VIX Recently Has Been “High” (vs. SPX Historic Volatility) By Matt Moran

Over the past year, and particularly at times when the CBOE Volatility Index® (VIX®) was below 15, several people have asked me questions such as –

  • Why is the VIX so low?
  • Shouldn’t the VIX be at higher levels, particularly in light of worldwide uncertainties and volatility?

An argument could be made that VIX recently has been at relatively low levels when compared to its long-term averages; the average daily closing levels for the VIX were (a) 13.05 so far in 2013; and (b) 20.4 for VIX since the inception of VIX data in January 1990.  The fact that the VIX has been about 7 points below its long-term average has been a key factor in facilitating the record volume in both VIX futures and VIX options in January 2013; some investors like to buy VIX call options and VIX futures for diversification and catastrophe-protection purposes when the VIX is below 15.

On the other hand, one could make the argument that VIX recently has been somewhat high when compared to the concurrent 30-day historic volatility of the S&P 500® (SPXTM) Index. Over the past year the average daily closing values were 17.1 for the VIX Index, and 12.8 for the 30-day historic volatility of the SPX Index.

This first chart has a comparison of the two values since January 2008 —

VIX & Hist Vola

The second chart is from Exhibit 12 of a paper by Hewitt EnnisKnupp – The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance (2012).  The paper states that the difference between implied volatility and realized volatility is a risk premium earned by the investor.

VIX and Realized Vol


A number of papers available at (including the paper by Hewitt EnnisKnupp) make the point that option-writing benchmark indexes have had relatively strong risk-adjusted performance, in part because implied volatility for SPX options usually has been higher than realized volatility.

You could try exploring the Benchmark Indexes and Education sections of the CBOE website to learn more about the writing of index options and the potential for higher yields and lower volatility in your portfolio.

Portfolio Protection Tools, As SPX Tops 1515 – By Matt Moran

This past Friday the S&P 500® Index (SPX) closed at 1517.93, and some investors are asking if now is the time to implement portfolio protection strategies.  Over the past decade the SPX Index had its highest daily close of 1565.15 on Oct. 9, 2007, and its lowest daily close of 676.53 on March 9, 2009.


Below are excerpts from recent news stories –

(1)  At

“As Stocks Surge, Is It Time for Some Protection?  By Brett Arends (February 8, 2013) …Many investors, as they watch stock prices rebound to levels last seen in 2007, might be wondering if it is time to cash in some of their gains. The downside to selling, of course, is that you risk missing out if the market keeps going up—and face a potential tax hit on capital gains. Another strategy is to buy insurance against a market downturn via options on individual stocks or a broad market index, such as the Standard & Poor’s 500-stock index. … Prices are now back to levels last seen in 2007, just before the crash, adds Sean Heron, who manages options-based portfolios at Philadelphia-based investment company Glenmede, which has $22 billion under management and buys and sells options. …”

(2)  At

“Traders Start Playing Defense. By Steven M. Sears (February 9, 2013) Investors are quietly building defensive options positions as the stock market hovers around all-time highs. The “greed-in” and “risk-on” trade still dominates, but a nascent change is occurring as key market risks, particularly the threat of sequestration, loom menacingly ahead.  With the Standard & Poor’s 500 inhaling thin oxygen around 1500, investors are bearishly positioning in financial and small-company stocks that have reacted poorly to Europe’s economic and political unrest and the U.S. economy’s malaise. Investors are buying puts,…”

After reading those news clips, you might ask – what about the past performance of protective strategies?.  Below are excerpts from some index analyses and studies.


CBOE now has 10 benchmark indexes designed to show the hypothetical performance of various options-related strategies.

Two of the CBOE Indexes that are designed to provide some downside protection are —

  • CLL – CBOE S&P 500 95-110 Collar Index (holds S&P 500 stocks, buys SPX put options for downside protection, and writes SPX call options for income)
  • VXTH – CBOE VIX Tail Hedge Index (holds S&P 500 stocks, and buys VIX® call options)

This chart compares the performance of VXTH, CLL, S&P 500, and the S&P GSCI commodity indexes around the time of the 2008 financial crisis.  During the 11-month period shown, the VXTH Index was down 25% and the S&P GSCI Index declined 58%.


Exhibit B of the paper by Asset Consulting Group, Key Tools for Hedging and Tail Risk Management (February 2012) (available at studied a time period of more than 25 years, and showed that the CLL Index had much left tail risk than the S&P 500 and S&P GSCI indexes.  During the time period studied, the S&P 500 experienced 13 months with losses of worse than 8%, while the CLL Index had only one such month.

Histogram CLL


In 2009 UMass published a paper –“VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis.”      The paper found that, with a 10% allocation of VIX futures to the Equity/Bond/Alternative portfolio over the 34-month time period ending in December 2008 –  The portfolio’s annualized return was improved by 3.5 percentage points (increased from -5.6% to -2.1%), and The standard deviation was cut by one-third (drops from 17.9% to 11.3%).

VIX Szado Fig 2


To learn more about protective strategies, please visit the Strategies and Education sections at

Before investing, please be mindful of taxes and transaction costs, and please read closely risk disclaimers at the web pages above, and in the Options Disclosure Document.


Record Monthly Volume for VIX Futures and Options by Matt Moran

In January 2013 both options and futures on the CBOE Volatility Index® (VIX®) established new all-time monthly volume records.

VIX Index options recorded their best month ever with an average daily volume (ADV) of 680,822 contracts, exceeding the previous record ADV of 582,022 contracts in August 2011.  Total volume for the month was 14.3 million contracts, also a new record.

VIX options Jan 2012

VIX futures monthly trading volume and ADV established all-time highs in January 2013.  Nearly 2.9 million VIX futures contracts changed hands, beating the previous record of over 2.7 million contracts traded in November 2012.  The record VIX futures ADV in January was 137,988 contracts, up 241 percent and 13 percent, respectively, from 40,439 contracts in January 2012 and 121,782 contracts in December 2012.  VIX futures also set new open interest records on four consecutive days in January, culminating on January 16 with record open interest of 472,403 contracts.  To learn more about VIX futures and options and how these tools can be used in your portfolio, please visit

VIX futures daily

VXAZN Index Fell a Record 37.5% Today

Jan. 30, 2013 – Today the CBOE Equity VIX® on Amazon (VXAZN) fell 37.5% – a record one-day fall in percentage terms for the index.  VXAZN is designed to measure the expected volatility of (AMZN) stock.   The data history for the VXAZN Index goes back to June 2010. A link to spreadsheets is at


Below are the six days in which the VXAZN Index had changes (up or down) of more than 27%; it is interesting to note that all five of the down days were the day after AMZN earnings announcements.

  • 30-Jan-2013                      -37.5%
  • 26-Oct-2012                      -36.1%
  • 1-Feb-2012                       -36.0%
  • 27-Jul-2012                       -31.3%
  • 27-Apr-2012                      -27.0%
  • 26-Dec-2012                     32.0%




The abstract for a 1996 academic article noted that —

“We study the implied volatility behavior of call options around scheduled news announcement days. Implied volatilities increase significantly during the pre-event period and reach a maximum on the eve of the news announcement. After the news release, implied volatility drops sharply and gradually moves back to its long-run level. Only on the event date are movements in the price of the underlying significantly larger than expected. These results confirm the theoretical results of Merton (1973).”

The Impact of Firm Specific News on Implied Volatilities, by Monique W.M. Dondersa and Ton C.F. Vorst.  Journal of Banking & Finance, (November 1996), Pages 1447–1461.



For more information on options strategies that could be considered as implied volatility is changing, please visit

Last Week’s VIX Action by Russell Rhoads, CFA

The S&P reached the 1500 level and then some this week.  The interesting action is that VIX and VVIX were higher as well.  It’s odd to have the weekly change for all the same color (red or green), but SPX, VIX, and VVIX were all green.   VIX held up in a higher S&P 500 market Friday which was attributed to a next week being a big news week.  Next week consumer confidence, GDP, and employment numbers come along with their being an FOMC meeting.

One of the more interesting trades this week involved a pretty complex spread.  There was a big buyer of VIX Apr 17 Puts and VIX May 22 Calls that was selling VIX Feb 19 Put and VIX Mar 24 Calls to help offset some of the premium.  Also on Thursday there was a buyer of 100,000 VIX Feb 16 Calls which came in as VVIX was around 71.  This buying pressure help push VVIX up to 80 from 71.  VVIX settled Thursday at 76 after a wide range based on VIX option buying.   Usually the front two month options have the most trading interest, however, due to the debt ceiling timing being pushed out to May, May options are seeing more activity than one would expect in late January.   The VIX May 20 and May 22 Calls are already trading heavily.

Upon first glance there was some divergence in the US equity markets this past week as the S&P 500 was up over 1% and the NASDAQ-100 was down about a quarter a percent.  Of course knowing that Apple (AAPL – 439.88) lost 12% on the week and as AAPL is the biggest component in the NASDAQ0100 this weighed a bit on performance.

More divergence occurred between the S&P 500 and VIX along with NASDAQ-100 and VXN.  The S&P 500 finished the week higher as did VIX and the NASDAQ-100 was lower as was VXN.  One possible explanation for VIX is that there is a slew of economic data along with an FOMC meeting next week.  With VXN the explanation of performance may go back to AAPL.  The implied volatility of AAPL was elevated going into AAPL’s earnings this past week and this bled over into the implied volatility of NDX options.  Post AAPL earnings there was a volatility crush in AAPL options and some pressure on VXN.

Finally, the curves both flattened as all VIX and VXN futures finished down on the week.  Although under pressure, VIX futures posted the fourth busiest day ever on Thursday this past week with 184,273 contracts changing hands.

VXAPL, VXIBM, VXGOG: 1-Day Falls of More Than 33%

This week earnings announcements were made after the close of regular stock trading by some key tech companies — IBM and Google on Jan. 22nd, and Apple on Jan. 23rd.

Implied volatility indexes related to these stocks experienced big one-day drops the following days –

  • CBOE Equity VIX® on IBM (VXIBM) had a record one-day drop of 40.9% on Jan. 23rd;
  • CBOE Equity VIX® on Google (VXGOG) had a record one-day fall of 36.7% on Jan. 23rd
  • CBOE Equity VIX® on Apple (VXAPL) fell 25.4% on Thursday, Jan. 24th


Here are one-week charts related to the 3 volatility indexes:


The historical data for the VXAPL, VXIBM, and VXGOG indexes goes back to June 2010.  Here are the biggest one-day moves (up or down) for these three indexes –


  • 25-Jan-2012                        -33.1%
  • 25-Jul-2012                         -26.2%
  • 19-Oct-2010                        -25.7%
  • 24-Jan-2013                        -25.4%
  • 8-Aug-2011                         25.7%
  • 4-Aug-2011                         29.6%
  • 16-Mar-2011                      30.0%
  • 14-Mar-2012                      31.5%
  • 18-Aug-2011                       39.7%


  • 23-Jan-2013                        -40.9%
  • 4-Aug-2011                         33.0%
  • 18-Aug-2011                       41.6%


  • 23-Jan-2013                        -36.7%
  • 14-Oct-2011                        -31.1%
  • 18-Aug-2011                       30.1%


One could ask – as a general principle, is there more uncertainty, higher implied volatility and higher prices for options in the period just prior to an earnings announcement (vs. the period just after an earnings announcement)?  Big changes in implied volatility can have a big impact on various options strategies and the amount of options premium paid or received.  For more information about options strategies and more than 20 volatility indexes, please visit

Last Week’s VIX Action by Russell Rhoads, CFA

US equity market volatility has reached levels not seen in some time.   The market (for the most part) continues to trade in narrow daily ranges which results in low realized volatility.  As the moves are mostly to the upside VIX and VXN have come under some extra pressure.  VIX went out Friday at 12.46.  Do keep in mind that there is always a little extra pressure on VIX going into a weekend and that is exacerbated when we have a three day weekend upon us.  VXN followed suite losing over 10% of value for the week.  I hesitate to use this term, but VIX and VXN appear to be pricing in a goldilocks economy.  A good portion of readers in their 20’s have no idea what that means, but those of us with a few grey hairs know the history behind that phrase.  Needless to say, perfection priced into the markets never lasts and the markets tend to surprise us when we least expect it.  A twelve handle on VIX makes me think the markets are not expecting any surprises.

I do like to focus on futures and February VIX Futures at a 2.19 premium and March VIX Futures at a premium of 3.84 to spot VIX indicates some volatility traders are still on edge or at least long some volatility ‘just in case’.  Maybe the last shoe to drop in perfection being priced into the markets is a flat VIX curve.

Due to the continued weakness in VIX and shape of the futures curve long VIX related ETPs continue to come under pressure.  The widely followed VXX lost over 9% last week as VIX broke 13.00 and the front month futures were at a discount of about 1.50 throughout the week.  The combination of these two factors is never a positive for the exchange traded products.  VXZ held up as the longer dated futures contracts were not under the same pressure as the near term VIX futures.

As all traders are probably aware of, VIX broke 13.00 this Friday, but that did not slow down out of the money call buying as a recurring buyer showed up throughout the week buying VIX Feb 20 and VIX Feb 24 Calls.  Another trade of note that was spread throughout the week was a buyer of the March 20 / 30 Call Spread.  I was in the pit Friday morning when 30,000 of those spreads were bought at 0.925.

Record 3-Week VIX Drop, and Diversification Ideas By Matt Moran

Saturday, Jan. 19, 2013 – Yesterday the CBOE Volatility Index® (VIX®) closed at 12.46, its first daily close below 13.00 since June 2007.  In addition, the S&P 500® Index reached a 5-year high yesterday.


Over the past three weeks (ending Jan. 18th) the VIX Index fell 45.2%, its biggest-ever 3-week fall in % terms. (The inception of the VIX price history is in Jan. 1990).

The CBOE S&P 100 Volatility Index (VXO) has data history back to 1986, and its largest 3-week fall in % terms was down 51.8% in the 3-week period ending  Nov 13, 1987.


With VIX at relatively low levels, some investors are asking about how to gain exposure to VIX.

Over the past decade many investors have noted with dismay that many assets have become more highly correlated (see, e.g. Chart 2 below).  Some investors have explored the possibility of using a small tactical allocation to products designed to track VIX-based indexes to help achieve their goals (see Chart 1 below).

Here are the returns for the 3rd quarter of 2011 (during which the U.S. debt received a downgraded rating) —

  • -13.9%                  S&P 500 (TR)
  • 157.3%                  S&P 500 VIX Short-term Futures Index TR
  • 45.4%                    S&P 500 VIX Mid-term Futures Index TR

Here are the returns for the 1st quarter of 2012

  • 12.6%                    S&P 500 (TR)
  • -53.3%                  S&P 500 VIX Short-term Futures Index TR
  • -24.5%                  S&P 500 VIX Mid-term Futures Index TR


If you do consider a longer-term allocation to the products on the VIX-based indexes, please research closely issues regarding roll costs, contango and backwardation. Past results are not a guarantee of future performance.


Indexes that have had higher correlations

Last Week’s VIX Action by Russell Rhoads, CFA

This past week VIX was quoted at the lowest levels seen before the financial crisis of 2007 and VIX continues to spend time in the 13’s.  The low level of VIX has been getting a lot of attention, but VVIX has also been making some significant lows.  Last Friday VVIX closed at an all-time low of 75.18.  Admittedly CBOE did not start quoting VVIX until just last year, but historical data is available on VVIX all the way back to 1/3/2007.  Using this data, VVIX tends to oscillate between 80 and 120.  However, this range may be changing as VVIX has spent many days with a 70 handle over the past few weeks.

Long ETNs have been under pressure due to low VIX and a return to the typical shape of the VIX curve.  The pressure on these will continue until we get the next pop in volatility that inverts the curve and pops the exchange traded funds.  VIXH and USMV both benefitted from the S&P 500 trading up 0.40% this week.  VIXH is of particular interest as it matches the S&P 500 performance, but has that tail hedge in place for when the next volatility event pops up.

In VIX option trading January expiration is next week.  Typically at this point the trading focus would be on February options, however, this time it is different.  Traders seem to be looking past February to March options.  The next drama to come out of Washington, DC is going to be the debate over the debt ceiling which will probably come to a head after February expiration, but before March.   Because of this March call options have been active.  A couple of trades of note last week – on Friday there was a buyer of the VIX Mar 25 / 35 Call Spread paying 0.595 and on Wednesday there was a buyer of the VIX Mar 20 / 30 Call spares as well.  Both those trades need a good volatility spike to payoff.

“All anyone wants to do is talk about how low VIX has gotten.”  That quote comes from Marty Kearney at the Options Institute on Friday.  It is true, VIX is low.  2012 was the calmest year for the stock market as far as day to day volatility goes and the result is market complacency, lack of any concern, and much lower implied volatility than the market has had since before the crisis in 2008 to 2009.  I find the January future premium of 0.79 a bit rich considering there are only two trading days remaining until January expiration.  This observation may have me doing some data mining this weekend to explore the historical spread going into the weekend before expiration.

VXN ticked up slightly on the week even though the underlying index moved up a bit as well.  This is not surprising due to the market being in the early phases of earnings season.  Implied volatility of individual stock options tends to rise around an earnings announcement.  Since the top ten stocks in NDX make up 50% of NDX weighting, VXN may be influenced by an increase in the implied volatility of some of these components.

In 2012 the spread between VXN and VIX was on average around 1.50, spreading out to almost 3.00 points and narrowing as much as parity.  Some of the periods of a wide spread came during the earnings seasons in 2012 and once earning was behind us, the spread returned to a normal level.  As of Friday’s close the VXN – VIX spread was at 2.51.  In the futures markets the Jan VXN – Jan VIX Spread was 2.50 and Feb VXN – Feb VIX Spread was 2.30.


What % Allocation to VIX Futures and Options for Portfolio Diversification?

During times when the CBOE Volatility Index® (VIX®) is at relatively low levels, we often receive investor questions such as – how much of an allocation might I make to VIX futures and options in order to try to diversify my portfolio?


In 2012 the average daily closing value of the VIX was 17.8, its lowest such value since 2007.

Due to fiscal cliff concerns, the VIX Index spot price rose to a close of 22.72 on Dec. 28th.  However,  both the VIX spot index and the VIX Jan. 2013 futures closed below 16 on all of the trading days so far this calendar year (through Jan. 14th).


In trying to answer the question re: allocation to VIX, one could explore the 2009 paper by the University of Massachusetts “VIX Futures and Options — A Case Study of Portfolio Diversification During the 2008 Financial Crisis,” which analyzes data from March 2006 to December 2008. The paper first examines investment performance for different investment portfolios during the second half of 2008, when the increased correlations among diverse asset classes generated significant losses for many investors who previously considered themselves well diversified. The study then explores the impact of adding various exposures of long CBOE VIX futures or long CBOE VIX call options to those portfolios.

For a traditional portfolio of stocks, bonds and alternatives during the five-month time period from August through December 2008, the following are three ways in which long volatility exposure was added, and the results are presented for the 5-month period studied:

(1) Using a 10% allocation to long near-term CBOE VIX futures–

– Total returns were improved by 15.7 percentage points (improvement to -4.0% from -19.7%)

– Standard deviation was reduced by about one-third (to 16.3% from 25.3%)

(2) Using a 3% allocation to long at-the-money one-month CBOE VIX calls, total returns were increased to +20.8% from -19.7%

(3) Using a 3% allocation to long 25%-out-the-money one-month CBOE VIX calls, period returns increased to +97.2% from -19.7%

The paper concludes by noting that “…investable VIX products could have been used to provide some much-needed diversification during the 2008 financial crisis.” A link to the paper is available at   Two of the figures from the two-page summary of the paper are below.


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