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CBOE SKEW Index Rises to 141.41, with Increased Demand for Portfolio Protection

FEB. 16, 2017 – Today the CBOE SKEW Index rose to 141.41, its highest level this month, and its 25th highest value since January 1990. With U.S. stock market indexes recently hitting all-time highs, there is quite a bit investor uncertainty about the markets and there is high demand for protection from large market declines. In the 27 years from 1990 through 2016, the average daily level for the SKEW Index was 118.4, and the average level of SKEW never topped 130 in any of those 27 years. In the year 2017 (through February 16) the average daily level of the SKEW Index was a relatively high 132.2, which could indicate increased relative demand for use of out-of-the-money SPX put options for portfolio protection.

1 SKEW since 1990 Feb 16 CBOE SKEW Index Rises to 141.41, with Increased Demand for Portfolio Protection at vixtrade.com

2 SKEW thru Feb 16 CBOE SKEW Index Rises to 141.41, with Increased Demand for Portfolio Protection at vixtrade.com

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 expected 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 147 around an average value of 115.

The FAQ on the CBOE 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.”

For more information please visit www.cboe.com/SKEW.

 CBOE SKEW Index Rises to 141.41, with Increased Demand for Portfolio Protection at vixtrade.com >

Portfolio Protection, Tail Risk and 11 Histograms

With U.S. stock market indexes recently hitting all-time highs, there is quite a bit investor uncertainty about the markets and there is high demand for protection from large market declines. One metric providing evidence of this high demand is the CBOE SKEW Index (SKEW). In the 27 years from 1990 through 2016, the average daily level for the SKEW Index was 118.4, and the average level of SKEW never topped 130 in any of those 27 years. In the year 2017 (through February 7) the average daily level of the SKEW Index was a relatively high 131.7, which could indicate increased relative demand for use of out-of-the-money SPX put options for portfolio protection.

Histograms and Profit-and-Loss Diagrams

Tools that can be helpful to investors who are attempting to assess the utility of various options-based strategies include (1) histograms with analyses of monthly returns for several CBOE benchmark indexes, and (2) profit-and-loss diagrams.  CBOE provides more than 30 strategy benchmark indexes that can help investors compare and contrast the hypothetical performance of different options strategies in different market scenarios. www.cboe.com/benchmarks.

Below are 11 histograms that compare past performance of CBOE option-related benchmark indexes and related stock indexes. These histograms can provide valuable information to investors who have high aversion to losses or a desire for more upside potential.

As shown in the 11 histograms below, the “best” big-loss-avoidance past performance by an index — in terms of avoiding monthly losses of 6% or more – was by the CBOE S&P 500 Iron Butterfly Index (BFLY). In the 30+ year period from July 1986 through January 2017, the number of months that indexes had loss of worse than 6% were –

The CBOE VIX Tail Hedge Index (VXTH) buys and holds S&P 500 stocks, and also often buys 30-delta call options on the CBOE Volatility Index® (VIX®).

1070 VXTH Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1012 BFLY Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

The CBOE S&P 500 Iron Butterfly Index (BFLY) tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly at-the-money (ATM) S&P 500 Index (SPX) put and call option; 2) buys a rolling monthly 5% out-of-the-money (OTM) SPX put and call option to reduce risk; and 3) holds a money market account invested in one-month Treasury bills, which is rebalanced on the option roll day and is designed to limit the downside return of the index. Compare the CBOE BFLY Index histogram above with the iron butterfly profit-and-loss diagram below. It appears that certain iron butterfly strategies could have the potential to lessen the probability of huge upside and downside moves.

1015 ironbutterfly PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1020 CLL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

The CBOE S&P 500 95-110 Collar Index (CLL) purchases stocks in the S&P 500 index, and each month sells SPX call options at 110% of the index value, and each quarter purchases SPX put options at 95% of the index value.

1025 Collar PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1030 RXM Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

The CBOE S&P 500 Risk Reversal Index (RXM) is a benchmark index designed to track the performance of a hypothetical risk reversal strategy that: (1) buys a rolling out-of-the-money (delta ? 0.25) monthly SPX Call option; (2) sells a rolling out-of-the-money (delta ? – 0.25) monthly SPX Put option; and (3) holds a rolling money market account invested in one-month Treasury bills to cover the liability from the short SPX Put option position.

1040 CLLZ Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

The CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ) tracks the performance of a hypothetical option trading strategy that 1) holds a long position indexed to the S&P 500 Index; 2) on a monthly basis buys a 2.5% – 5% S&P 500 Index (SPX) put option spread; and 3) sells a monthly out-of-the-money (OTM) SPX call option to cover the cost of the put spread.

1060 CNDR Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

The CBOE S&P 500 Iron Condor Index (CNDR) tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly out-of-the-money (OTM) S&P 500 Index (SPX) put option (delta ? – 0.2) and a rolling monthly out-of-the-money (OTM) SPX call option (delta ? 0.2); 2) buys a rolling monthly OTM SPX put option (delta ? – 0.05) and a rolling monthly OTM SPX call option (delta ? 0.05) to reduce risk; and 3) holds a money market account invested in one-month Treasury bills, which is rebalanced on option roll days and is designed to limit the downside return of the index.

1065 ironcondor PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1100 PPUT Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

1080 PUT Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1095 cs PutWrite PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

1110 CMBO Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

1115 cov Combo PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

 

1120 BXM Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

1135 ATM Buywrite PL Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

With the at-the-money (A-T-M) buy-write strategy, an investor often takes in more options premium, but has no participation in stocks’ upside moves, when compared with the out-of-the-money (O-T-M) buywrite strategy. Compare right and left tails for the BXM Index above versus the BXMD Index below.

1140 BXMD Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

1155 OTM BuyWrite Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com

MORE INFORMATION

A representatives of Wilshire will discuss CBOE Benchmark indexes and downside risk at the 33rd Annual CBOE Risk Management Conference (RMC) next month www.cboermc.com.

For additional information about the CBOE benchmark indexes and related white papers on portfolio management, please visit www.cboe.com/benchmarks.

More information on tail risk and histograms is at www.cboe.com/histograms.

 Portfolio Protection, Tail Risk and 11 Histograms at vixtrade.com >

Finding Volatility in the US Markets

VIX is low, we all know VIX is low.  I type that and feel I need to stop channeling Dr. Seuss.

However, there are some pockets of volatility in the US equity markets, we just need to know where to look.  Since CBOE quotes several volatility indexes that are based on the US markets I went searching for places where the market is still pricing in a little concern about the future.  Two areas that stood out –  tail risk and small cap risk.  Let’s start with tail risk.

The CBOE SKEW index is a measure that takes out of the money put option volatility and compares it to the implied volatility of SPX put options that are not as far out of the money.  If SKEW is equal to 100 then the out of the money IV is in line with that if SPX puts with strikes closer to the levels of the S&P 500.  SKEW is typically around 120 or so and came in at 130 yesterday.  I like looking at volatility measures relative to other volatility measures and the outcome for SKEW appears in the chart below.  This chart shows the daily levels for SKEW divided by VIX going back to 1990.  Note it rarely moves over 12, but that’s where it is right now.  This may be read as out of the money stock market protection is expensive relative to the cost of at the money SPX options.

 Finding Volatility in the US Markets at vixtrade.com

The second area of high volatility relates to small cap stocks in the US.  CBOE quotes VIX, but we also have the CBOE Russell 2000 Volatility Index (RVX) which gives us a consistent measure of Russell 2000 (RUT) implied volatility like VIX does for the S&P 500.  With a handful of exceptions RVX has always closed at a premium to VIX.  However, it rarely is at more than a 60% premium to VIX like it is as I write this blog.  We can take that as option premiums for RUT options are relatively expensive when compared to SPX options or that traders are more willing to pay up for small cap protection than large cap protection.

 Finding Volatility in the US Markets at vixtrade.com

 Finding Volatility in the US Markets at vixtrade.com >

Weekend Review – Volatility Indexes and ETPs – 2/5/2017

VXST dropped while the other three volatility indexes based on S&P 500 index option pricing rose slightly.  This all happened despite a rise in the S&P 500 last week.

VXST VIX VXV VXMT Weekend Review – Volatility Indexes and ETPs – 2/5/2017 at vixtrade.com

Probably the most notable thing on the table below is the rise in VVIX despite the stock market and VIX not doing much last week.

VXX Table Weekend Review – Volatility Indexes and ETPs – 2/5/2017 at vixtrade.com

Focusing on the VIX related ETPs shows that the trend of short volatility being the place to be in 2017 continues to hold up.

VXX SVXY UVXY Comparison Weekend Review – Volatility Indexes and ETPs – 2/5/2017 at vixtrade.com

Looking outside the broad-based index volatility space, there were a lot of gainers despite not a lot going on in the equity markets.  There doesn’t seem to be any pattern among the gainers, just a variety of pockets of higher volatility.

Vol Indexes Weekend Review – Volatility Indexes and ETPs – 2/5/2017 at vixtrade.com

On Monday I came across what appears to be the first of a two-step trade.  With VXX around 20.00 someone came in and sold 200 of the VXX Feb 3rd 21 Calls for 0.30 and purchased 200 VXX Feb 10th 31 Calls for 0.05 resulting in a net credit of 0.25.  Friday VXX closed well below the short strike, which leads me to believe whoever still owns the VXX 31 Call that has a week until expiration may be using that position to sell another call if they still have a short bias with respect to VXX.

 Weekend Review – Volatility Indexes and ETPs – 2/5/2017 at vixtrade.com >