PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk-Adjusted Returns

The Cboe S&P 500 Putwrite Index (PUT) is designed to reflect a cash-secured put-writing strategy. The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 (SPX) Index puts and invest cash at one- and three-month Treasury bill rates. The number of puts sold is limited so that the amount held in Treasury Bills can finance the loss from final settlement of the SPX puts.

In recent years the PUT Index and the cash-secured put-write strategy have gained more interest from and acceptance by fund managers.

With the increased volatility this month, we are receiving questions from investors and the news media about the impact of higher volatility and possible stock market declines on the performance of the PUT Index. We are fortunate in that the price history for the PUT Index goes back more than 31 years to mid-1986, and so analysts can see the absolute and relative returns in various market regimes – high- and low-volatility, and bullish and bearish stock markets.

LESS SEVERE DROPS FOR KEY OPTION-WRITING INDEXES IN FEBRUARY 2018

So far in February 2018 (through Feb. 15), the S&P 500 (total return) index fell 3.1%, while the Cboe’s PUT and BXM indexes fell 1.7%. Many covered option-writing strategies are designed to provide a cushion in the event of a big drop in stock index prices.

LOWER STANDARD DEVIATIONS FOR PUT OVER MORE THAN THREE DECADES

The fact that the PUT Index engages in a cash-secured strategy that holds Treasury bills has helped the index have significantly lower standard deviations than the S&P 500, MSCI EAFE and S&P GSCI indexes since mid-1986.

P1 Stan dev 4 index PUT thru Jan 2018 PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

LESS SEVERE DRAWDOWNS FOR BOTH PUT AND WPUT INDEXES

A 2016 paper by Professor Oleg Bondarenko found that two indexes that engage in cash-secured writing of SPX puts had less severe drawdowns than the S&P 500® stock index. According to the paper, the worst drawdowns were down 32.7% for the PUT Index, down 24.2% for the Cboe S&P 500 One-week PutWrite Index (WPUT, an index that sells cash-secured SPX options every week), and down 50.9% for the S&P 500 Index.

P2 Drawdowns PUT WPUT SP PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

HIGHER MONTHLY PREMIUMS FOR PUT IN VOLATILE MONTHS

As shown in the chart below, the PUT Index has generated gross premiums that have averaged 1.7% per month, and in the volatile year of 2008, the gross premiums generated topped 6% in two consecutive months.

P3 PUT Premiums thru Jan 2018 PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

RELATIVE RETURNS FOR PUT IN TWO VOLATILE YEARS

Since 1990 the two years with the highest average levels for the Cboe Volatility Index® (VIX®) were 2009 and 2009, years in which the S&P 500 total return index fell 37% and rose 26.5%, respectively. As shown in the table below, during both those years the PUT Index had higher returns than the S&P 500 Index; in 2008 the premiums received by the PUT Index served as a cushion during the big drawdown for stocks, and in 2009 the average daily closing level for the VIX Index was 31.5 (the second highest value for any year), and the aggregate amount of gross premiums received by the PUT Index totaled 38.6%.

P4 PUT in 2008 2009 PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

P5 PUT premiums in 2009 PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

 

HIGHER RISK-ADJUSTED RETURNS FOR PUT INDEX

Many investors are interested in indexes that have relatively strong risk-adjusted returns. Exhibit 19 of the 2016 paper by Oleg Bondarenko showed that, since mid-1986, the PUT Index had stronger risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio (which looks at downside deviations), and Stutzer Index (which makes adjustments for positive or negative skewness) than three stock indexes and a Treasury bond index.

P6 Risk adj returns by Oleg PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com

MORE INFORMATION AND WHITE PAPERS

To learn more as to how cash-secured put writing and the PUT Index can be used in the management of your portfolio, please visit www.cboe.com/PUT and click on the links to these white papers —

 

 PUT Index Generated Lower Volatility, Less Severe Drawdowns, More Income and Better Risk Adjusted Returns at vixtrade.com >

Weekend Review of VIX Futures and Options – 12/24/2017

December VIX went off the board and January became the front month this past week.   VIX moved higher for the week, however, all the standard futures moved down a bit.  The contango is still steep as traders start to brace for 2018.

 Weekend Review of VIX Futures and Options – 12/24/2017 at vixtrade.com

Late Friday someone executed the VIX version of a covered call focusing on the standard March expiration.  About 1200 of the VIX Mar 13 Puts were sold at 1.92 and March 13 Calls purchased for 2.03.  For those who don’t remember their put-call parity from school short put plus long call is the equivalent of being long the underlying.  In VIX world the closest thing to an underlying for the options is the corresponding future.  At the time of the trade the March VIX future was trading at 13.10, the synthetic long position created by selling the put and buying the call cost 0.11.  Adding 0.11 to the strike price gives you an equivalent price of 13.11.

Now that I’m done lecturing about put-call parity I’ll get back to the trade.  The trade was finished with the VIX Mar 23 Calls being sold for 0.76.  The net result was a credit of 0.65 and a very familiar looking payoff at expiration.

 Weekend Review of VIX Futures and Options – 12/24/2017 at vixtrade.com

 Weekend Review of VIX Futures and Options – 12/24/2017 at vixtrade.com >

Weekend Review of Volatility Indexes and ETPs – 12/24/2017

The volatility index price action relative to the equity market price action was pretty interesting last week.  The S&P 500 was higher, as were three of the four volatility indexes calculated using S&P 500 option pricing.  VXST was lower, but that is very common before three day weekends due to the calculation methodology (calendar days) when we have the market closed for three days.

 Weekend Review of Volatility Indexes and ETPs – 12/24/2017 at vixtrade.com

VVIX stays over 90 and moved up a bit last week and TYVIX moved nicely off closing at an all-time low on the previous Friday.   The long funds suffered a bit despite VIX moving higher as a reminder that VXX is not VIX.

 Weekend Review of Volatility Indexes and ETPs – 12/24/2017 at vixtrade.com

Usually the holiday season with the extra days off results in volatility indexes suffering a bit of a head wind.  I was surprised to the point of double checking numbers before posting the table below as I would have expected more indexes lower than higher last week.

 Weekend Review of Volatility Indexes and ETPs – 12/24/2017 at vixtrade.com

UVXY hasn’t had a very good 2017, which is being polite.  At least one trader thinks UVXY will not be gaining any of the losses back next week.  With 2 minutes left in the day and UVXY at 10.10 a trader sold 600 UVXY Dec 29th 10.00 Calls for 0.43 and then purchased 600 UVXY Dec 29th 12.50 Calls for 0.14 taking in a credit of 0.29.

 Weekend Review of Volatility Indexes and ETPs – 12/24/2017 at vixtrade.com

Note in the payout diagram above, UVXY only needs to drop 0.10 or more.  Considering that UVXY dropped 36 of the last 50 weeks and the average weekly performance being down over 4%, this trade makes some sense.  Barring a year end volatility event things should work out as hoped for this trade.

 Weekend Review of Volatility Indexes and ETPs – 12/24/2017 at vixtrade.com >

Weekend Review – Volatility Indexes and ETPs – 12/17/2017

Friday was a huge day for US stocks with broad based indexes rallying nicely.  The result was pressure on the SPX related volatility indexes which pushed them from up on the week to having a losing week.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com

Friday’s price action put pressure on the long ETPs and pushed the short ETPs (XIV and SVXY) to even higher levels.  Both have now more than doubled in 2017.  VVIX remains elevated which indicates the VIX call buyers haven’t completely gone away.  TYVIX managed to close at an all-time low on Friday as we got past the FOMC.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com

A large number of volatility indexes quoted by Cboe dropped last week.  Two individual stocks (GS and IBM) and VVIX were the only gainers.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com

 

On Friday there was one trader that appears to be looking for a volatility event this coming week.  With UVXY at 10.62 they purchased 100 of the UVXY Dec 22nd 14 Calls for 0.11.  In order for this trade to make money at next Friday’s close UVXY needs to rally about 32.8%.  I’ll discuss this a little further below the generic payoff diagram.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com

I’ve been doing some work on all the volatility linked ETPs and have calculated the rolling 5-day performance for these products going back to inception.  For UVXY I broke things out into 5% performance buckets and a bar chart representing this appears below.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com

Note on the right side of the diagram I highlighted all instances where UVXY was up 35% or more (which would result in a nice trade outcome for this call purchase).  It turns out that despite 32.8% being a pretty large number, about 4.7% of 5-day performance observations resulted in a move of 35% or more.  I’m not saying this trade will work out, but about 1 out of 20 times in the past the UVXY price action has resulted in this sort of short term out of the money call purchase resulting in a profit.

 Weekend Review – Volatility Indexes and ETPs – 12/17/2017 at vixtrade.com >

Record Days for VIX Futures and Options Volume and Open Interest This Month

Despite the fact that the average daily closing value of the CBOE Volatility Index® (VIX®) is about 11.5 so far this year, VIX futures and options both had record days for volume and for open interest this month.

OPEN INTEREST RECORDS. VIX futures hit a new record for open interest with more than 673,000 contracts on August 7, and VIX options reached a new record for open interest with 14,783,380 contracts open on August 15. V1 Open Int VIX Record Days for VIX Futures and Options Volume and Open Interest This Month at vixtrade.com

VOLUME RECORDS. August 10 was an all-time record volume day for both VIX futures (volume of 942,109 contacts) and for VIX options (volume of 2,538,121 contracts). V2 VIX fut opt volume Record Days for VIX Futures and Options Volume and Open Interest This Month at vixtrade.com

 IS THE VIX INDEX “TOO LOW”? SPX HISTORIC VOLATILITY HAS BEEN EVEN LOWER; THERE STILL IS A VOLATILITY RISK PREMIUM

This year many financial professionals have raised the issue as to whether the VIX level appears to be “low” compared to the levels of worldwide financial insecurity.  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. As shown in the chart below, in 2017 the averages of the daily levels were 11.5 for the VIX Index and only 7.1 for the 30-trading-day historic volatility of the S&P 500 Index. Compared to the SPX historic volatility, the VIX Index has not necessarily been “low” this year.

V3 Vol Risk Prem 1 Record Days for VIX Futures and Options Volume and Open Interest This Month at vixtrade.com

The fact that the VIX Index has been higher than SPX historic and realized volatility means that there has been a volatility risk premium. Some professional money managers who consistently sell index options like to see the volatility risk premium. Benchmark indexes that take advantage of the volatility risk premium (such as the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 30-Delta BuyWrite Index (BXMD)) generated relatively strong risk-adjusted returns over three decades, according to a research paper by Wilshire – Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis (2016).

HIGH DEMAND FOR DISASTER PROTECTION – CBOE SKEW INDEX AND VOLATILITY SKEW CHART

Demand for disaster protection using index options has been high this year. Note in the volatility skew chart below that the implied volatility was highest for the out-of-the-money VIX calls (at 120% moneyness) and the out-of-the money SPX puts (at 80% moneyness)

V4 Volatility skew Record Days for VIX Futures and Options Volume and Open Interest This Month at vixtrade.com

On August 18 I posted a blog on the CBOE SKEW Index that noted “The long-term daily average for the SKEW Index (since January 1990) is 118.8, but the daily average for the SKEW Index in 2017 (through August 17) is a much higher 134.5. …”

An August 24 story in the Financial Times noted that –

“Investors seek more protection against risk of a Wall St plunge A gauge that tracks hedging against a fall in US stocks is near a record level …       The CBOE SKEW index, which is meant to reflect concern about “tail risk”, or events roiling the markets, rose to 148.62 last week, its third highest reading … “

MORE INFORMATION ON VIX FUTURES AND OPTIONS

To learn more about ways in which the powerful VIX futures and options can be used for portfolio management, please visit www.cboe.com/VIX.

 

 

 Record Days for VIX Futures and Options Volume and Open Interest This Month at vixtrade.com >

New Single-day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4%

An August 10 press release by CBOE Holdings stated that —

“ … trading volume in options and futures on the CBOE Volatility Index® (VIX®) each reached new all-time highs on Thursday, August 10. In VIX options at CBOE, a reported 2,562,477 contracts traded on Thursday, surpassing the previous single-day record of 2,382,752 contracts on February 3, 2014. Year-to-date through the end of July, average daily volume in VIX options was 687,181 contracts, 11 percent ahead of the same period a year ago. In VIX futures at CBOE Futures Exchange (CFE), a reported 939,297 contracts traded on Thursday, surpassing the previous single-day record of 791,788 contracts on October 15, 2014. Of the 10 busiest trading days of all-time for VIX futures, four have occurred in 2017. Year-to-date through the end of July, average daily volume in VIX futures was 283,342 contracts, 20 percent ahead of the same period a year ago.”

A story posted at nytimes.com noted that —

“… After a record-breaking run of buoyant market behavior, investors appeared unnerved on Thursday by a series of provocative remarks by President Trump and increasing tensions with North Korea. …”

BIGGEST ONE-DAY MOVES FOR VIX INDEX

On August 10 the VIX Index jumped 44.4% to close at 16.04. The move was the ninth-biggest one-day move (in percentage terms) for the VIX Index. Note that in the table below with ten dates that the S&P 500 Index fell farther than the CBOE S&P 500 PutWrite Index (PUT) on all ten dates, and that option-writing strategies often are designed to provide a cushion in the event of a downward move in the stock index.

 2 Biggest Moves VIX Table Aug 10 New Single day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4% at vixtrade.com

 

OTHER VOLATILITY INDEXES ALSO ROSE ON AUGUST 10

As shown in the next table, several other volatility indexes also rose on August 10, including the CBOE Equity VIX on Apple (VXAPL) (up 22.4%) and the CBOE VIX of VIX Index (VVIX) (up 26.7%).

2Views Table indexes Aug 10 New Single day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4% at vixtrade.com

RECORD OPEN INTEREST FOR VIX FUTURES

In addition to this month’s single-day volume records, the VIX futures set another new record with more than 675,000 open interest. VIX futures open interest has more than doubled since January 2016. I find it interesting to examine the table below with its comparison of VIX futures open interest and VIX Index values. While some observers assume that high volatility levels are  associated with high volume and open interest figures, in the chart it appears that at times VIX futures open interest increased when the VIX Index was well below its long-term average levels.

 4 VIX Fut Open interest and VIX index New Single day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4% at vixtrade.com

VIX FUTURES PRICES

While there is much press coverage of movements of the spot VIX Index, the index is not investable. Investors who are interested in VIX-related investable instruments can explore the pricing of VIX futures. The table below shows that the last prices for VIX futures with 14 different expiration dates ranged from 14.75 to 17.45 at around 7:05 p.m. Chicago time on August 10.

VIX fut table New Single day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4% at vixtrade.com

MORE INFORMATION

To learn more about how VIX futures and VIX options can help in the management of portfolios, please visit www.cboe.com/VIX.

 

 

 New Single day Volume Records for VIX Futures and VIX Options, as the VIX Index Rises 44.4% at vixtrade.com >

2017 is a Record-Breaking Year for Both SKEW-Over-145 and VIX-Under-10 Values

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.

1 Table chart VIX SKEW 2017 is a Record Breaking Year for Both SKEW Over 145 and VIX Under 10 Values 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 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.

2 Livevol vol skew SPX 2017 is a Record Breaking Year for Both SKEW Over 145 and VIX Under 10 Values at vixtrade.com

 

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).

 3 VIX Term Structure July 23 2017 is a Record Breaking Year for Both SKEW Over 145 and VIX Under 10 Values at vixtrade.com

 

CONCLUSION

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.

Links to more information on the SKEW Index, VIX futures and options, and more than 25 volatility indexes is at www.cboe.com/volatility.

 2017 is a Record Breaking Year for Both SKEW Over 145 and VIX Under 10 Values at vixtrade.com >

Weekend Review of Volatility Indexes and ETPs – 7/23/2017

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/23/2017 at vixtrade.com >

Weekend Review of VIX Futures and Options – 7/16/2017

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.

 Weekend Review of VIX Futures and Options – 7/16/2017 at vixtrade.com

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.

 Weekend Review of VIX Futures and Options – 7/16/2017 at vixtrade.com

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.

 Weekend Review of VIX Futures and Options – 7/16/2017 at vixtrade.com >

Weekend Review of Volatility Indexes and ETPs – 7/16/2017

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.

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com

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.

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com

 Weekend Review of Volatility Indexes and ETPs – 7/16/2017 at vixtrade.com >

Award-Winning PUT Index Now Has 31-Year Price History with Strong Risk-Adjusted Returns

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.

1 31 years PUT bar Ret SD Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

2 PUT Line 31 Years Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

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.

3 PUT Histogram thru June 2017 Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

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.

  

  • 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 —

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.

4 SPX adv thru June Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

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.

Award PUT PUTW Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

Representatives of both CBOE and S&P Dow Jones Indices celebrated the award for the 2017 Index/ETF Product of the Year.

Pic 2017 06 26 CBOE SP reps at IMN PUT award Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com

MORE INFORMATION

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

 Award Winning PUT Index Now Has 31 Year Price History with Strong Risk Adjusted Returns at vixtrade.com >

Weekend Review of Volatility Indexes and ETPs – 6/25/2017

VXST was slightly higher while the rest of the SPX related volatility indexes dropped last week.  All moves were relatively small as we have truly entered the summer doldrums, at least for broad based index volatility.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com

There’s very little exciting on the table below.  TYVIX bumped up slightly, but is still at very low levels.  VVIX remaining over 80.00 is interesting as traders may continue to take advantage low VIX to get long volatility exposure through buying calls or spreads that put some upward pressure on OTM calls.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com

We are at almost the mid-point for 2017 and short volatility has ruled the year.  SVXY is up over 80% while VXX is down a little over 50%.  When a fund loses 50%, you need a 100% gain to get back to flat.  Don’t count VXX out for the year as the underlying index gained over 100% in October 2008.  I’m not predicting that sort of action again this year, but just noting it has happened in the past.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com

I mentioned equity index volatility was tame, but that doesn’t mean all volatility was boring last week.  Headline price action in the oil market resulted in nice gains for OVX and VXXLE.  VXGS was the leader of the pack last week which I’m going to attribute mostly to earnings, but also to some bullish option activity that keeps popping up in the financial sector.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com

Any strength in VXX this past week came on Tuesday.  Mid-day VXX was around 12.95 and a bear put spread was executed when the VXX Jun 23rd 13.00 Puts were purchased for 0.31 and the VXX Jun 23rd 12.50 Puts were sold for 0.07 resulting in a net cost of 0.24.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com

This trade was nearly perfect as VXX finished the week at 12.54, just 0.04 above the short strike.  Of course, it is very possible our trader exited this position early, but even if that were the case I bet they were happy with the outcome.

 Weekend Review of Volatility Indexes and ETPs – 6/25/2017 at vixtrade.com >