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 >

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 >

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 >

VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery

On June 1st the CBOE Volatility Index® (VIX®) closed at 9.89. June 1st marked only the 14th day on which the VIX Index closed below 10 (its price history begins in 1990). Six of the 14 days on which the VIX Index closed below 10 occurred in 2017 (see Exhibit 1 below for a list of all 14 dates).

In addition, on June 1st the CBOE SKEW Index closed at 124.55, a relatively high level that indicated strong demand for SPX put options that could help protect against a severe downturn in the stock market.

REMARKS AT CFA ANNUAL CONFERENCE

On May 21 through 24 I listened to several outstanding speakers 70th CFA Institute Annual Conference in Philadelphia. Speakers’ remarks that were among the most interesting and relevant to me were on the topic of the current levels of volatility and the VIX Index. I found the following volatility comments of two speakers particularly intriguing —

  • In a Q&A session on May 21, Richard H. Thaler, the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the Booth School of Business, University of Chicago, answered a question on volatility by noting that the current low level of the VIX Index was the biggest [financial] mystery of our time, in light of the fact that we live in a time of great uncertainty, regardless of one’s political views, and whether or not one is supportive of the program of the current U.S. President. Professor Thaler said we face surprises when we read early morning tweets, and that when animals are afraid, they often freeze up.
  • In her prepared remarks on May 24, Abby Joseph Cohen, CFA, Advisory Director and Senior Investment Strategist, Goldman Sachs & Co., noted that realized volatility for major indices sharply declined following Euro-zone worries in late 2011, but realized volatility is now increasing. In answer to a question about concerns for future volatility, Ms. Cohen said she was even more concerned about the potential for future higher bond market volatility when compared to future equity market volatility.

In addition, minutes from the Federal Reserve in early 2017expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for … policy initiatives …”

VIX INDEX VALUES

The CBOE Volatility Index (VIX) is a measure of market expectations of 30-calendar-day volatility conveyed by S&P 500 Index (SPX) option prices. The VIX White Paper notes that the VIX Index estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.  The selected options are out-of-the-money SPX calls and out-of-the-money SPX puts centered around an at-the-money strike price. I recently have heard comments and questions on the topic of why the VIX Index recently has been lower than its long-term average, and I also have been asked if there continues to be interest in hedging of downside risk in stock portfolios. The average of the daily closing values on the VIX Index was 19.7 in the 27 years from 1990 through 2016, but only 11.8 year-to-date in 2017 (through June 1).

EXHIBIT 1 – VIX INDEX CLOSED BELOW 10 ON 14 DATES

1 VIX below 10 14 dates table VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

EXHIBIT 2 – VIX INDEX SINCE 1990

2 VIX line thru June 1 VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

While some commenters point to macroeconomic factors and Fed policies that could impact the levels of VIX, below are three discussion points (re: skew, historic volatility, and term structure) with charts that help better explain the relatively low level of the VIX Index.

HIGH SKEW AND MORE INTEREST IN HEDGING SEVERE DOWNTURNS

While the VIX Index recently has been below its long-term average, there still has been strong demand for use of stock index options to hedge severe downturns in the stock markets.

So far in 2017, there usually has been a relatively high volatility skew for SPX options, in that the implied volatility for the out-of-the-money (O-T-M) SPX put options usually has been much higher than the implied volatility for the at-the-money (A-T-M) SPX options. Bloomberg’s estimates average 30-trading-day implied volatilities for SPX options in 2017 were (through May 25): (1) about 31.7 for SPX options at 80% moneyness (this implied volatility could apply to SPX protective put options that are 20% out-of-the-money), and (2) about 9.2 for SPX options that are at 100% moneyness (or at-the-money).

EXHIBIT 3 – SPX OPTIONS IMPLIED VOLATILITIES – CHART WITH ESTIMATES FROM CBOE LIVEVOL   

3 Vol Skew SPX on June 1 VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

A metric that investors can use to track the relative demand for disaster protection is the CBOE SKEW Index, which is calculated from weighted strips of out-of-the-money S&P 500 options, and rises to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence. If there were no tail risk expectations, the SKEW Index would be equal to 100.

EXHIBIT 4 – CBOE SKEW INDEX

4 SKEW thru June 1 VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

The averages of the daily closing values of the SKEW Index were 118.4 in the 27 years from 1990 through 2016, and 134.5 in 2017 (through June 1).

VIX INDEX HAS BEEN HIGHER THAN SPX HISTORIC VOLATILITY

While some people have recently questioned as to how the VIX Index values could be in a “low” range from 9.7 to 12 on most days in the past month, one should note that the historic volatility of the S&P 500 Index recently has been even lower than the VIX. When compared to SPX historic volatility, one could argue that VIX has not necessarily been “low.” The averages of daily closing values in May (through May 30) were 10.9 for the VIX Index, 7.4 for the 30-trading-day historic volatility of the S&P 500 Index, and 4.6 for the TYVIX Index (an index that reflects the expectations of interest rate volatility; in her remarks, Abby Joseph Cohen expressed concern about the possibility for a spike in interest rate volatility).

EXHIBIT 5 – RECENT VOLATILITY SINCE MAY 1ST

 5 VIX HV TYVIX May VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

TERM STRUCTURE – VIX FUTURES PRICES ARE HIGHER THAN VIX SPOT PRICE

For those folks who ask about the “low” level of the VIX Index, one response would be to say that folks are welcome to explore the prices of the tradable VIX futures. As shown in the VIX futures term structure chart below, the quoted prices were 10.59 for the VIX spot index, and the quoted prices for the VIX futures (which are based on the forward values of the VIX Index, and reflect expectations of 30-day volatility at future dates) ranged from 10.90 for the VIX futures expiring on June 7, to 17.40 for the VIX futures expiring on February 14, 2018.

EXHIBIT 6 – VIX TERM STRUCTURE IS IN CONTANGO AND UPWARD-SLOPING

6 VIX Term stuct May 31 VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com

FOUR BENCHMARK INDEXES

For investors who are interested in equity portfolio protection with SPX options at times when price-earnings ratios are relatively high, and the VIX Index is at relatively low levels, four benchmark indexes that could be explored are:

  • 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. www.cboe.com/CLL
  • CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ) – track 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. www.cboe.com/CLLZ.
  • 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). www.cboe.com/VXTH.
  • CBOE S&P 500 5% Put Protection Index (PPUT) – strategy that holds a long position indexed to the S&P 500 Index and buys a monthly 5% out-of-the-money (OTM) S&P 500 Index (SPX) put option as a hedge. www.cboe.com/PPUT.

CONCLUSION

For people who ask me about the VIX Index recently being much lower than its long-term average, I suggest that they look at the following three factors to gain a fuller picture of implied volatility, and the interest in and costs for hedging strategies –

  • The SPX skew and the related SKEW Index have been relatively high in recent years, and there still is strong demand for hedging severe downside risk;
  • The VIX Index generally has been higher than the historic volatility of the S&P 500 Index in 2017 (using this comparison, one could argue that the VIX has not necessarily been “low”); and
  • While the VIX Index was valued at 10.68 on the morning of May 30, the VIX futures term structure chart showed that most tradable VIX futures were priced higher than the VIX spot index.

 VIX Index Closes Below 10 Again, As Professor Called the VIX Level the Biggest Financial Mystery at vixtrade.com >

VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes

MAY 17, 2017 – Today both the CBOE Volatility Index (VIX) and the CBOE VIX of VIX Index (VVIX) rose more than 45%. Some U.S. news developments that impacted the financial markets today concerned the former FBI director James Comey and former National Security Adviser Michael Flynn.

TABLES WITH BIGGEST ONE-DAY MOVES

Today’s 46.4% move in the VIX Index was (in percentage terms) it sixth biggest move ever and its biggest one-day move (in percentage terms) since the Brexit vote.

1 VIX biggest  VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

Nine days ago (on May 8) the VIX Index closed at 9.77, its lowest daily closing value since 1993.

Today the CBOE VIX of VIX Index (VVIX) rose 34.72 points (or 45.2%) – its second biggest up moves both in terms of points and percentages. The VVIX Index is an indicator of the expected volatility of the 30-day forward price of the VIX. This volatility drives nearby VIX option prices. The VVIX table below shows the days with the biggest up and down moves.

1 Largest VVIX VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

Today more than six other volatility indexes (including VXST, VXGS, JYVIX, VXAZN, VXV, and VXAPL) rose more than 20%.

2 Volatility Indexes on May 17 VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

3-MONTH PRICE CHARTS

The 3-month price charts from Livevol below show the big upward moves on May 17 for both the VIX and VVIX indexes.

3 VIX Livevol 3 mo May 17 1 VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

4 VVIX Livevol 3 mo May 17 VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

VIX FUTURES PRICES

The VIX Futures Prices table below shows that at 4:30 pm CT on May 17 (which actually was part of the May 18 trading day) the VIX futures prices ranged from 14.20 to 17.75.5 VIX Futures May 17 VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com

HIGH TRADING VOLUMES ON MAY 17

  • The trading volume at the all-electronic C2 Options Exchange, Incorporated (C2) set a one-day trading record with reported trading volume of 966,604 contracts, surpassing a previous single-day record of 825,299 contracts set on November 9, 2016.
  • Trading volume on Bats’ two options exchanges, BZX and EDGX, also each had their second-busiest single trading days ever, with BZX trading a reported 3.9 million contracts and EDGX trading a reported 317,250 contracts. Bats is a CBOE Holdings company.
  • Trading volume at Chicago Board Options Exchange, Incorporated (CBOE) was a reported 7.6 million contracts, and combined reported trading volume at CBOE Holdings’ four options exchanges totaled nearly 13 million contracts on Wednesday.
  • In addition, CBOE Futures Exchange, LLC (CFE) today set its third-highest trading volume day with a reported 735,161 contracts. The flagship product of the CFE is VIX futures.

MORE INFORMATION

Visit www.cboe.com/volatility for more information about how to use volatility indexes and VIX futures and options.

 VIX and VVIX Indexes Both Jump More Than 45% on Wednesday, with Strong Trading Volumes at vixtrade.com >

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 >

Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six-Month High – By Matt Moran

JAN. 18, 2017 – Today the CBOE SKEW Index (SKEW) closed at 143.43, its highest value since June 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.

SKEW Jan 18 Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six Month High – By Matt Moran at vixtrade.com

The FAQ on the 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.”

HIGHER SKEW VALUES IN RECENT YEARS

The average value of SKEW (since the beginning of its data history in 1990) has been 118.4. Prior to 2014, the highest average daily closing value in a year for the SKEW Index was 122.5, but in each of the years 2014, 2015, 2016, and year-to-date 2017, the average daily closing level for the SKEW Index was 127.5 or higher.

 SKEW since 1990 through Jan 18 Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six Month High – By Matt Moran at vixtrade.com

30 ½ YEARS — BENCHMARK INDEXES AND SPX PUT OPTIONS

For investors who wish to learn more about hypothetical long-term performance of strategies that use index options, CBOE provides more than 30 strategy benchmark indexes. Note in the two charts below that the left tail risk was higher for the S&P 500 Index than it was for two indexes that use SPX put options – the CBOE S&P 500 PutWrite Index (PUT) sells cash-secured SPX options, while the CBOE S&P 500 5% Put Protection Index (PPUT) buys out-of-the-money protective put options on the SPX Index.

3 PUT Histogram Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six Month High – By Matt Moran at vixtrade.com

4 PPUT Histogram Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six Month High – By Matt Moran at vixtrade.com

MORE INFORMATION

For more information on skew and use of options for protection and income, please visit www.cboe.com/SKEW and www.cboe.com/benchmarks.

 Demand for Disaster Protection Increases as CBOE SKEW Index Hits a Six Month High – By Matt Moran at vixtrade.com >

20 Volatility Indexes in 2016: BPVIX Rose 277% Pre-Brexit, and On Election Night VIX Futures Rose 55%

Dozens of worldwide volatility indexes can serve as valuable tools for investors who wish to gauge intraday and long-term sentiment changes related to a variety of asset classes. In addition, investors take long and short positions in futures and options on key volatility indexes.

The tables and seven graphs below provide an overview of the 2016 performance of 20 volatility indexes and the CBOE SKEW Index. Key points regarding volatility indexes in 2016 include the following:

  • There were some big moves in volatility indexes around the June 24 Brexit vote and the November 8 U.S. election.
  • New all-time daily trading volume records for futures on the CBOE Volatility Index® (VIX®) during Extended Trading Hours (non-U.S. hours from 3:30 p.m. to 8:30 a.m.) were set on June 24 (235,141 contracts) and again on November 9 (263,663 contracts).
  • The prices for VIX futures rose 55% over a 140-minute period on the night of November 8 (see Exhibit 2 below).
  • The daily closing values of the CBOE/CME FX British Pound Volatility Index (BPVIX) rose from 7.72 on Jan. 8th, to 29.10 on June 14th, a rise of 277% (see Exhibit 3 below). Implied volatility on the British pound was one of the financial markets’ biggest major movers in the months leading up to the Brexit vote (see Exhibit 3 below).
  • While the average daily closing value of the VIX Index in 2016 was 15.8 (below its long-term average of 19.7 since 1990), the average daily closing value of the CBOE SKEW Index was 127.6 (the second highest level among all its 27 years since 1990). These numbers could indicate that demand for hedging with deeper out-of-the-money S&P 500® (SPX) protective puts options could have been stronger in 2016.

VIX INDEX AND THE EXPECTED VOLATILITY OF THE S&P 500 INDEX

The CBOE Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices.

In 2016 the daily closing values of the VIX ranged from 11.27 to 28.14, and the VIX rose a record ninth straight trading day on November 4 (prior to the U.S. election).

VVw1 VIX SPX 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

VIX FUTURES ON NOVEMBER 8 AND 9

On the November 8 Tuesday election night in the United States, the reported prices for the November futures on the VIX Index rose from a low of 15.10 at 8:07 p.m. E.T., to a high of 23.46 at 10:27 p.m. E.T., a rise of 55% over a 140-minute period (source: Bloomberg). Reported volume for VIX futures during non-U.S. trading hours was an all-time record of 263,663 contracts during the November 9 trading session (which technically began at 3:30 p.m. C.T. the day before. www.cboe.com/ETH).  On Wednesday morning, the price of the VIX Nov. futures fell below 16, as a story at cbsnews.com noted that “Conciliatory comments from U.S. President-elect Donald Trump in the aftermath of his stunning victory over Hillary Clinton helped global stock markets erase a large chunk of their earlier losses Wednesday.”

 V 2 VIX Futures on Nov 8 9 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

CURRENCY AND INTEREST RATE VOLATILITY

While average daily close for the BPVIX Index was 12.0 in 2016, the BPVIX Index soared to 29.1 on June 14, prior to the Brexit vote.  Futures on the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX) are available, and some observers believe that interest rate volatility could soar in 2017.

V 3 Curr Int Rate Vola in 2016 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

COMMODITY VOLATILITY INDEXES IN 2016

In 2016 the CBOE Crude Oil ETF Volatility Index (OVX) hit a daily closing value peak of 78.97 on February 12, and it closed the year at 30.83.

V 4 Commodity Volatility 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

WORLDWIDE VOLATILITY INDEXES IN 2016

In 2016 the peak daily closing values were 37.99 for the HIS Volatility Index (Hong Kong) and 39.90 for the EuroSTOXX 50 Volatility Index.

VVw5 Global Vola 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

VOLATILITY ON SINGLE STOCKS

In 2016 the average daily closing values were 30.9 for the VXAZN Index, 23.6 for the VXGOG Index, and 25.3 for the VXAPL Index. Exhibit 6 shows that the VXAZN Index had some big moves, and that the earnings announcement dates for Amazon in 2016 were on January 28, April 28, July 28, and October 27.

V 6 Vol Stocks 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

SKEW, VVIX AND VIX INDEXES

In 2016 the highest daily closing values were 153.66 for the CBOE SKEW Index on June 28, and 125.13 for the CBOE VIX of VIX Index (VVIX) on June 24. Both indexes hit relatively high levels around the June 24 Brexit vote and the November 8 U.S. election, as there was uncertainty as to how these events might impact equity markets.

V 7 SKEW VVIX 2016 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com

BENCHMARK INDEXES

The volatility indexes above are designed to primarily serve as gauges for market expectations of future volatility, and are not meant to show investable performance.

For those investors who would like to explore the possibility of investing in VIX futures and options, there are certain benchmark indexes that are designed to show the potential for investable performance for certain strategies that use VIX futures or VIX options. Here are the 2016 changes for a sampling of the many benchmarks that use VIX futures or VIX options –

  • 28.8%               S&P 500 VIX Futures Term-Structure Index TR
  • 25.2%               VPD – CBOE VIX Premium Strategy Index
  • 23.0%               VPN – CBOE Capped VIX Premium Strategy Index
  • 8.3%                 S&P 500 Dynamic VIX Futures Index TR
  • 1.1%                 VSTG – CBOE VIX Strangle Index
  • 1.0%                 VXTH – CBOE VIX Tail Hedge Index
  • 0.1%                 S&P 500 Dynamic VEQTOR Index TR
  • -28.3%              S&P 500 VIX Futures Tail Risk Index TR – Short Term

To learn more about the CBOE benchmark indexes, please visit www.cboe.com./benchmarks, and read closely the related disclosures and disclaimers. Past performance is not predictive of future returns.

MORE INFORMATION ON VOLATILITY INDEXES

Please visit www.cboe.com/volatility for links to information on more than 25 volatility indexes, strategies and a bibliography.

 20 Volatility Indexes in 2016: BPVIX Rose 277% Pre Brexit, and On Election Night VIX Futures Rose 55% at vixtrade.com >

VVIX Index Spikes 21% on News of Investigation – By Matt Moran

OCT. 28 – On Friday afternoon a news story at wsj.com noted that –

“Worries about a surprise election outcome resurfaced anew in financial markets on Friday afternoon after the Federal Bureau of Investigation uncovered new evidence in its investigation of Democratic presidential candidate Hillary Clinton‘s email server. … The news sent ripples through stocks, currencies and commodities in afternoon trading. The S&P 500 slumped to the day’s lows in recent trading and the CBOE Volatility Index, the market’s “fear gauge,” shot to its highest level in six weeks. …”

 FIVE CHARTS SHOW PRICE MOVES ON FRIDAY AFTERNOON

The CBOE VIX of VIX Index (VVIX) is an indicator of the expected volatility of the 30-day forward price of the VIX. www.cboe.com/VVIX. The prices of VIX options are used in the VVIX calculation. On Friday afternoon the VVIX Index had a quick rise of more than 21% to an intraday high of 106.66.

 A VVIX Oct 28 VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com

 

The popular CBOE Volatility Index® (VIX®) also spiked Friday afternoon. The VIX Index ranged from a low of 14.65 to a high of 17.35 during the trading day.

B VIX on Oct. 28 VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com

While many folks follow the VIX Index, volatility traders often focus more on tradeable instruments such as the VIX futures. The VIX November futures (expiring on Nov. 16) also spiked mid-day Friday, and during the Friday trading session (which runs more than 23 hours) the VIX November futures prices ranged from a low of 15.74 to a high of 17.08.

C VIX Nov Futures VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com

The S&P 500® Index (SPX) had a drop of about 20 points mid-day Friday, and for the entire day the index was down 6.63 points.

D SPX on Oct 28 VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com

A Bloomberg report noted that “American equities erased gains and Mexico’s peso, which is seen as a proxy for market perception on the U.S. vote, declined against most major currencies. …”

E Peso VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com

MORE INFORMATION

Visit the Product Specific Strategies section of the CBOE website to learn more about how index options can help you manage your investment portfolio in times of market uncertainty.

 VVIX Index Spikes 21% on News of Investigation – By Matt Moran at vixtrade.com >

New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades

By Matt Moran

SEPT. 21, 2016 – Wilshire Associates recently was ranked as one of the world’s ten largest investment consultants, due to the fact that it had more than $1 trillion in worldwide institutional assets under advisement, according to the survey published in the Nov. 30, 2015 issue of Pensions & Investments.

A new study – “Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis – was released today. The study was commissioned by CBOE and authored by Wilshire Analytics’ Applied Research Group. It is the first major study that surveys 30 years of data related to benchmarks engaged in the buying and/or selling of index options.

Wilshire Analytics analyzed the performance of several indexes over a period of 30 years, from June 30, 1986 through June 30, 2016, including five indexes that sell and/or buy options on the S&P 500® (SPX) Index:

  • CBOE S&P 500 BuyWrite Index (BXM)
  • CBOE S&P 500 30-Delta BuyWrite Index (BXMD)
  • CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ)
  • CBOE S&P 500 5% Put Protection Index (PPUT)
  • CBOE S&P 500 PutWrite Index (PUT)

The performance of these indexes was compared with certain other key stock, bond and commodity indexes that represent asset classes typically found in the investment portfolios of institutions and individual investors.

KEY FINDINGS

Key findings of the 30-year study include:

  • Higher Absolute and Risk-Adjusted Returns: Two indexes that sold SPX options every month to collect option premium income – PUT and BXMD – both had higher absolute returns and higher risk-adjusted returns than the other indexes studied.
  • Lower Volatility: Each of the five option-based indexes had lower volatility than all the other indexes included in the study, other than the fixed-income index.
  • Less Downside Risk: The maximum drawdown for the options-based indexes was 24 percent lower, on average, than for the S&P 500 Index.
  • Market Capacity and Liquidity: The notional value of SPX options’ average daily volume grew significantly over the last 10 years; it was more than $200 billion for the 12 months ended June 2016, the most recent year studied.
  • Pension Plan Allocations: Analysis of actual pension plan allocations suggests plan sponsors would have benefited from the addition of index-based buy-write option strategies.

RETURNS AND VOLATILITY OVER 30 YEARS

As shown in the first charts below, over the three-decade period, the option-selling indexes (BXMD, PUT and BXM) all had higher returns than the option-buying index (PPUT) and the MSCI EAFE and S&P GSCI indexes. Index option-selling indexes can benefit from the fact that the implied volatility usually has exceeded realized volatility, as is shown in Exhibit 8 of the study.

1 returns Wilshire New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

2 Volatility by Wilshire New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

EFFICIENT FRONTIER

The five options-based indexes are shown in the triangle symbols on the Efficient Frontier chart.

3 Efficient Frontier Wilshire  New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

NEW HEAT MAP

A new “heat map” uses color coding to rank returns across asset class by year (within each column).

4 Heat Map 1st New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

5 Heat map 2nd New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

 

Over the past 15 years, option-writing strategies, particularly the BXMD and PUT strategies, typically had above-average returns and were rarely among the lower-performing asset classes.  Other asset classes were occasionally top performers but also were ranked at or near the bottom more than once. Past performance is not predictive of future returns.  Sources:  Bloomberg, CBOE, St. Louis Federal Reserve Bank and Wilshire Associates.

$200 BILLION IN AVERAGE DAILY NOTIONAL VOLUME FOR SPX OPTIONS

After hearing about the strong performance of certain CBOE benchmark indexes, institutional investors often ask me about market capacity for SPX options. The study presents a chart that shows that the estimated notional value of average daily volume in SPX options grew to more than $200 billion in the last 12 months studied.

 6 Capacity Volume VIX Wilshire  New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com

 

CONCLUSION

For links to the entire new paper by Wilshire Analytics and to more information about CBOE benchmark indexes, please visit www.cboe.com/benchmarks.

 

 

 New Wilshire Study: BXMD and PUT Indexes Offered Higher Returns, Lower Volatility Over Three Decades at vixtrade.com >