Discussion of Volatility of Volatility at RMC in Hong Kong on Dec. 1

On December 1st in Hong Kong at the First Annual CBOE Risk Management Conference (RMC) Asia, two expert speakers – William Chan, Equity Derivatives Strategist, Bank of America Merrill Lynch, and Michael Fagan, Chairman, Levitas Capital – will discuss the topic of Volatility of Volatility, and (1) Historical observations and interpretations for “vol-of-vol” surfaces, (2) Trading and hedging applications, depending on client objectives, and (3) A case study approach. Below is some analysis I did to prepare for the presentations.


The averages of the daily closing values since mid-2014 in the two charts below are as follows:

131.4               Historic Volatility of VIX Index (30 Trading Days)
92.7                 CBOE VVIX Index www.cboe.com/VVIX
128.3               CBOE SKEW Index www.cboe.com/SKEW
15.8                 CBOE Volatility Index® (VIX®)
13.4                 Historic Volatility of S&P 500 Index (30 Trading Days)

Note that the average levels for the VIX Index usually have been higher than the historic volatility of S&P 500 Index (over 30 trading days or 20 trading days), and it is suggested that this is because of the volatility risk premium for stock index options in the United States. In Hong Kong I plan to ask about the relationships between implied and realized volatility in both the U.S. and Asia.891 - SKEW VVIX VIX line


CBOE Launches 5 New Strategy Benchmark Indexes on Russell® 2000 Index

Monday marked the launch of 5 Strategy Benchmark Indexes based on the Russell 2000 Index.  Created by the Chicago Board Options Exchange, these options based strategies have been used previously as risk management and yield-enhancing tools.

CBOE Russell 2000 PutWrite Index (PUTR)

The CBOE Russell 2000 PutWrite Index is designed to track the performance of a hypothetical strategy that sells a monthly at-the-money (ATM) Russell 2000 Index put option. The written Russell 2000 put option is collateralized by a money market account invested in one-month Treasury bills.  The PUTR Index rolls on a monthly basis, typically every third Friday of the month.

CBOE Russell 2000 Zero-Cost Put Spread Collar Index (CLLR)

The CBOE Russell 2000 Zero-Cost Put Spread Collar Index is designed to track the performance of a hypothetical option trading strategy that 1) holds a long position indexed to the Russell 2000 Index; 2) on a monthly basis buys a 2.5% – 5% Russell 2000 Index put option spread; and 3) sells a monthly out-of-the-money (OTM) Russell 2000 call option to cover the cost of the put spread.  The CLLR Index rolls on a monthly basis, typically every third Friday of the month.

CBOE Russell 2000 30-Delta BuyWrite Index (BXRD)

The CBOE Russell 2000 30-Delta BuyWrite Index is designed to track the performance of a hypothetical covered call strategy that holds a long position indexed to the Russell 2000 Index and sells a monthly out-of-the-money (OTM) Russell 2000 Index call option. The call option written is the strike nearest to the 30 Delta at 10:00 a.m. CT on the Roll Date.  The BXRD Index rolls on a monthly basis, typically every third Friday of the month.

CBOE Russell 2000 Conditional BuyWrite Index (BXRC)

The CBOE Russell 2000 Conditional BuyWrite Index is designed to track the performance of a hypothetical covered call strategy that holds a long position indexed to the Russell 2000 Index and sells a monthly at-the-money (ATM) Russell 2000 Index call option. The written number of ATM call options will be either ½ unit or 1 unit and will be determined by the level of the CBOE Russell Volatility Index (RVX Index) when the call option is written on the Roll Date.  The BXRC Index rolls on a monthly basis, typically every third Friday of the month.

CBOE Russell 2000 One-Week PutWrite Index (WPTR)

The CBOE Russell 2000 One-Week PutWrite Index is designed to track the performance of a hypothetical strategy that sells an at-the-money (ATM) Russell 2000 Index put option on a weekly basis. The maturity of the written SPX put option is one week to expiry. The written SPX put option is collateralized by a money market account invested in one-month Treasury bills.  The WPTR Index rolls on a weekly basis, typically every Friday.

Improve Risk Adjusted Returns

The annualized returns and standard deviations were calculated based using time periods from their launch through the end of 2014.  A standout performer is the PutWrite strategies which generate higher risk adjusted returns as seen by the graphs below (note WPTR data commences in Mar 2011 and BXRC data commences in Jan 2004).

RR Blog 1

Annual Performance Comparisons

Whether expressing a view on the market cycle or volatility, the launch to these strategy index benchmarks allows you now have the ability to measure performance of an outright position relative to a risk adjusted strategy.

RR Blog 2

Paris Terrorist Attack Generated Another Market Dip

After last week’s horrific Paris terrorist attack, many had expected markets to fall sharply when they opened for business the following Monday.  Sure enough, when the futures opened for trading that Sunday evening we saw prices fall sharply, but they managed to recover and open positively.  That led to a massive rally on that day and paced the markets for the rest of the week.  In fact, the stock market had its best weekly performance of 2015, the SPX 500 rising more than 3.3%.  With all the turmoil, uncertainty and expectation it was truly an amazing feat.

But the market will often do what few expect to happen – it’s just the nature of human behavior to lean heavily to one side due to an emotional response.  However, patterns and trends are powerful tools to follow, and if we let them guide us we can see the opportunity ahead that many do not see.  On that fateful Friday when the Paris attacks hit the markets were off again sharply for the third time in a week, down six of seven days.

By several metrics and readings, markets were oversold having dropped about 3.5% over that period of time.  The last dip of that size was in mid/late September and that followed the massive drop in late August.  Every dip is always met with a skeptical eye – is this the one that won’t get bought?  Perhaps it was time to take prices up, and sentiment was starting to become sour (a good contrarian indicator), and now the terrorist attacks were sure to cause more selling.  As mentioned above, that did not occur.


Weekly Market Outlook – Bullish, But Facing A Wall

Last week a diametrical opposite to the action from two weeks ago. Two weeks ago, the bears were firmly in charge, and picking up steam. Something happened over the prior weekend though, and stocks hit the ground running higher last week… and never looked back. When all was said and done, the S&P 500 (SPX) (SPY) finished the week up 3.6%, having hurdled two key moving averages along the way.

And yet, the finish on Friday was anything but convincingly bullish.

This week could go either way, though it’s worth noting that the BigTrends TrendScore for stocks was a solid 83.5 (out of 100) as of Friday close, pointing bullishly. Thanksgiving week is also usually a bullish one too, even if tepidly.

We’ll run through it all, but first, let’s work through some of the key economic numbers.

Economic Data

Last week wasn’t a huge week for economic data. The biggest news was the release of the minutes from last month’s meeting of the Federal Reserve’s governors meeting. No curve-balls…  but it does appear the Fed’s leaders were even more gung-ho to ramp up rates this December than the market was even anticipating. As of Friday’s close, traders are saying there’s a 74% chance the Fed Funds rate will move to 0.5% (and only a 26% chance it will remain at 0.25%).

We also got a look at last month’s consumer inflation rate. For the month, price grew 0.2% overall and on a core (ex-food and ex-energy) basis. But, don’t jump to conclusions. On a year-over-year basis, the inflation rate now stands at 0.171% overall, and is still a tame 1.9% on a core basis. There’s no serious inflationary pressure forcing the Fed to pump up rates.

Inflation Chart
Source: Thomas Reuters

We also got an update on the home-construction front. Starts fell, but permits perked up. Both moves reversed September’s moves. More important, in both cases, the longer-term trend is still an upward-pointing one. More

The Week in Russell 2000 Trading – 11/16 – 11/20

Large caps ruled the week with the Russell 1000 (RUI) gaining over 3%.  Small cap stocks were no slouches, but the Russell 2000 did lag the Russell 1000 gaining 2.5%.  For the year RUI is up 1.21% and RUT is down 2.45%.  However, at the end of this blog I’ll note some statistics that show RUT still has a shot at victory in 2015.



The Week in Volatility Indexes and ETPs – 11/16 – 11/20

The shift for the VXST – VIX – VXV – VXMT curve was dramatic, but sort of what we have become use to in this buy on the dip culture.  VIX finished the week under 16.00, which voids a prediction that I had for the rest of the year.  I felt concerns about a December rate hike and the impact on stocks into 2016 would keep VIX elevated for the final few weeks of the year.



The Weekly Options News Roundup – 11/20/2015

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast, online and social media outlets.

RMC Heads East
CBOE will hold the first-ever CBOE Risk Management Conference (RMC) Asia in Hong Kong, November 30th and December 1st.  The conference will feature presentations by experts in the industry discussing the latest products and strategies for managing risk, enhancing yield and lowering portfolio volatility. For more information, visit CBOE RMC Asia.

“1st Annual CBOE Risk Management Conference Asia 2015 – Hong Kong Site of Forum For Options, Equity Derivatives, Volatility Traders, November 30 – December 1” – Mondo Visione

As we swiftly approach the holiday season, most investors may be wondering if the markets will be naughty or nice.  The beginning of the week brought a dip in stocks, causing a surge in volatility that catapulted the VIX Index above 20.  Since then, vol has ebbed, causing the VIX to dip to the 15 mark by week’s end.  Will investors receive the gift of tranquil markets or a lump of volatile coal this holiday season?

“Weekly VIX Flow Report: Calls Drive Friday Spike” – Ryan Sachetta, EQ Derivatives

“Will Santa Claus Bring Volatility?” – Nathan Buehler, Seeking Alpha

“VIX Shows Fear Once Again, With Signs of a Surge to Come” – Bob Lang, Investing.com

“How ‘Smart’ Are VIX Futures?” – Adam Warner, Schaeffer’s Investment Research

“Measuring the Volatility of the VIX” – Dean Curnutt, CEO, Macro Risk Advisors

Wednesday, November 18, 2015, Bloomberg Television

TYVIX Weekly Review: Term Structure of Treasury Volatility Flattens Along With Curve as Rate Hike Looms

TYVIX Update Header


Market participants have observed that the expected December increase in the federal fund target rate is flattening the term structure of Treasury yields as investors shift from the short to the long end of the curve.  However, fewer market observers have noted that the same scenario is playing out on the volatility side.  As TYVIX continues to decrease, the expected volatility of shorter-dated Treasuries, such as one-year Treasuries, is rising, pushing the spread between the two volatilities to its lowest value for the year.

Figure 1.  Treasury volatility spreads versus yield spreads1

Figure 2.  Weekly update of volatility indexes2

Small-Cap Rally RUT Delayed Year-End Play

The recent market rally we have seen seen has been driven by big cap names such as AAPL, FB, GOOG, but this week it would appear small cap is catching up based on price action in the Russell 2000 small cap index (CBOE: RUT 11.77.32).

Small cap stocks are traditionally a big favorite of mutual funds – popular investment vehicles for traditional retirement investors, the same individuals who are known for driving the year-end ‘Santa Clause Rally.’

As year-end approaches, these types of investors are scrambling to invest year-end bonuses and might also look to lock-in their IRA tax deductions before year-end.

Year-to-date, the S&P 500 is up around 1.8 percent whereas the Russell 2k is off by 2.55 percent – a performance differential of 4.3 percent.

Looking at the RUT Dec Quarterly 1175 Straddle, it is priced at $53.75 or implying a move of about 4.5 percent.  The implied move is just slightly more than the performance differential previously mentioned.

With the FOMC press conference on December 16, I’m more concerned with volatility dampening a Santa Clause rally, so I look to January expiration to give myself more time to play RUT.

My ‘year-end’ trade:

Buy the RUT Jan 1210-1230 Bull CS for $6.35

Max Risk: $635 per 1 lot
Max Reward: $1365
Break-even level (at expiration): 1216.35

I like this trade because it  gives me additional time to get past the FOMC catalyst, but is still roughly aligned with the year-end measured move target.

Since The Paris Attacks, Some International Sectors Are Rallying Strongly

How has the stock market performed since last Friday’s 11/13 attacks in Paris, France?  The S&P 500 Index ETF (SPY) is up around 3.5% in this time frame, an impressive rally.  The broad market has largely shrugged off this event, which is likely a sign of strength — the reaction to news among traders and investors often being more important than the news itself.

Many International ETFs are among those that have performed the best since last Friday’s close,  We looked at pure sector play Exchange Traded Funds (ETFs), no inverse/ultra etc — those that are optionable and have over 500k average daily volume.

Some of the top ETF sectors over the past week (based on last Friday’s close):

iShares MSCI Brazil ETF (EWZ) +10.1%
Market Vectors Russia ETF (RSX) +9.2%
iShares MSCI South Africa ETF (EZA) +8.9%
iShares MSCI Australia ETF (EWA) +7.5%

Meanwhile, Option Volatility has come in quite a bit — and cold weather has yet to hit most of the US — so both VXX & UNG are among the worst ETF performers over the past week (additionally, both of these ETFs have some sort of structural design that seems to push them lower over time, as we’ve discussed previously).

US National Gas Fund ETF (UNG) -8.6%
S&P 500 VIX Short-Term Futures ETF (VXX) -11.8%

Sidenote:  the coming Christmas season hasn’t done much for Retailers thus far this month other than a few select names, most of the gains have gone to Internet Retailers like Amazon (AMZN).

November performance:

SPDR S&P Retail ETF (XRT) -4.0%
Amazon (AMZN) +6.3%

The “Data Dependent” Fed Continues to Consider the Data

This afternoon the minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting were released. Yesterday the market digested the October CPI (inflation) data.

Next week, GDP (Tuesday) and Durable Goods (Wednesday) will be relatively important. Without question, the upcoming Unemployment Report (Non-Farm Payrolls) on 12/4 will be the most influential piece of economic data before the December Fed Meeting where most market participants anticipate the Fed will raise interest rates for the first time since June 29, 2006.

Looking back – the CPI data was in line with expectations (+0.2%) as was the Core Inflation number, which excludes Food and Energy (+1.9% YoY). The Fed has targeted a “healthy” annual inflation rate of 2.0%, so we are slightly below their benchmark.

Price pressure (upward) in things like housing, medical care, alcohol/recreation have been almost entirely offset by the steep drop in energy prices over the past year. In November and December of 2014, WTI Crude Oil was selling around $75/barrel. As of 11/18/2015, WTI is selling around $42/barrel.

Today’s FOMC Minutes indicated that Yellen and the other Fed Governors believe “liftoff may be appropriate”. On first blush, the minutes strike a slightly more dovish tone than the press conference following the last meeting.

U.S. and Global equity markets have responded positively this week with the .SPX about 2.8% off Friday’s close (when headlines about terror in France emerged). The .RUT is higher by nearly 2.0% compared to last week’s settle. The VIX has fallen from just over 20 to nearly 17 in the past 3 sessions.

The old adage that “The Market is Always Right” seems apropos.

Interpreting Fed Funds Futures, the market’s assessment continues to point toward a 25 basis point increase next month. The likelihood has vacillated between 62 and 71% this week. Current reading is just below 68%. Keep in mind that figure is up from about 6% a month ago. Barring exogenous shocks, the Fed, and the broad market will remain “data dependent”.


Post written by Kevin Davitt, CBOE Options Institute


More Tools for Managing Global Exposure – Added Expirations for Options on MSCI Indexes

Today CBOE added three new expirations for options on both the MSCI Emerging Markets Index (MXEF) and on the MSCI EAFE Index (MXEA). There now are six expiration dates for options on the MXEF and MXEA indexes –

  • Nov-20-2015
  • Dec-18-2015
  • Jan-15-2016
  • Mar-18-2016
  • Jun-17-2016
  • Sep-16-2016


Below are two charts with daily closing values for index prices and the 30-day at-the-money (ATM) implied volatility estimates from Bloomberg. This month, the estimated ATM implied volatility for MXEF options rose from 17.3 on Nov. 2 to 28.6 on Nov. 16. The peak values for implied volatility estimates since April were 36.5 for MXEF and 26.9 for MXEA. image001image002


Timing That Top or Bottom?  Forget it! (Unless Perhaps You are Gaming the Fed)

We would all love to continually call tops and bottoms in markets and be correct. After all, with that ‘magic’ we could never lose, right? Sell at the exact height of a bull run, get in at the bottom of a bear move. While that can be possible to do from time to time, nobody can call a top or bottom correctly on a regular basis. With so much emotion, psychology and irrationality there is just not a clean path to calling a top or bottom. Charts and technicals certainly are helpful identifying reference points, high/low volume areas and zones of interest.

A serious question: Should the Fed and their comments be the impetus for a market top or bottom? Is it a coincidence the market bottomed out at end of September near some very dovish Fed comments, or perhaps topped out this week after a rather hawkish tone from six Fed Governors? To be sure, the Fed cannot be happy with this modern day version of Pavlov’s Dog.

This past week had many scratching their heads at the market action (as usual). Could the big rally be over so soon? 250 SPX points and now it’s ready to go up in flames? I’m not so sure that is the case, but with the big dips on 3/5 days this week it certainly caused some worry to re-appear. After all, volatility had been smashed down from the high 20’s in late September to a paltry 13% only a month later. However, talk of a potential rate hike gave the bulls the shivers, and after such a huge run in a short time, who would blame anyone for taking some profits, especially when the removal of the Fed’s ‘punchbowl’ is being threatened. Now the VIX is showing some fear once again, back in the 20’s and showing signs of a surge to come.


Block Trade Analysis – VIX Weeklys Option Trades

Tomorrow is November VIX settlement, but that hasn’t stopped some short term VIX traders from putting on new positions, in fact it may have encouraged them to do some trading.

I ventured down to the trader floor late today to see what may be going on in the VIX Weeklys options set to settle on the open next Tuesday.  For those that know VIX well, you know that VIX futures and options normally settle on a Wednesday, 30 days before an expiration Friday.  However, December 25th is a Friday (and a holiday) so we have SPX options expiring Thursday the 24th of December.  Backtrack 30 days and we get a VIX Weeklys settlement on the open next Tuesday.

With about 30 minutes to go in the trading day I noticed the VIX Nov 24th 17, 18, 19, and 20 Calls all had traded about 7,000 contracts.  On the other side of the board over 17,000 VIX Nov 24th 16 Puts had traded.

I investigated further and it appears the Nov 24th 16 Puts traded in several lots over a 2 minutes period early in the day at an average price of about 0.28.  It appears it was paper selling.  The payoff on the open next Tuesday appears in the diagram below.  Note I’m only putting spot VIX on the diagram, which was at about 18.40 when the trade went off, since there’s a good chance this trade is to be held to settlement.

VIX PO 16 Put