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 www.cboe.com/vix.   Two of the figures from the two-page summary of the paper are below.


2012 VIX in Context by Russell Rhoads, CFA

In Chapter 9 of Trading VIX Derivatives I discuss VIX as a stock market indicator. The relationship between VIX and VIX futures is discussed and to smooth futures data I created what I call the Modified VIX Futures contract. The motivation behind creation of this Modified VIX Futures contract was to have a consistent futures price to compare to VIX. Simply put, the Modified VIX Futures contract takes a time weighted average of the front two month futures contracts to create a single futures price to compare to the VIX index. As focus shifts from the near month to the second month in trading volume so does the emphasis of influence from the price of the second month futures contract. On the Friday before expiration I will retired the front month and start using the next two expiration month contracts. This Friday will be the last day that January VIX Futures feed into the calculation as January VIX Futures and Options expire next week.

A use that had not occurred to me when I was writing the book was that the Modified Future may be a method of determining when near term VIX futures are in contango or backwardation relative to the VIX index. These two terms, contango and backwardation, refer to the shape of the graph that may be created by charting and underlying market and futures prices according to time left to expiration.

When the market goes into what is known as backwardation the biggest impact is often on the nearer dated contracts. The table below shows the number of days the Modified Future has been at a discount to the spot index for each year since 2007. I always use January 2, 2007 as a starting date for any VIX Futures related back test as volume was sufficient at that time to lead credibility to the data I use for the study.

Trading Days Contango Backwardation % Contango % Backwardation
2007 251 177 74 70.52% 29.48%
2008 253 143 110 56.52% 43.48%
2009 252 202 50 80.16% 19.84%
2010 252 223 29 88.49% 11.51%
2011 252 178 74 70.63% 29.37%
2012 250 248 2 99.20% 0.80%
Total 1510 1171 339 77.55% 22.45%

What stands out dramatically on this table is 2012. There were only two trading days where VIX closed at a premium to the Modified Future. In fact those two days were December 27th and 28th when the S&P 500 was under pressure based on fiscal cliff fears going into the end of the year. Backwardation is usually the result of a spike in VIX. Volatility will revert to a mean or average over time. When VIX moves up quickly the futures markets subsequently price in a drop. With one small exception a spike in VIX just did not occur in 2012. Also, the high low range for VIX in 2012 was the narrowest range since 2012. The table below compares shows the high low range for VIX by year from 2007 to 2012 –

2007 2008 2009 2010 2011 2012
High 31.09 80.86 56.65 45.79 48.00 26.66
Low 9.89 16.30 19.47 15.45 14.62 13.45
Range 214% 396% 191% 196% 228% 98%
Average 17.54 32.69 31.48 22.55 24.20 17.80

The high low range for 2012 was less than 100% which is a much narrower range that any other year since 2007. I believe comparing the yearly ranges and average VIX prices is more significant than looking at year to year change VIX. VIX is going to oscillate more than trend so comparing the close at the end of 2011 to the close at the end of 2012 does not tell me much. If December 30th had been the end of 2012 instead of December 31st VIX would have been down 2% in 2012 instead of down 22%. Again, I think range and average VIX tells us more. This table tells me is what the nature of VIX was in 2012 in context to other years. VIX was low and stayed pretty low for most of the year.

Finally, there are two things VIX traders use as a rule of thumb. One is the reversion of VIX that I mentioned above. The second, that when VIX and market volatility has been calm eventually a storm shows up and VIX spikes accordingly. The longer the quiet, the closer the big VIX move may be. Seeing 2012 as a quiet year makes me wonder what 2013 will bring. It’s been quiet, maybe too quiet.

VIX Drops to 13.22 — Lowest Level Since June 2007

Jan. 9, 2013 – Today the CBOE Volatility Index® (VIX®) dropped to its lowest intraday value since June 20, 2007.  Here is a 5-year chart of VIX values –For more information on VIX-related strategies and papers, please visit www.cboe.com/VIX.


CBOE S&P 500® Implied Correlation Index Fell 27.8%

In recent years investors often have asked if stocks have high correlations and move in lockstep with each other.   The CBOE S&P 500® Implied Correlation Index (JCJ-E Jan. 2014) fell from 87.1 on Dec. 14, 2011, to 62.87 on Jan. 8, 2013, a drop of 27.8% www.cboe.com/JCJ

A Jan. 9th Bloomberg News story by Cecile Vannucci, Alexis Xydias and Nikolaj Gammeltoft noted that:

 “ … The Chicago Board Options Exchange S&P 500 Implied Correlation Index has fallen 12 percent to 62.87 since reaching a four-month high in December. The gauge, which uses options to measure expectations about whether Standard & Poor’s 500 Index companies will move in lockstep, reached 59.76 on Jan. 2, its lowest level since November 2010. Alcoa Inc., the first company in the Dow Jones Industrial Average to report results, started the fourth-quarter earnings season yesterday. Improvement in the world’s largest economy will reduce the market’s sensitivity to government reports, allowing investors to focus on individual companies, Anthony Benichou of Louis Capital Markets said. … “

The CBOE S&P 500 Implied Correlation Indexes measure changes in the relative premium between index options and single-stock options. The CBOE S&P 500 Implied Correlation Indexes may be used to provide trading signals for a strategy known as volatility dispersion (or correlation) trading. For example, a long volatility dispersion trade is characterized by selling at-the-money index option straddles and purchasing at-the-money straddles in options on index components. One interpretation of this strategy is that when implied correlation is high, index option premiums are rich relative to single-stock options. Therefore, it may be profitable to sell the rich index options and buy the relatively inexpensive equity options. (The language in this paragraph is excerpted from www.cboe.com/JCJ, which has much more information on this topic.)

VIX – Record “Cliff” Dive (Down 39.1%) and Record Volume

Jan. 4, 2013 – The CBOE Volatility Index® (VIX®) closed at 13.83 today and was down a record 39.1% this week as the U.S. Congress approved legislation to address the fiscal cliff uncertainties.


Here is a list of the weeks when VIX had its 5 biggest down moves and its 5 biggest up moves (in % terms) since the inception of its data history in 1990 —

% Change            Week Ending

  • -39.1%                  04-Jan-2012     (After “fiscal cliff” resolution)
  • -30.9%                  24-Aug-2007
  • -28.4%                  15-Mar-1991 (Gulf War)
  • -26.7%                  25-Mar-2011
  • -25.2%                  28-Sep-2001   (After 9/11)
  • 52.5%                    22-Jan-2010
  • 53.4%                    4-Feb-1994
  • 55.0%                    10-Oct-2008   (Financial crisis)
  • 75.9%                    2-Mar-2007
  • 85.7%                    7-May-2010   (Flash crash)


In addition to the VIX Index, CBOE also offer an index designed to track the expected volatility of S&P 100 Index – the CBOE S&P 100 Volatility Index (VXO).  www.cboe.com/VXO.   The biggest 1- week % up- and down moves for the VXO Index prior to 1990 were up 171.7% the week ending 23-Oct-1987, and down 37.9% the following week that ended 30-Oct-1987.


As investors adjusted their risk tolerances in light of the news on fiscal negotiations, VIX futures had all-time record volume days on both Dec. 31st (212,800 contracts) and on Jan. 1st (221,323 contracts).


Here is a recent one-week price chart on VIX (this is updated on trading days at www.cboe.com/VIX) —


VIX options avg. daily volume in 2012 was a record 442,959 contacts (up 14% over the 2011 figure).  www.cboe.com/VIX

VIX futures avg. daily volume in 2012 was 95,143 contacts (up 99% over the 2011 figure). www.cboe.com/VIX


To learn more about use of VIX options and futures for risk management, please visit www.cboe.com/VIX

In 2012 VXAPL Rose 25.5% and VXGOG Fell 7.1%

Many investors noted the lack of volatility in the broad stock markets in 2012 – the CBOE Volatility Index® (VIX®) Index had an average daily closing value of 17.82 for the year, the lowest such value since 2007.

Some tech stocks experienced more volatility than the S&P 500 in 2012. For example, Apple (AAPL) rose in the first three quarters, but then faced some challenges in the fourth quarter as there were poor reviews for the Apple Maps application on a new iPhone, and continued enhanced competition for the smartphone and tablet markets.

Here are the average daily closing values in 2012 for four volatility indexes designed to reflect expected volatility for key tech stocks —

These indexes can serve as helpful intraday or longer-term gauges of changes in implied volatility.

AAPL was up 31.4% in 2012, as it experienced a wide range of closing prices throughout the year, with a high daily close of $702.10 and a low daily close of $405.00.

To learn more about more than 20 volatility indexes, please visit www.cboe.com/volatility.

VIX Has Its Biggest Two-Day Fall – 35.4%; Record Futures Volume

Jan. 2, 2013 – On the two most recent trading days of Dec. 31st and Jan. 2nd –

  • The CBOE Volatility Index® (VIX®) fell by 35.4%, the biggest-ever drop (in percentage terms) over two trading days for the VIX Index, which has historical data back to 1990; and
  • Futures on the VIX Index set new trading volume records on both days, with 212,800 contracts on Dec. 31st, and an estimated 221,323 contacts on Jan. 2nd.

Over the past six trading days the VIX has had a roller-coaster ride as investor sentiment shifted in regard to perceived prospects for a near-term solution to the U.S. fiscal cliff situation. Daily closing prices on the VIX went from 17.84 on Dec. 24th, to 22.72 on Dec. 28th, to 14.68 on Jan. 2nd.


The table below shows the prices for the VIX Index and near-term VIX futures; the table is updated intraday at www.cboe.com/VIX. While the record VIX futures trading volume in recent days is driven by a variety of investors, it is probable that some investors have tried to go long the Jan. ’13 VIX futures at around 15.60, or the Feb. ’13 VIX futures at around 16.72, as a strategy to attempt to diversify their overall portfolios. To learn more about strategies to use VIX futures and options for diversification and risk management, please visit www.cboe.com/VIX.


Links to a paper on “VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis” (July 2009):    Two-page summary    Full report     Press Release

VIX Futures – Record Volume Day and Year

Dec. 31, 2012 – Here is a year-end update on VIX and select options-based indexes —

  1. Futures on the CBOE Volatility Index® (VIX®) set a new single-day volume record of 212,800 contracts (estimated) today. The new daily record eclipsed the previous single-day record of 190,081 contracts traded on September 13, 2012.
  2. VIX futures are poised for another record year in 2012, with trading volume up 86 percent through November.
  3. The VIX Index was down 20.7% today, its biggest one-day drop (in percentage terms) since August 8. 2011.
  4. VIX futures prices also dropped today. As shown in the table at www.cboe.com/VIX, the Jan. ’13 VIX futures price fell by 4.67 points to close at 17.68 today.

5. Here are the % changes in 2012 for select indexes —

  • 10.2%                    BXY – CBOE S&P 500 2% OTM BuyWrite Index       www.cboe.com/BXY
  • 8.1%                      PUT – CBOE S&P 500 PutWrite Index                        www.cboe.com/PUT
  • 6.7%                      CLL – CBOE S&P 500 95-110 Collar Index                  www.cboe.com/CLL
  • 5.2%                      BXM – CBOE S&P 500 BuyWrite Index                      www.cboe.com/BXM
  • 4.3%                      LOVOL – CBOE Low Volatility Index                            www.cboe.com/LOVOL
  • -23.0%                  VIX – CBOE Volatility Index                           www.cboe.com/VIX


Happy New Year to all!

VIX Has Biggest 1-Day Jump of 2012; 6 Key Facts

Dec. 28, 2012 – Here is an update on 6 key facts about the VIX and related indexes and trading instruments —

(1)    Today (Friday) the CBOE Volatility Index® (VIX®) rose 16.7%, its biggest one-day up move (in percentage terms) since November 2011.  A key factor in the rise in the VIX is investor uncertainty about the year-end budget negotiations of U.S. lawmakers.

(2)    Today’s closing values (and point changes) for the VIX Index and select VIX futures include –

  • 22.72 (up 3.25) — VIX Index (spot)
  • 22.35 (up 3.25) — VIX Jan. ’13 futures
  • 21.92 (up 2.52) – VIX Feb. ’13 futures
  • 21.98 (up 1.88) – VIX Mar. ’13 futures
  • 24.41 (up 0.81) – VIX Sep. ’13 futures

The spot and Jan. numbers above appear to indicate that some traders do have some heightened anxiety about volatility and uncertainty over the next month, but the Feb. and Mar. numbers indicate that there could be less anxiety about volatility 3 months from now (and perhaps many anticipate that the U.S. budget negotiations will be finished by then).

If you would like to see delayed quotes on select VIX futures, please visit the VIX microsite at www.cboe.com/VIX and examine this table that is updated throughout trading days —

(3)    While the VIX is a measure of 30-day expected volatility, the CBOE S&P 500 3-Month Volatility Index (VXV) is designed to be a constant measure of 3-month implied volatility of the S&P 500 www.cboe.com/VXV.  In 2012 the daily closes of the VXV Index were (on average) about 2.8 points higher than the VIX Index. However, today the VIX close (22.72) was 0.82 higher than the VXV close (21.88).  The last time that the VIX close was more than 0.50 higher than the VXV close was in Nov. 2011.

(4)    The average daily closing price of the VIX in 2012 (through Dec. 28) was 17.8, the lowest such figure since 2007.

(5)    The CBOE’s VIX of VIX Index (VVIX) is an important measure of the expected volatility of the VIX www.cboe.com/VVIX.  Today the VVIX Index closed at 104.72, its highest daily closing value since July 25, 2012.

(6)    VIX futures and options both have experienced record trading volumes in 2012. In November 2012 the average daily volume (A.D.V.) in VIX futures reached a new record of 130,202 contracts, an increase of 233 percent over the 39,144 contracts per day November 2011, and up 12 percent versus the A.D.V. of 116,375 contracts in October 2012.

To learn more about VIX and related indexes and trading instruments, please visit www.cboe.com/VIX

The Disciplined Investor Podcast: Understanding VIX

In a recent podcast with Andrew Horowitz from The Disciplined Investor, I discussed what the VIX is, how it is structured and common misconceptions about the index.  Click here to listen to the full podcast.

Last Week’s VIX Action

Most of the week Dec VIX futures were at a discount to the spot VIX index. This was despite the November employment report being released on Friday. The market yawned at the report with the S&P 500 finishing up slightly on the week and VIX finished the week basically unchanged. The December contract spent most of the week at a discount to the index, but traded to a slight premium on Friday. January was slightly higher while the rest of the VIX futures contracts traded lower and the result was a flattening of the curve.

The December futures price action, basically in line with the index, is a clear indication that the market expects any volatility to occur after December expiration (December 19). On the other side of the coin, January futures are at a consistent premium to the index and of course December contract. From an academic and market watcher standpoint this is an interesting scenario to watch unfold.

The NASDAQ-100 and VXN activity was a completely different story last week based on price action in a single stock – Apple (AAPL – 533.25). The NDX lost about 1.4% last week and VXN traded up over 9% on the week. The interesting thing is that the futures curve experiences a fairly parallel move. This indicates that the feeling in the market place is that higher volatility for the NDX may be around for a while.


With VIX drifting around last week and December VIX futures at a discount to January contracts the long VIX ETPs were mostly lower on the week.  Something of note was the underperformance of VXZ which indicates lower anticipated volatility in the 1st quarter of next year.  Every VIX future contract from February out was lower last week and this is reflected in the VXZ losing over 2% on the week.  The majority of ETPs focus on the front two month contracts and it appears December futures are going to be complacent, while the January contract is the one that gathers all in the attention for the rest of the year.  This thought depends on the fiscal cliff talks dragging out until after December expiration and being resolved (one way or another) before January expiration.


The hedged and low volatility funds did well as US stocks were slightly higher despite the weight of AAPL.  Emerging markets our performed US stocks (AAPL is not in that index…) and that can be seen with the EEMV being the best performing of the actively traded VIX related exchange traded products.

There was something new in the exchange traded product area this week.  On Thursday the PowerShares S&P 500 Downside Hedged Portfolio (PHDG – 25.16) began trading.  The press release describing the strategy behind PHDG involves exposure to the S&P 500, VIX futures and cash depending on market volatility.  This ETF joins the VIXH, which uses VIX call options dynamically combined with investment in the S&P 500 to achieve hedged performance as a convenient method to have equity market exposure hedged with volatility exposure.

The word of the week in the VIX Options pit was ‘quiet’.  Whenever I hear that the old saying, “it is quiet…too quiet” pops in my mind.  VIX was fairly range bound, VVIX is low, and December VIX futures were trading at a discount to the VIX index most of the week.  An article I came across mid-week did note that the majority of VIX option trading is in opening new out of the money call positions.   The article highlighted huge open interest in the VIX Jan 25 Calls (almost 400,000 contracts) as an option that appears to have a lot of demand as a speculation on or hedge against the stock market dropping if we go over the fiscal cliff.

  • Categories

  • Recent Comments

  • Tags

  • Subscribe to
    VIX Views
  • Contributors


  • Quick Links

  • Blogroll

  • Follow Us

  • Archives