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.
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).
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.
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)
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.