the questions touched on counterparty exposure and instruments used by clients to take positions with respect to equity volatility.

Some things I found interesting in this report include:

  • There was a question about the relative use of volatility across all types of investors.  The majority of firms responded that the number of clients using volatility has remained steady over the past couple of years.  However, mutual funds and hedge funds use of volatility in their investment strategies has been growing.
  • A significant question was, “On net, how are your clients positioned for a sustained increase in volatility?”  Half the responses stated that most clients are net long or more clients are net long that net short in the hedge funds space.  22.2% of responses stated that more clients are net short than net long volatility in the hedge fund area.   Across all firm types the responses favored long volatility versus short volatility.  The belief of the popular press that short volatility is a ‘crowded trade’ may require a second look after seeing the Fed survey results.
  • In product usage VIX futures and options scored higher than the VIX related ETPs as the instrument of choice for hedge funds to gain exposure to equity volatility.  However, the most heavily used instrument is exchange traded equity options which may reflect the preference of hedge funds to focus on individual stocks.

There’s a lot more to this report and I could spend all day slicing and dicing the numbers.  If you want to dive into all the questions about volatility the full report can be found at https://www.federalreserve.gov/data/scoos/scoos_201709.htm

 Fed Survey Touches on Equity Volatility Instrument Usage at vixtrade.com >

Weekend Review – VIX Futures and Options – 10/1/2017

VIX remains at low levels and the curve continues to be steep as the volatility markets appear to be braced for ‘something’.  That something is probably an unknown unknown that will shock some very complacent markets.

 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com

An interesting VIX trade caught my eye on Friday as it were a little different than most of the trades I’ve come across.  First the trade details and then a little color about that trade.  Friday morning, with VIX around 9.50, there was a buyer of about 16,000 VIX Oct 11th 21 Calls for 0.10 who sold about 8,000 VIX Nov 1st 16 Calls for 0.60 each.  This results in a net credit of 0.40 for each ratio diagonal spread.  Also, worth pointing out is that both legs are in VIX Weeklys and not standard expirations.  The payout scenarios are infinite so I’m just going to show a couple before expiration along with how things work out if all options expire with no value.

In order to guesstimate (that’s the accurate word here) where this trade might be next Friday I have to assume how the October 11th and November 1st VIX curves would reaction to a move higher from VIX.  This first payoff diagram assumes a flattening of the curve if VIX moves up to 15 and then an inversion of the prices if VIX moves higher.

 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com

Based on the curve assumptions above the profit or loss for this trade based on various VIX levels on Friday October 6th.  Note the unrealized P/L is negative anywhere from 10 up to the low 20’s.

 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com

The payout for October 11th settlement is my second guesstimate for the progression of this trade.  Once again, the short leg is holding up well which keeps this from being much of a profit unless we have a huge pop in volatility.

 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com

Finally, I take things to November 1st expiration assuming that the long and short legs of this trade expire out of the money at the two expiration dates.  Basically, it is a picture of being short the Nov 1st 16 Calls at 0.40.  We have to guess the trader behind this spread is hoping to catch a small volatility spike, trade out of the long leg taking in some more premium and then hold into November 1st settlement with the expectation that the settlement print will come in below 16.00.
VIX PO 3 09292017 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com

 Weekend Review – VIX Futures and Options – 10/1/2017 at vixtrade.com >

Large Buyer of VIX Calls Today at CBOE

Another big bullish VIX trade came into the pit today, with VIX just over 10.00 and the October futures at 12.20, a buyer of about 100,000 VIX Oct 17 Calls came into the market paying 0.45 for the whole lot.  The trade got divided up around the pit in several pieces, which shows up in the time and sales from LiveVol below.

 Large Buyer of VIX Calls Today at CBOE at vixtrade.com

There’s just under 3 weeks October 18th when these options settle on the market open so the buyer is either speculating on a volatility spike, or guarding against one using long VIX exposure as a hedge.   The comment I heard in the VIX pit was, “This seems a little unusual”, probably as most long volatility plays come in the form of a spread to lower the cost of the trade.   Either way, it’ll be interesting to keep an eye on the 17 line for the next few weeks.

 Large Buyer of VIX Calls Today at CBOE at vixtrade.com >