Record Volume Month for VIX Futures

Nov. 1st – The CBOE Futures Exchange, LLC (CFE®) announced today that trading in futures on the CBOE Volatility Index® (VIX®) reached an all-time volume high for any month in its history.

During October, a record 2,443,878 VIX futures contracts changed hands, beating the September record of 2,400,552 contracts. VIX futures average daily volume (ADV) in October was 116,375 contracts, 172 percent over October 2011 and two percent over September 2012.

The three charts below all cover the same time periods beginning in January 2008. VIX futures average daily volume is up 87% in 2012 y-t-d over 2011.

It is interesting to compare the volume charts above to the price chart below.  Does VIX futures volume pick up in times of high volatility of volatility, or when VIX is at relatively low levels when investors believe they can buy some relatively cheap “insurance” against a big drop in stock prices?

www.cboe.com/VIX

Trading VIX – Trade-off between Liquidity, Beta Exposure and Roll Cost

Besides commodities, volatility is another example of the application of futures-based indices. Spot volatility, as measured by the VIX, is not tradeable as the index represents the weighted average of implied volatilities of various options on the S&P 500. Prior to the introduction of VIX futures on the Chicago Board Options Exchange in 2004, equity volatility was only traded by sophisticated counterparties by way of over-the-counter instruments, such as variance swaps. Since then, VIX futures and options have gradually gained acceptance but trading was confined principally to sophisticated players in the derivatives market. More recently, the ongoing economic downturn and the introduction of S&P VIX Futures indices in 2009 have made volatility a popular alternative asset class with many products offered in this space (Dash and Liu, 2010). Interestingly, the development of ETNs and ETFs linked to these indices has also significantly enhanced the liquidity of the underlying VIX futures.

It is well-known that implied volatility exhibits a strong, negative correlation with equity markets and often spikes up during market turmoil. To that end, volatility indices serve to provide directional exposure to spot VIX, either as a trading vehicle or as a hedging instrument to attenuate tail risk events. From this, it follows that the sensitivity to the spot VIX, namely the beta, has to be a critical factor in the design of volatility indices.  In addition, as in commodity indices, the liquidity of the underlying futures contracts as well as the costs associated with the rolling of the futures are also important considerations.

As can be observed in the figure below, the liquidity of VIX futures, as measured by average daily trading volume, is concentrated in the one-month and two-month contracts, and drops quickly thereafter. Moreover, the volatility beta of the VIX futures indices and the roll costs fall as maturities lengthen. These characteristics indicate that there are trade-offs between liquidity, beta exposure to spot VIX and roll costs.

This is an excerpt of an article published in the September/October issue of the Journal of Indexes Europe by Xiaowei Kang, Director, Index Research & Design at S&P Dow Jones Indices and Daniel Ung, Associate Director, Index Research & Design at S&P Dow Jones Indices.  The full article can be accessed at www.indexuniverse.eu/joi.

 

25 Years Ago, the VXO Index Topped 150

Twenty-five years ago, on October 19, 1987, the S&P 500 Index (SPX) fell by 20.5%, and the CBOE S&P 100 Volatility Index (VXO) rose by 313% to close at an all-time daily closing high of 150.19.

Below are key values for seven trading days in October 1987 —

VXO INDEX – 25 YEARS AGO – DAILY CLOSING VALUES www.cboe.com/VXO

 15-Oct-1987                27.86

16-Oct-1987                36.37

19-Oct-1987               150.19

20-Oct-1987               140.00

21-Oct-1987                73.91

22-Oct-1987               102.22

23-Oct-1987                98.81

 

 S&P 500 INDEX – 25 YEARS AGO – DAILY PRICE CHANGES

 15-Oct-87                        -2.3%

16-Oct-87                        -5.2%

19-Oct-87                        -20.5%

20-Oct-87                        5.3%

21-Oct-87                        9.1%

22-Oct-87                        -3.9%

23-Oct-87                        0.0%

 

 COMPARING THE VIX AND VXO INDEXES

Here are some key features of the VIX and VXO Indexes –

  •  START DATE. The CBOE S&P 100 Volatility Index was introduced in 1993 and has a price data history going back to January 1986; it originally had the ticker symbol VIX, but in 2003 its ticker symbol was changed to VXO.  The CBOE Volatility Index® (VIX®) was introduced in 2003 and has a price data history going back to January 1990.

 

  • UNDERLYING OPTIONS.  The CBOE Volatility Index (VIX) is a widely followed measure of market expectations of near-term volatility conveyed by S&P 500 (SPX) stock index option prices, while the VXO Index is measure of market expectations of near-term volatility conveyed by S&P 100 (OEX) index option prices.

 

  • DAILY PRICE LEVELS OF VIX AND VXO INDEXES.  In the period from Jan. 1990 through Sept. 2012 –
    • The average daily closing value was 20.49 for the VIX Index and 21.04 for the VXO Index;
    • The highest daily closing levels were 80.86 for the VIX Index and 87.24 for the VXO Index;
    • The lowest daily closing values were 9.31 for the VIX Index and 9.04 for the VXO Index.

25-YEAR CHANGES

Here are the % changes for four indexes in the 25-year time period from Oct. 19, 1987 through Oct. 19, 2012 —

  • 1583%                     CBOE S&P 500 PutWrite Index (PUT)
  • 1097%                     CBOE S&P 500 BuyWrite Index (BXM)
  •  345%                       CBOE S&P 500 95-110 Collar Index (CLL)
  • -89.4%                     CBOE S&P 100 Volatility Index (VXO)

ALL-TIME DAILY TRADING VOLUME RECORDS FOR VIX FUTURES AND OPTIONS

Investor interest in volatility indexes and related tradable products has grown in recent years.  Last month all-time single-day trading volume records were set for both —

  • VIX futures on September 13, as 190,081 contracts traded; and
  • VIX options on September 11, as a reported 1,221,403 contracts changed hands.

VIX FUTURES VOLUME IS UP 80%

Average daily volume for VIX futures in the first three quarters of 2012 was 86,022 (up 80% over the average daily volume in 2011).

QUESTION ABOUT POSSIBILITY OF A FUTURE BLACK SWAN EVENT

In the future, could we experience a day in which the VIX rose more than 300 percent to triple-digit territory?  I have asked this question to some financial experts, and some experts note that (unlike in 1987) we now have official circuit breakers to slow down intraday moves. On Dec. 21, 2007, the VIX closed at 18.47, and many “experts” probably would have said that the chances of VIX rising to record-breaking levels above 70 or 80 within the following year (with circuit-breakers) were extremely unlikely.  However, on Oct. 24, 2008, the VIX did hit an intraday high of 89.53.

Here are some quotes from a book by Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable —

“If you hear a ‘prominent’ economist using the word ‘equilibrium,’ or ‘normal distribution,’ do not argue with him; just ignore him, or try to put a rat down his shirt. … The inability to predict outliers implies the inability to predict the course of history …  ”

 LINKS TO MORE INFORMATION

More info (including spreadsheets and bibliogpaphy) is available at –

www.cboe.com/volatility

www.cboe.com/benchmarks

www.cboe.com/VIX

 

CNBC ꞌWorldwide Exchangeꞌ Interview with David Blitzer on the 25th Anniversary of Black Monday

David Blitzer, Managing Director and Chairman of the S&P Index Committee, discusses Black Monday with CNBC.  Watch the video clip

VXAPL Index Up 97%, as Apple Puts Become More Expensive

October 5, 2012 – The CBOE Equity VIX® on Apple (VXAPL) has risen from an intraday low of 18.81 on August 13, 2012, to a closing value of 37.03 today, a rise of 97%.

An October 4th Bloomberg news article by Cecile Vannucci and Nikolaj Gammeltoft notes that —

“Apple Puts Jump to 10-Month High After IPhone Map Flaws.   Bearish Apple Inc. options are the most expensive in 10 months relative to bullish ones after the world’s biggest company sold fewer iPhones than forecast and apologized for faulty maps software.  Puts that pay should the iPad and MacBook Pro maker lose 10 percent cost 7.9 points more than calls betting on a 10 percent gain, according to one-month options data compiled by Bloomberg. The price relationship known as skew reached 8.04 on Oct. 2, the highest since November. The stock lost 4.1 percent since the iPhone 5 debut on Sept. 21. … “More and more people are hedging,” Oliver Pursche, co- manager of the GMG Defensive Beta Fund and president of Suffern, New York-based Gary Goldberg Financial Services, said yesterday in a phone interview.  …”

 CHART ON VXAPL and VIX

Here is a chart showing the daily closing values of the VXAPL Index and the CBOE Volatility Index® (VIX®). The indexes have diverged in the past month, and today’s closing values were 37.03 for VXAPL and 14.33 for the VIX, hwoch is designed to show the implied volatility for the S&P 500 Index (SPX).

VOLATILITY INDEXES

For information on more than 20 CBOE volatility indexes (with strategies, charts, and a bibliography), please visit www.cboe.com/volatility

Recap of Oct. 2nd Panel on Managing Risk and Yield

On October 2nd 85 financial professionals attended a panel discussion at CBOE on “Managing Risk and Yield in a Low Interest-rate Environment: Options-based and Low Volatility Strategies.”

The three panelists were —

  •  (1) Mr. Scott Maidel, CFA, CAIA, FRM, senior portfolio manager in the equity derivatives group for Russell Investments and co-portfolio manager of the new Russell Strategic Call Overwriting fund. Russell Investments has more than $150 billion in assets under management and is headquartered in Seattle, WA.
  • (2) Mr. John Gambla, CFA, FRM, PRM, a Senior Portfolio Manager for the Alternatives and Active Equity Investment Team at First Trust Advisors L.P. John is a portfolio manager for the new First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH). First Trust Advisors, L.P. is headquartered in Wheaton, IL and has approximately $56 billion assets under management or supervision as of July 31, 2012.
  • (3) Mr. Edward McRedmond, Senior VP – Institutional & Portfolio Strategies, Invesco PowerShares, a firm headquartered in Wheaton, IL with franchise assets of over $65 billion that offers more than 140 ETFs, including the PowerShares S&P 500 BuyWrite Portfolio (PBP) and PowerShares S&P 500 Low Volatility Portfolio (SPLV).

The panelists considered a variety of topics on risk management, low volatility, and options-based strategies.  A panelist noted his expectation that options-based will continue to experience great growth over the next decade.  Two of the many charts presented are shown below.

VXTH AND BXY INDEXES

As shown on the chart below, in the time period from March 31, 2006 through Sept. 28, 2012, the top performers of the indexes shown in terms of returns were the VXTH Index (up 51%) and the BXY Index (up 43%).

PAPER BY RUSSELL INVESTMENTS

The paper by Russell Investments – “Capturing the Volatility Premium through Call Overwriting.” (July 2012) http://bit.ly/Russell-Buy-Write has several good charts on use of 1-month and 1-week options. Exhibit 1 of the paper showed risk and return for the BXM and BXY indexes. The paper notes that “Covered call writing has historically benefitted wealth creation and lowered overall wealth creation …”

PICTURE OF EVENT

In the picture below are (clockwise from top left) – John Gambla, Barry Feldman, Adam Cohen, Scott Maidel, Ed McRedmond, and Matt Moran.

MORE INFORMATION

For more information on indexes and research papers, please visit www.cboe.com/benchmarks

VIX Presentations in NYC (Oct. 18) and Boston (Oct. 25)

As shown in the charts below, both VIX® futures and VIX options are experiencing all-time record high average daily volumes this year.   While interest in VIX is high, many investors remark that they would like to learn more about VIX and volatility.  Presentations on Accessing VIX and Volatility will be delivered in New York and Boston later this month; if you would like to see more details and register to attend, please click on the links below.

+++++++++++++++++++++++++++++

NEW YORK CITY, THURSDAY, OCT. 18th, 6:00 p.m.

Accessing VIX and Volatility: Dynamics Features and Portfolio Applications

  • Joanne M. Hill, PhD, Head of Investment Strategy at ProShares Advisors
  • Matthew T. Moran, VP, Business Development, CBOE

At NYSSA, 1540 Broadway, (entrance on 45th Street), Suite 1010, New York, 10036

http://bit.ly/VIX-NYSSA

+++++++++++++++++++++++++++++

BOSTON, THURSDAY, OCT. 25th, 12:15 p.m.

Accessing VIX and Volatility: Dynamics, Features and Portfolio Applications

  • Joanne M. Hill, PhD, Head of Investment Strategy at ProShares Advisors
  • Matthew T. Moran, VP, Business Development, CBOE

At: Hyatt Regency Boston, One Avenue de Lafayette, Boston, MA  02111

http://bit.ly/VIXBSAS

+++++++++++++++++++++++++++

 

ALL-TIME DAILY TRADING VOLUME RECORDS FOR VIX FUTURES AND OPTIONS

In the past month all-time single-day trading volume records were set for both —

  • VIX futures on September 13, as 190,081 contracts traded; and
  • VIX options on September 11, as a reported 1,221,403 contracts changed hands.

VIX FUTURES VOLUME IS UP 80%

Average daily volume for VIX futures in the first three quarters of 2012 was 86,022 (up 80% over the average daily volume in 2011).

VIX OPTIONS VOLUME IS UP 10%

Average daily volume for VIX options in the first three quarters of 2012 was 428,050 (up 10% over the average daily volume in 2011).  More VIX information is at www.cboe.com/VIX

 

 

 

OVX/VIX Ratio Rises Above 2.2

Sept. 27 – Investors can gain valuable insights into the relative costs of various options positions by comparing the values of key volatility indexes.  On Thursday the closing values for three volatility indexes were —

33.05             OVX – CBOE Crude Oil Volatility Index

17.07             VXV – CBOE S&P 500 3-Month Volatility Index

14.84             VIX® – CBOE Volatility Index®

NEWS STORY

In a September 27th story, Bloomberg reporters Nikolaj Gammeltoft and Cecile Vannucci wrote —

“Oil Puts at 16-Month High Versus S&P 500 on Slowdown.  Costs to protect against losses in oil jumped to a 16-month high compared with U.S. stocks, a sign the slowing economic recovery may be a greater risk to energy demand than to share prices.   The Chicago Board Options Exchange Crude Oil Volatility Index, tracking 30-day options on the United States Oil Fund LP, climbed 2.3 percent to 35.13 yesterday and reached a two-month high of 36.58 on Sept. 19. The ratio between the oil gauge and the CBOE Volatility Index for equities rose to its highest since May 2011 on Sept. 19.  Traders are paying a premium to protect against losses in oil futures, which have tumbled more than 9 percent since Sept. 14 compared with a 2.2 percent retreat in the Standard & Poor’s 500 Index. … The oil volatility index has climbed 44 percent since its record low on April 27. In the same period, the volatility gauge for U.S. stock options, known as the VIX, gained 3 percent. …  “

COMPARING 3 INDEXES — OVX, VXV and VIX

Here are the daily closing OVX/VIX ratios on 3 select dates —

8-Aug-2011         1.17

19-Sep-2012               2.64

27-Sep-2012               2.23

The chart below shows 14 months of price movements for three indexes – OVX, VXV and VIX.  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® (SPX) Index options. The VXV Index has tended to be less volatile than the CBOE Volatility Index® (VIX®), which measures one-month implied volatility. Using the VXV and VIX indexes together provides useful insight into the term structure of S&P 500 (SPX) option implied volatility. The ratio of the VXV to the VIX Index reached 1.41 on March 16, 2012, but in the past week the VXV/VIX ratio was around 1.1.

DAILY TRADING VOLUME RECORDS FOR VIX FUTURES AND OPTIONS THIS MONTH

This month all-time single-day trading volume records were set for both —

  • VIX futures on September 13, as 190,081 contracts traded; and
  • VIX options on September 11, as a reported 1,221,403 contracts changed hands.

The price chart above can be compared to the volume chart below as they both cover a 14-month time period.

Total volume for OVX futures is more than 8,600 contacts.

LINKS TO MORE INFORMATION

VXTH Index and Panel on Oct. 2nd

Three financial experts will discuss the topic ‘Options for Managing Risk and Yield in a Low Interest-rate Environment’ at a panel discussion to be held from 5:00 p.m. to 6:30 p.m. on Tuesday, October 2nd on the fourth floor of the Chicago Board Options Exchange (CBOE), 400 South LaSalle Street, Chicago.

The three panelists will be:

(1) Mr. John Gambla, CFA, FRM, PRM, a Senior Portfolio Manager for the Alternatives and Active Equity Investment Team at First Trust Advisors L.P.  John is a portfolio manager for the new First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH). First Trust Advisors, L.P. is headquartered in Wheaton, IL and has approximately $56 billion assets under management or supervision as of July 31, 2012.

(2) Mr. Scott Maidel, CFA, CAIA, FRM, senior portfolio manager in the equity derivatives group for Russell Investments and co-portfolio manager of the new Russell Strategic Call Overwriting Fund. Russell Investments has more than $150 billion in assets under management and is headquartered in Seattle, WA.

(3) Mr. Edward McRedmond, Senior VP – Institutional & Portfolio Strategies, Invesco PowerShares, a firm headquartered in Wheaton, IL with franchise assets of over $65 billion that offers more than 140 ETFs, including the PowerShares S&P 500 BuyWrite Portfolio (PBP) and PowerShares S&P 500 Low Volatility Portfolio (SPLV).

Admission is $10 in advance (or $15 at the door) with snacks and drinks provided.

Please RSVP via

http://www.acteva.com/go/ChicagoQWAFAFEW

by Friday, September 28th, 2012.

 

A press release with more information is at —

http://www.prweb.com/releases/2012/9/prweb9859956.htm

The meeting is jointly sponsored by Chicago QWAFAFEW and Chicago PRMIA.

Mr. Gambla will provide an analysis of the CBOE VIX Tail Hedge Index (VXTH) www.cboe.com/VXTH

Below is a chart from a paper by Asset Consulting Group entitled “Key Tools for Hedging and Tail Risk Management” (February 2012)  http://bit.ly/TailRskACG

The chart shows the changes for three indexes — the VXTH Index, S&P 500 Index, and CBOE S&P 500 95-110 Collar Index (CLL). 

 

For more information on indexes and studies, please visit www.cboe.com/benchmarks

This Week in VIX and VXN Trading

Both the S&P 500 and Nasdaq-100 Indexes were higher last week. Neither VIX nor VXN followed the typical inverse relationship with the underlying indexes and actually finished the week higher as well.

On the open Friday, the S&P 500 was higher and VIX was under pressure trading around 13.50. I saw several twitter comments predicting a 12 handle for VIX before the end of the day. However, it appears even though the S&P 500 continued to finish positive on the day on the day that demand for SPX options picked up pushing VIX to higher levels as well. VIX finished the week at 14.51, up for the day and up just under 1% on the week. VXN held up better than VIX during the week, but did lose value on Friday. Although the implied volatility of NDX options dropped on Friday, VXN was up more than VIX on the week.

A similarity between VIX and VXN trading last week was the shift in each curve. Both spot indexes were higher along with the front month September futures contracts. However, beyond September, both VIX and VXN futures were all lower on the week. The result is a unique curve shift for both markets.

Finally, congratulations were in order for the VIX Futures pit as the CBOE Futures Exchange had record VIX futures volume last Thursday.

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