What s Happening Personal and property insurer Aetna AET is expected to report its second quarter numbers on August 3 The company will release its numbers before the market open with the consensus calling for earnings of 2 34 per share up from 2 21 during the same period last year
The 160 Dow Jones Industrial Average DJIA 160 touched a new record high rallying on the wings of a strong post earnings performance from Boeing stock Stocks also stayed relatively steady after the Fed s unsurprising decision to leave interest rates unchanged though the central
The 160 Dow Jones Industrial Average DJIA 160 finished lower today marking its 160 third straight loss The S amp P 500 Index SPX joined the Dow in the red as traders exercised caution ahead of a Fed meeting later this week However the Nasdaq Composite COMP 160
In recent weeks several news articles have noted that the CBOE Volatility Index® (VIX®) dipped below 10, and have asked if there is an unusual amount of complacency in the markets. The VIX Index closed below 10 on seven straight trading days (an all-time record) from July 13 to July 21. Recent headlines stated (1) “Too calm? Wall Street volatility collapses to lowest since 1993” (by CNBC), and (2) “Dip in volatility stirs warnings about too much complacency” (by Pensions & Investments).
IS THERE TOO MUCH COMPLACENCY IN THE MARKETS?
I believe that an argument could be made that the markets still are concerned about downside risk, and are not completely complacent in 2017, particularly if one looks at the statistics in three charts below: (1) the CBOE SKEW Index already has closed above 145 on 10 days in 2017 (more than any other calendar year); (2) a recent SPX volatility skew chart showed that the implied volatility estimates for many of the out-of-the-money put options ranged from 11 to 27, and (3) a recent VIX futures term structure chart showed VIX futures prices (with expirations at future dates) ranged from 10.35 to 16.
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.
SPX VOLATILITY SKEW CHART – SHOWS DEMAND FOR DOWNSIDE PROTECTION
The volatility skew chart below shows the implied volatility estimates for SPX options at the close on Friday, July 21. On that date the closing values were 2472.54 for the SPX Index, 9.36 for the CBOE Volatility Index® (VIX®) (the second-lowest daily close for the VIX Index), and 134.53 for the CBOE SKEW Index (SKEW). The long-term average daily closing values since January 1990 are 19.5 for the VIX Index and 118.7 for the SKEW Index.
The SPX volatility skew chart below shows:
- Expirations on 26 upcoming dates in 2017 (including Mondays, Wednesdays, and Fridays and end-of-months) are available for SPX options; and
- The implied volatility estimates for at-the-money SPX options ranged from around 5 to 12, and the implied volatility estimates for many of the out-of-the-money put options (with strike prices from 2230 to 2404, and that can be used for downside portfolio protection) were often much higher, with a range from around 11 to 27. With the SKEW Index at 134.53, one can expect generally higher implied volatilities for out-of-the-money SPX put options, when compared with at-the-money SPX options.
VIX FUTURES TERM STRUCTURE – RANGE FROM 10.35 TO 16
The VIX futures term structure chart is upward sloping and shows that the VIX futures prices ranged from 10.35 (for the July 26 expiration) to 16 (for the VIX futures expiring on February 14, 2018).
In order to gain a better sense of the amount of overall fear or complacency in the markets, analysts and investors can examine and compare many metrics, including the VIX Index, SKEW Index, volatility skew charts, and VIX futures term structure.
VIX closed Friday a tad shy of an all-time low while the S&P 500 continues to push higher having gained just over ½ a percent last week. The curve below does appear steep, but the context of VIX being so low should be taken into account.
One trader came into the VIX pit mid-day on Friday with what could be considered a massive trade. With VIX at 9.76 and the standard October contract at 13.70 someone came in with a three-leg bullish trade on VIX. They sold 262,441 VIX Oct 12 Puts for 0.75, purchased 262,441 VIX Oct 15 Calls for 1.45 and then finished things up with a sale of 524,882 VIX Oct 25 Calls at 0.45. The result is a spread that is short 1 12 put, long 1 15 call and then short 2 25 calls for a net credit of 0.20. The payoff below depicts this trade at October expiration along with an assumption of how this would work based on different October VIX futures pricing half way to expiration.
Note the purple line and how it basically returns some sort of profit between the current October VIX future level and about 33.00. Of course, there are assumptions about IV, etc, that go into the half-way to expiration line, but it shows that this trader got some long VIX exposure while taking in a credit that pays off if we get even a minor volatility event between now and October expiration.
VIX finished the week just off all-time lows and the VXST – VIX – VXV – VXMT curve shifted lower. This is a result of realized volatility for S&P 500 price action remaining low and there not appearing to be any speed bumps on the horizon for the financial markets.
VVIX dipped below 80.00 to finish the week and TYVIX is near all-time lows despite there being an FOMC meeting this Wednesday. The long funds continue to suffer (discussed a little more shortly) and the short funds are having nothing short of a stellar year.
To be specific SVXY is now up 99.96% for the year. I know that rounds to 100.0%, but since it fell short of a double I rounded down this week.
GS and IBM reported earnings last week and their presence at the bottom of the table below is a result of a post earnings volatility crush. Note GOOG, AAPL, and AMZN are near the top of the table as they are yet to report. The rise in VXN may also be attributed to earnings as just a handful of stocks contribute to a big portion of price action in the Nasdaq-100.
We know the long VIX related ETPs tend to move down over time. Apparently, someone decided that this sort of behavior was going to kick in between the open and the close on Friday for UVXY. Two seconds into the day on Friday someone sold 200 UVXY Jul 21st 30 Calls for 0.80 and purchased 200 UVXY UVXY Jul 21st 34 Calls for 0.25 taking in a net credit of 0.65. The payoff on the close yesterday appears below.
Note that this trade worked out quite well with UVXY finishing the day at 29.79 and both options expiring with no value. I was webcasting last week and got a question about selling options on the Friday of expiration, this is a bit of a deviation of that sort of activity, but a deviation that worked pretty well.
The 160 Dow Jones Industrial Average DJIA 160 spent most of the session in the red 160 bogged down by Home Depot s steep Amazon fueled drop In addition negative earnings reactions for fellow Dow stocks American Express and Travelers as well as concerns about a possible probe
The 160 Dow Jones Industrial Average DJIA 160 finished lower today brought down by a poor earnings showing from the likes of Goldman Sachs The S amp P 500 Index SPX 160 ended a wishy washy session slightly higher while the 160 Nasdaq Composite COMP proved to be
VIX finished the week at the lowest close since 1993, but the two lower closes came during a holiday week so I’m considering consulting with other VIX watchers with respect to if this is basically an all-time low. Note the dramatic move in the July contract that goes off the board on the open Monday.
The most exciting activity we got from VIX came around lunchtime on Tuesday. Many traders may have miss VIX running to the mid-11’s and the July contract trading around 12.50. At least one nimble trader pulled themselves away from Amazon Prime day shopping and caught a good purchase in VIX Put options. They managed to buy the VIX Jul 19th 14.00 Puts for 1.80. With VIX around 11.50 this trade had a break-even just above the spot index with just over a week to go until expiration.
This trade looked pretty good as of Friday with VIX down at 9.51 and the July contract finishing about a point higher. The bid side on the close for this option was 3.40 for a potentially unrealized gain of 1.60.
We only have data going back to the 2007 – 2008 period for the non-VIX SPX related indexes on the diagram below. VXST, VXV, and VXMT all made all-time lows, based on the history we have to work with, on the close Friday. VIX closing at 9.51 was the third lowest on record. However, the two instances of lower closing prices for VIX occurred on December 22nd and 23rd of 1993 (9.38 and 9.41). In December 1993, the 24th was a market holiday as Christmas fell on the 25th. Also, options expiring on January 21, 1994 dominated the VIX calculation as there was just under 30 days left until that expiration. There were three market holidays between the days where VIX closed lower that this past Friday and the third Friday of January. We know holidays take a little bit out of VIX, we see it every December and often before three-day weekends. Since there are no holidays between now and the two option series feeding into VIX (August 11th and August 18th) I’m going to say the VIX closing price on Friday counts as an all-time low, with an asterisk followed by the previous explanation.
The week was tough for long funds and good for short funds. VMIN continues to have a great 2017 and added over 11% to that year. VSTOXX is low which contributed to over a 9% move in the upstart EXIV ETN. Finally, TYVIX is testing all-time lows at 3.75.
SVXY is on path for an easy double in 2017 as long as we don’t get a catastrophic market event in the next few months while VXX and UVXY performance continues to languish. As a quick reminder, UVXY is set for a reverse split this coming week.
The table below shows how volatility is under pressure across the board. VXIBM and VXAZN moving up are both a function of a pending earnings announcement. GVZ snuck in an all-time low in late June, which I missed, and at 11.11 is amazingly low when you read about geopolitical issues.
As the trading week had about an hour left and VXX was trading at 12.01 someone came into the VIX Pit (VXX options trade there too) with a bullish VXX trade that has a pretty interesting time-frame. The trader sold the VXX Sep 1st 14 Puts for 2.54 and bought the VXX Sep 1st 12.50 Puts for 1.34 and a net credit of 1.20. The risk for this trade is 0.30 if VXX is at or below 12.50 on the close September 1st. Basically, for this trade to make money we need a volatility event (or two) that pushes VXX up to around the short strike prices of 14.00. The payout diagram below shows the payoff at expiration, but also includes a half way to expiration line since I believe our put spread seller would be inclined to take profits on any sort of volatility spike.
The 160 Dow Jones Industrial Average DJIA 160 had another record setting day building off the momentum of its last two sessions and shrugging off a round of disappointing bank earnings Bolstering stocks was a weak batch of inflation data which along with Fed Chair
Over the past couple of years more investors have expressed interest in the cash-secured put writing strategy. The leading performance benchmark for this strategy is the CBOE S&P 500 PutWrite Index (PUT), an index that measures the performance of a hypothetical portfolio that sells one-month S&P 500® Index (SPX) put options against collateralized cash reserves held in a money market account.
HIGHER RETURNS AND LOWER VOLATILITY
Note in the bar charts that the PUT Index had higher returns and lower volatility than the other six benchmark indexes, and put option writing (as represented by the PUT Index) had much higher returns than put option buying (as represented by the PPUT Index). A driving factor behind strong risk-adjusted returns for the PUT Index has been the volatility risk premium; options sellers often have been rewarded because implied volatility usually has been higher than realized volatility for S&P 500 options.
HISTOGRAM AND LESS LEFT-TAIL RISK
In the 31-year histogram, the left tail risk was mitigated in that the S&P 500 Index had 26 monthly declines with losses of worse than 6%, while the PUT Index had only 12 such declines.
NEWS COVERAGE OF PENSION FUNDS AND PUT-WRITE STRATEGY
Below are excerpts from three news stories on pension fund allocations to the put-write strategy.
- Institutional Investor (March 2017)
- “The Hedging Strategy That’s Cheaper Than Hedge Funds. … Two big pension funds are now employing a strategy called cash-secured put writing …”
- Wall Street Journal (Aug. 21, 2016)
- “Pensions Try a Fear Trade. Options strategy used by pension funds aims to work like a volatility dampener … Some pension funds are seeking to profit from others’ fear. Pension funds in Hawaii and South Carolina are plying an arcane options strategy called cash-secured put writing. … Hawaii wanted to diversify market exposure after the financial crisis hit many assets at once… Pension Consulting Alliance first suggested Hawaii use the strategy and currently advises on it, .. The CBOE S&P 500 PutWrite Index, a benchmark for the strategy, … didn’t fall as sharply as the market during the selloff of early 2016, but has lagged behind the rallies. In 2008, during the financial crisis, the put-write strategy returned minus-27% compared with the S&P 500’s return of minus-37%. CBOE’s calculations of how the index would have performed before its 2007 creation estimate that annualized returns over the 30 years through this June were 10%, narrowly topping the S&P 500. … ”
- Pensions & Investments (Oct. 3, 2016)
- “Funds go exotic with put-write options to stem volatility … Hawaii Employees in the spring hired Neuberger Berman, Analytic Investors, UBS Asset Management and Gateway Investment Advisers to run $400 million each in put-write strategies. This was the first move into the strategy for the pension fund. Earlier this year, the $28.2 billion South Carolina Retirement System Investment Commission, Columbia, hired Russell Implementation Services and AQR Capital Management to each manage $800 million in put-write strategies. And the $16.6 billion Illinois State Universities Retirement System, Champaign, hired Gladius Capital Management to manage $400 million in notional value in a put-write overlay, a move that Executive Director W. Brian Lewis said would result in ‘an income enhancement tool’ … In its paper, Wilshire noted that the CBOE S&P 500 put-write index, with an annualized 10.1% return, outperformed the CBOE S&P 500 buy-write index’s 8.9% and the S&P 500 stock index’s 9.9% over 30 years ended Dec. 31. And for 2015 alone, the put-write index returned 6.4% vs. the buy-write index’s 5.2% and the S&P 500’s 1.4%. …”
RESEARCH PAPERS THAT HIGHLIGHT THE PUT INDEX
Visit www.cboe.com/benchmarks for links to the papers below that analyze the performance of the PUT and other benchmark indexes —
- Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012)
- BlackRock. VIX Your Portfolio – Selling Volatility to Improve Performance (June 2013)
- Black, Keith, and Edward Szado. Performance Analysis of CBOE S&P 500 Options-Selling Indices. (2016)
- Bondarenko, Oleg. An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016)
- Ennis Knupp & Associates. “Evaluating the Performance Characteristics of the CBOE S&P 500 PutWrite Index” (December 2008)
- Wilshire. Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis (2016).
GROWTH IN VOLUME FOR S&P 500 OPTIONS
Average daily volume for S&P 500 options at CBOE: (1) has risen in each of the last 5 years, and (2) has risen more than 1000% since 2001.
AWARD FOR PUT INDEX AND PUTW ETF
On June 26 the CBOE S&P 500 PutWrite Index (PUT) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund ETF (PUTW) won the 2017 Index/ETF Product of the Year award at an annual ceremony that was presented by IMN and the Journal of Index Investing. The awards ceremony was held during the 22nd Annual Global Indexing and ETFs conference, a 3-day event with about 750 financial professionals (including representatives of CBOE, Bats, S&P Dow Jones Indices, and ETF.com) in attendance.
Representatives of both CBOE and S&P Dow Jones Indices celebrated the award for the 2017 Index/ETF Product of the Year.
The microsite for the PUT Index is at www.cboe.com/PUT.
For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts,
If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences —
- RMC EUROPE 2017, Sept. 11 – 13, 2017, The Grove Hotel, Chandler’s Cross, Hertfordshire, UK
- RMC ASIA 2017, Dec 5 – 6, 2017, Conrad Hong Kong, Hong Kong
- RMC US 2017, March 7 – 9, 2018, Hyatt Regency Coconut Point, FL