Presentation at CBOE RMC on Hedging with VIX Options

Rocky Fishman, Equity Derivatives Strategist from Deutsche Bank Securities and Andrew Warwick, Managing Director from Blackrock teamed up to discuss Hedging with VIX Option at CBOE’s Risk Management Conference in Ireland Tuesday.

They focused on evaluating VIX option strategies, not just from implementation to expiration, but also looking at the behavior of positions over a multi-week period.  A comparison was made between SPX and VIX option hedging as well as looking at when it may be time to monetize a VIX hedge.  They also took a look at using VIX ETPs for hedging purposes.

With respect to timing the monetization of a VIX hedge, the VIX reaction to the Brexit referendum was used as an example of how important taking profits on a VIX position can be.  It was noted that in order for a VIX hedge to be effect the position needed to be exited either on Friday June 24th or Monday June 27th.  After the 27th, only a position entered on the 23rd would have still provide profitable, and that profit went away the following day.

There was also a comparison between buying a VIX call option and taking a long position in a call spread.  The pure long call outperforms call spreads in a severe volatility spike.  Also, it was noted that out of the money call spreads need a strong quick shock to work.

Finally, three costs of having a VIX hedge were discussed.  There is the negative carry that is associated with owning any option with time value.  If a put is sold to fund a long call, we may be exposed to losses if there is a drop in VIX futures.  Finally, if options are sold on another asset to pay for a VIX hedge there is always the possibility of experiencing losses on the short option position.

New Paper by Fund Evaluation Group Analyzes CBOE Russell Benchmark Index Suite with Strong Performance by PUTR Index

This week a new paper by Fund Evaluation Group (FEG) —  Evaluating Options For Enhanced Risk-Adjusted Returns: CBOE Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options (2016) – was released and presented at the Fifth Annual CBOE Risk Management Conference (RMC) Europe.

A link to the new 18-page paper is at, and below in this blog are 6 of the 30 exhibits in the paper.


R1 - Index descriptions


Discussions Focusing on Short Volatility Strategies Today at RMC

Stephen Crewe from Fulcrum Asset management and Dhvani Gupta from Barclays shared the presentation duties during a session titled Implementing Systematic Short Volatility Strategies at the 5th Annual European CBOE RMC this afternoon.

Dhvani Gupta started things off noting that the SPX Implied – Realized Volatility Premium has averaged 4.3% since January 1990 through present.  She noted that short volatility exposure has benefits beyond traditional diversification techniques so she suggests substituting the equity risk premium with volatility exposure.  She also spent time discussing the benefits of frequent trading to reduce path dependency as well as allowing for a more stable gamma profile.

Stephen Crewe followed up with a discussion that focused on the diversification benefits of short volatility positioning across asset classes.  He noted that the correlation between the EuroStoxx 50 and S&P 500 is about 85% but the correlation of the volatility risk premium of options trading on those two indexes is around 72%.  He also spent some time on different assets for example noting that the volatility risk premium for Natural Gas is correlated by only 2% with SPX volatility.

Long Volatility Alternatives Discussed at RMC

Daniel Danon from Assenagon Asset management and Nicolas Vanhoutteghem from Argentiere Capital teamed up for a discussion around Implementing Long Volatility Exposures at CBOE RMC in Ireland this afternoon.

Danon kicked things off with a discussion centering around creating an affordable volatility exposure.  This is a topic that we could probably have a single full day conference discussing as the flexibility around how to gain long volatility exposure without suffering the costs often associated with this exposure.  In the time allotted he was able to compared long put options, delta hedged positions, and using various long volatility structures.  He then noted that relative value trades are a good method of financing long volatility exposure in order to hedge a portfolio.

Vanhoutteghem started his session off noting that 3 month SPX implied volatility is near the 15th percentile over the past 10 years.  However, this does not mean that protection is cheap because realized volatility is at 6.5 or 6 volatility points below implied.  The normal level is about 2 volatility points of premium to realized.  The result is a high cost of carry and the goal is to determine how to minimize this cost of carry.

Panel Discussion on Volatility Based Investment Strategies at RMC

The first afternoon session at CBOE RMC Europe was a discussion titled Panel on Volatility-Based Investment Strategies.  The panel moderator was Chris Limbach, Managing Director Investments, PGGM Institutional Business.  The panelists were:

  • Uri Geller, Co-Founder and CIO, Granite M.S.A LTD
  • Roy Hoevenaars, PhD, Portfolio Manager, Blenheim Capital Management
  • Fergus Taylor, Portfolio Manager, Arrowgrass Capital Partners
  • Brendan Walsh, Multi Asset Fund Manager, Aviva Investors Global Services

Some themes that were touched on during the presentation included:

  • The search for yield has resulted in some structured solutions due to the low interest rate environment
  • It was noted that currency volatility has been an area of opportunity this year based on commodity price changes as well as political events
  • At times there are selective opportunities to be long volatility – but the mean reverting nature of volatility makes long volatility trading tricky
  • The creation and popularity of Weeklys has created many new opportunities
  • In a world of low-yield the S&P 500 offers one of the few quality investments
  • One panelist noted that VIX Weeklys are an instrument they turn to for long volatility positions

Cross Asset Dislocations and Market Signals Presentation at RMC

Rebecca Cheong from UBS led a discussion titled Cross Asset Dislocations and Market Signals.  She also was the first of our presenters to utilize our instant poll app during her presentation.  More on that in a moment…

Rebecca’s presentation was divided into three sections.  She initially covered market dislocations noting that some are temporary and others are structural, with the latter often lasting longer.  An example that we are probably all familiar with is the increase in SPX put skew that has accompanied the implementation of Dodd-Frank.

The presentation then moved on to discuss these dislocations and the use of them as market signals.  Specifically, she noted disconnections between top down and bottom up risk drivers.  For example, the cost of hedging an S&P 500 portfolio may be cheap while individual stock hedging costs may be expensive or EEM options may be cheap and options on individual emerging markets may be expensive.  Eventually these dislocations should come back in line.

Finally, Rebecca asked several polling questions that the audience was able to answer using an app that conference participants were using.  Her final question was which of the following has experienced the most growth over the last 5 years.  Note the results in the graphic below.

RC Poll 5

Neither the average height of a six-year old boy or the growth of hedge fund assets under management were near the top.  However, attendees were wrong to assume the growth of VIX ETPs or VIX Futures volume experienced higher growth than the assets under management in in Managed Risk Funds over the past five years.

Panel Discussion on Institutional Liabilities and Option Strategies

The final session at CBOE’s Risk Management Conference in Europe today was a panel discussion that was titled Real Money:  Institutional Liabilities and How Options Strategies Can Help.  The moderator was Abhinandan Deb, Head of European Equity Derivatives Research, Bank of America Merrill Lynch.  The panelists were:

  • Jon Havice, President and Chief Investment Officer, DGV Solutions
  • Michael Holliger, Portfolio Manager, Swiss Life Asset Management AG
  • Dan Mikulskis, Head of DB Pensions, Redington, Ltd.

Before the discussion each panelist made about a 15 minute presentation.

Jon Havice led things off highlighting the types of liabilities that institutions are charged with matching.  He notes that option strategies offer the ability to reduced downside exposure without reducing return expectations, although some upside participation will be sacrificed.  He spent some of his presentation discussing how many pension funds are currently underfunded.  He did note the CBOE Put Write Index (PUT) as a good example of a strategy that offers equity like returns with lower volatility of those returns.  Finally, he demonstrated PUT performance in different market environments and noted that is many regimes PUT outperforms the S&P 500.

Michael Hollinger followed up discussing the pension system in Switzerland and what factors influence equity positioning at Swiss Life.   Four factors that impact equity positioning are regulatory in the form of the Swiss Solvency Test, accounting treatment of investments, return expectations, and liability structure.  He noted three different potential equity exposures:   long the market, long market plus a put-spread collar, or long market plus owning a put.

Dan Mikulskis was the final presenter and he discussed the pension funding gap in the UK.  He spent some time discussing different approaches to filling the gap and he noted that there are many more tools and methods to close the gap than have been available in the past.

A takeaway from this panel was that despite the headlines that look pretty dire with respect to unfunded liabilities.  However, the situation may be manageable over time and the gap can be closed.

Presentation on Volatility Risk Premia at RMC Today

The second presentation on the first day of RMC featured a discussion titled Constructing / Deconstructing Volatility Risk Premia Strategies delivered by Roni Israelov from AQR Capital Management.  This presentation centered around an article that appeared in the Financial Analysts Journal in 2015 titled Covered Calls Uncovered which may be found at

This presentation started out with a discussion of Covered Calls with the CBOE S&P 500 BuyWrite Index being used to demonstrate the type of returns associated with a systematic covered call program.  It is noted that covered calls seek to offer equity-like returns with lower volatility.

Israelov breaks down the returns associated with covered calls into three parts:  passive equity, short volatility, and equity timing.  Specifically, he notes that a covered call includes equity timing and short volatility exposure and reduces passive equity exposure relative to the underlying equity index.   He noted their approach to studying these returns may be applied to other strategies and that AQR has another study available focusing on equity index collars which is also available at

Some highlights from Israelov’s presentation include:

  • The alpha from selling an at the money call comes from being short volatility
  • A demonstration of how the timing bet associated with the at the money covered call grows and then resets
  • Noting the potential performance of a strategy that eliminates the equity market timing risk component of a buy-write strategy which he refers to as a Risk-Managed Buy-Write Index
  • He also noted that the beta for a risk managed strategy is much lower than a traditional buy write strategy when the market is under pressure
  • He finished up with a preview of a forthcoming study that looks at covered call returns for 11 global equity indexes

RMC Presentation by Bill Speth and Matt Moran from CBOE

The first session that kicked off the 5th Annual European version of CBOE’s Risk Management Conference involved a discussion titled New Developments in Options and Volatility-Based Benchmarks delivered by Bill Speth and Matt Moran.

Bill kicked things off talking about some current and pending strategy based indexes created by CBOE.  The indexes discussed were:

  • CBOE Russell 2000 Conditional BuyWrite Index
  • CBOE S&P 500 Smile Index
  • CBOE S&P 500 Buffer Protect Strategy Series
  • CBOE S&P 500 Enhanced Growth Strategy Series
  • CBOE SMA Large Cap Index
  • CBOE Stabilis Index

A couple of these indexes are in the process of development and will be introduced in the next few weeks (Smile Index and Stabilis Index) so I’ll hold off talking about them in this space until that time.

In discussing the Russell 2000 Conditional BuyWrite Index he noted the strong absolute and risk adjusted returns.  He noted the Buffer Protect and Enhanced Growth Series Indexes and discussed how Vest Financial is working with CBOE with respect to Target Outcome Indexes.  Finally, he spent some time discussing the development of the SMA Large Cap Index in conjunction with Social Market Analytics.

Matt Moran followed Bill with a look at several recent studies that have covered CBOE strategy indexes.  Matt started out showing a list of papers, most of which may be found at

He highlighted PutWrite indexes that CBOE currently calculates and quotes

  • CBOE S&P 500 PutWrite Index (PUT)
  • CBOE Russell 2000 PutWrite Index (PUTR)
  • CBOE S&P 500 One-Week PutWrite Index (WPUT)
  • CBOE Russell 2000 One-Week PutWrite Index (WPTR)

Matt specifically highlighted results from a study that came out just a week ago from Wilshire which took a look at BXM, BXMD, CLLZ, PPUT, and PUT indexes.

  • 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 study noted that on an absolute basis both PUT and BXMD outperform the total return of the S&P 500 over a 30-year period.  One of the most interesting findings in the Wilshire study is that all five of the indexes in the study experienced a lower peak to trough drawdown than a buy and hold portfolio.

Another study discussed by Matt was conducted by Fund Evaluation Group which focused on Russell 2000 Index Option oriented strategies.  This study noted that the CBOE Russell 2000 PutWrite Index (PUTR) has outperformed the Russell 2000 Index since 2001 with lower volatility than the Russell 2000.  He also highlighted several other aspects on this study which is scheduled to be released in the very near future. Weekly Market Outlook – September 26, 2016

While the market may have ended last week on a sour note, a little pre-weekend profit-taking can’t entirely come as a surprise. Once traders learned on Wednesday the Federal Reserve wouldn’t be imposing a rate-hike this month, they celebrated in the form of a 1.7% advance that lasted all the way through Thursday’s close. Friday’s 0.6% lull didn’t even drag any of the major indices back below their most important technical levels.

Still, stocks could just as easily kick-start a pullback here as they could reignite the rally. They finished the week on the fence, and within sight of a breakdown and a breakout. Overall, the bulls look to have a bit of the edge here.
We’ll look at the stock market big picture in a moment, after a rundown of last week’s and this week’s most important economic news.

Economic Data
Last week wasn’t all that busy in terms of economic data. The biggie was of course Wednesday’s interest rate decision, and the Fed’s assessment of the current economic condition. The Federal Reserve is pleased with the economy, though doesn’t see it so strong that it needs to be cooled.
It was also a big week for real estate, and home constriction in particular. It wasn’t an especially encouraging week, however.

That data started out with August’s housing starts and building permits. Both fell from July’s levels, and fell short of estimates. Perhaps more alarming is how both seem to be slowing down in a much bigger way.

Housing Starts and Building Permits Chart

Source: Thomson Reuters
Existing home sales were also a disappointment, falling to a pace of 5.33 million versus expectations for a rise to a pace of 5.5 million. Limited inventory may continue to be holding sales of existing homes back.

Existing Home Sales, Inventory Chart

Source: Thomson Reuters
We won’t get an update on new home sales until this week. Inventory have been light there too, though it’s worth noting the weakness we’ve seen in terms of existing homes has largely been offset by the rise in purchases of new houses.

Everything else is on the following grid:
Economic Calendar


The Weekly Options News Roundup – 9/25/2016

2016 Risk Management Conference Europe
Tomorrow kicks off the 5th annual CBOE Risk Management Conference Europe at the Powerscourt Hotel in County Wicklow, Ireland.  The industry’s top traders, strategists and researchers will convene to discuss the latest products and strategies for managing risks, that enhance yields and lower portfolio volatility. For more information, see

“2016 CBOE Risk Management Conference Europe” – Hedgeweek

Options R.O.I.
Earlier this week, CBOE along with Wilshire Analytics, the investment technology foundation of Wilshire Associates Inc., released an analysis of the performance of options-based benchmark indexes covering a 30-year period. The results of the study revealed that the use of options-based benchmark indexes with premium selling or buying produce higher absolute returns, lower volatility, less downside risk, increased market capacity and liquidity, and stronger benefits for pension plan allocations.  For more information see CBOE Benchmarks. 

“Options Indices Offered ‘Noteworthy’ Returns Over 30 Years, Says Study” – Hedgeweek

“Retail Traders Should Buy Options During Volatile Markets” – Ellen Chang, The Street

CurveGlobal Fires Up Engines
After another successful week of testing, CurveGlobal is set to officially launch Monday, September 26th.  CurveGlobal is a new venue for trading interest rate futures backed by the London Stock Exchange, CBOE and several major dealer banks.  The platform aims to cater to those market participants looking for more capital efficient ways to trade and hedge these products.

“LSE Passes Final Test Ahead Of Sept. 26 Curve Launch” – Luke Jeffs, FOW

“Curve To Launch With Four ISVs, Seven Banks” – Luke Jeffs, FOW

VIX Fix: Volatility Averted  
Stocks ended lower on Friday falling by 130 points as momentum from inaction by the Fed dissipated.  Volatility seemed poised to make its triumphant reentrance in the market but after a short-lived spike the VIX Index retreated back to near all-time lows, now around the 12 level.  But as the U.S. Election date draws near, and political uncertainty looms, volatility may be down but not out.

“’Tantrum’ Threat Fades” – Min Zeng and Sam GoldFarb, Wall Street Journal

“Volatility Trade Flames Out As VIX-Loving Bears Cash In On Notes” – Dani Burger, Bloomberg

“The Return Of Volatility” – Chris Beauchamp, IG

“The Markets “Gear Gauge” Has Collapsed Following The Federal Reserve’s Policy Meeting” – David Cottle, News Markets

Weekend Review – Russell 2000 Options and Volatility – 9/19 – 9/23

The relative performance of small caps to large caps has been phenomenal for those who picked the equity market bottom back in February.  This past week the Russell 2000 (RUT) almost doubled the performance of the large cap focused Russell 1000 (RUI) rising 2.56% versus 1.30%.  This places RUT at up 10.45% for 2016 while RUI is up a still respectable 6.06%.  The really amazing numbers shows up when we look at what RUT has done relative to RUI since February 11th of this year.  RUT is up 31.6% since the equity market bottomed out while RUI is up 19.3%.


VIX took it on the chin last week as the equity market positively digested the FOMC announcement and subsequent Janet Yellen presser.  The CBOE Russell 2000 Volatility Index (RVX) also dropped, but not to the extent of VIX which resulted in a spike for the RVX / VIX premium.

Weekend Review – VIX Futures and Options – 9/19 – 9/23

VIX reacted to the post FOMC rally by giving up just over 20% last week.  The standard September contract went off the board leaving October to take over as the front month.  With a little time until October expiration (10/19) the result has been resumption of pretty steep contango.  Of course there are some potentially market moving events between now and the end of the year so VIX futures bracing for some sort of spike may be expected.

VIX Contango


New Heat Map Shows Less Downside for BXMD and PUT Indexes – Blog #1 on the Wilshire Paper

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 this week. 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.


A new heat map is presented as one of the 13 exhibits in the Wilshire paper.

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


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.


More Blogs on new research papers will be posted at in the near future. For links to the entire new paper and more information about CBOE benchmark indexes, please visit