Tail Risk Protection to be Discussed at 3-Day Conference in Ireland

Tail risk protection will be one of the many topics to be discussed at CBOE’s inaugural Risk Management Conference (RMC) in Europe. Now in its 28th year in the U.S., the first RMC Europe will be held on 5 – 7 September 2012 at The Ritz-Carlton Powerscourt, County Wicklow, Ireland.

The conference agenda and registration information are at www.cboermc.com/Europe Keynote speakers at the conference will be Dr. David M. Blitzer, Managing Director and Director of the Index Committee, Standard & Poor’s, and William J. Brodsky, CBOE Chairman and CEO.

The panel on Tail Risk Protection will discuss:

  • Why and how investors might hedge downside risk
  • The case for hedging as an offensive strategy in today’s market
  • Determining acceptable levels of protection and costs
  • Strategy alternatives for implementing hedges

Moderator: Ryan McRandall, Portfolio Manager, AXA Investment Managers


  • Alex Capez, Portfolio Manager, Occitan Capital Partners
  • Fabio Castaldi, Head of Absolute Return, Amundi Asset Management
  • Sandy Rattray, Head of Man Systematic Strategies, Man Group
  • Chris Rodarte, Portfolio Manager, Pine River Capital Management


The two charts below show months in which the S&P 500 Index dropped by 16.8% (October 2008) and 6.0% (May 2012).  The spot gold price and the S&P GSCI commodity index also experienced steep declines during these two months, and some investors have lamented the fact that, as the stock indexes fall, many other indexes tend to go down, and correlations among indexes tend to rise.  However, three of the VIX-based indexes in the charts below actually rose in both months.  Investors might re-think traditional diversification strategies after seeing these charts.

CAUTION: Please read the applicable prospectus and examine at the multi-year performance of these indexes before investing in any investment product related to these indexes. For example, while the S&P 500 VIX Short-term Futures Index might be useful when considering a short-term hedge against catastrophic risk, the index is not viewed as a good long-term holding because of longer-term roll costs involved with contango issues.

Exhibit J of the paper by Asset Consulting Group – “Key Tools for Hedging and Tail Risk Management” (February 2012, available at www.cboe.com/benchmarks) shows the performance of four indexes

  • S&P 500 VIX Mid-term Futures Index (VXMT)
  • S&P 500 Dynamic VIX Futures Index (DyVX)
  • S&P 500 VIX Futures Tail Risk Index – Short Term (VTRsk)
  • S&P 500 Index


To learn more about tail risk protection, please consider:


Please note that indexes are not directly investable.  Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options, http://www.cboe.com/Resources/Intro.asp  which is available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. The information in the charts above is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Past performance is not a guarantee of future returns.



The VIX Term Structure and Launch of SPX Extended Weekly

Investors often are interested in risk management and volatility expectations over different time periods.   Below is an overview of the VIX term structure, and an update on the launch of SPX Extended Weekly options.


The VIX® term structure illustrates, by maturity, expectations of market volatility conveyed by S&P 500 (SPX) stock index option prices.  CBOE calculates these expectations by applying the VIX methodology to standard SPX option maturities.  The items below represent the VIX term structure as of the date and time indicated.  www.cboe.com/VIX



On May 31st CBOE began an extension of the listings of S&P 500® SPX Weekly (SPXW) options, and CBOE Holdings now maintains five consecutive expiration weeks available for trading options on the S&P 500. www.cboe.com/SPXW

In the first five trading days of June, the total volume for SPX Weekly options was 876,945, and average daily volume of SPXW options was 175,389.



Here is a list of SPX options expiration dates over the next five weeks

Expiration        Options Contract                          URL

8-Jun-2012         SPX Weeklys                    www.cboe.com/SPXW

16-Jun-2012       SPXpm options                 www.cboe.com/SPXpm

16-Jun-2012       SPX options (a.m.-settled)  www.cboe.com/SPX

22-Jun-2012       SPX Weeklys                    www.cboe.com/SPXW

29-Jun-2012       SPX Quarterly Options       www.cboe.com/SPXQ

6-Jul-2012          SPX Weeklys                   www.cboe.com/SPXW

13-Jul-2012        SPX Weeklys                   www.cboe.com/SPXW

Please visit www.cboe.com/SPX for information about more SPX expiration dates in future months and years.


SPX Weeklys are traded on CBOE and quotes can be found in SPX options chains under root symbol SPXW. SPX Weeklys are PM-settled on the last trading day, typically a Friday.

Key features of SPX Weeklys options —

> LARGE CONTRACT SIZE WITH A $100 MULTIPLIER (ten times larger than SPY options);




Performance of Selected Tradable Volatility Indices: May 2012

May 2012 was a restless month in the US equity market. The S&P 500 Index declined 6% and VIX rose 40% from 17.15 (4/30/2012) to 24.06 (5/31/2012).

The S&P 500 VIX Short Term Futures Index and the S&P 500 VIX Mid Term Futures Index rose 28.71% and 13.13%, respectively. The S&P 500 Dynamic VIX Futures Index, which offers positive volatility exposure at reduced holding cost, responded positively, but at a muted 2.34%. The S&P 500 VIX Futures Term Structure Index lost 1.50%. Compared with the YTD returns, last month’s performance statistics proves that: 1) the two basic VIX futures indices are more sensitive to market movements; 2) the S&P 500 Dynamic VIX Futures Index provides a less expensive hedge to the equity market.

The S&P 500 Dynamic VEQTOR Index, which simulates the return of an equity portfolio with a built-in volatility hedge, saw a 2.20% decline in May. Its volatility is low at 4.79%, compared to the 12.52% volatility in the 500.

Click the image to see it in full size.

Exhibit: Performance Summary (5/31/2012)

S&P Indices General Disclaimer

Several Volatility Indexes Rose More Than 35% Last Month

Several volatility indexes (including VXGOG, VIX, OVX, VXN, VXEEM, and GVZ) rose more than 35% last month www.cboe.com/volatility

The S&P 500 Index (TR) declined by 6% in May. The BXM and PUT Indexes took in premium that helped cushion their downside moves in May. www.cboe.com/benchmarks

* Please note that indexes are not directly investable. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options, http://www.cboe.com/Resources/Intro.asp which is available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. The information in these slides is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Past performance is not a guarantee of future returns.

Article from IndexUniverse: Volatility Indices Redux

Interesting article on VIX from IndexUniverse:  Volatility Indices Redux

VIX-related Instruments to be Discussed at Three Events in New York

Next week VIX-related benchmark indexes and investable instruments will be discussed at three events in New York:

Tuesday, April 24th – NY QWAFAFEW event begins at 5:30 p.m. at 40 E. 43rd St.

Wednesday, April 25th – Capital Link Forum begins at 7:30 a.m. at 1 E. 60th St.

Thursday, April 26th – ETF Global Awards Dinner & Workshop begins at 1:30 p.m. at Grand Hyatt

Certain financial professionals may attend these events run by third parties.  Please click on the website links above to learn more about registration and payment.



Yesterday’s closing values were 21.33 for VIX May 2012 futures and 19.55 for the VIX spot index.  www.cboe.com/VIX



The Asset Consulting Group recently published a new 4-page study — “Key Tools for Hedging and Tail Risk Management

Exhibit O of the paper found that the addition of a 5% or 10% allocation to any of these three indexes over a certain time period

  • S&P 500 VIX Mid-term Futures Index (VXMT)
  • S&P 500 Dynamic VIX Futures Index (DyVX)
  • S&P 500 VIX Futures Tail Risk Index – Short Term (VTRsk)

— could have lowered the volatility and increased the returns for a portfolio of S&P 500 stocks.


Please read the risk disclosure below for more information.  More papers are available at www.cboe.com/benchmarks


Asset Consulting Group is an investment consulting firm which provides a full scope of investment advisory services to a select group of clients. The Chicago Board Options Exchange® (CBOE®) provided financial support for this paper. The CBOE S&P 500 indices are designed to represent proposed hypothetical strategies. The actual performance of investment vehicles such as mutual funds can have significant differences from the performance of the hypothetical indices. Like many passive indices, the indices do not take into account significant factors such as transaction costs and taxes. Investors attempting to replicate the indices should discuss with their advisors possible timing and liquidity issues. Past performance does not guarantee future results. Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC and are licensed for use by the CBOE. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and the CBOE indices are servicemarks of the CBOE. CBOE calculates and disseminates the indices. The methodology of the indices are owned by CBOE and may be covered by one or more patents or pending patent applications. The information contained in this report is based on information obtained by ACG from sources that are believed to be reliable. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The views expressed are those of Asset Consulting Group.

They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.



Reaping Roll Yield from a Quasi Volatility Neutral Strategy

On February 8th, I discussed the use of the inverse VIX ETP (XIV) to collect the roll yield from the VIX futures. When stocks fall and volatility rises, however, such a naked short position drops drastically. From 4/2 to 4/10, XIV dropped from 12.29 to 9.94, and lost 19% of its value (it’s now back to 10.37).

S&P 500 VIX Futures Term Structure Index (“Term Structure Index”) models a quasi-volatility neutral strategy that collects roll yield by exploring the difference in betas (to the VIX spot) along the VIX futures curve.

The Term Structure Index is a composite index that measures the return from taking a long 100% position in the S&P 500 VIX Mid-Term Futures Index Excess Return (“Mid Term Index”) with a short, or inverse, 50% position in the S&P 500 VIX Short-Term Futures Index Excess Return (“Short Term Index”), with daily rebalancing of the long and short positions. UBS E-TRACS Daily Long Short VIX ETN (Ticker: XVIX) tracks this index. XVIX returned 9.4% in Q1 2012.

Why does this strategy work? The strategy works based on two observations along the VIX futures curve:

1 – Since 12/20/2005, the Short Term and Mid Term indices have a beta of 47% and 23% to the spot VIX, respectively. So the beta of the Term Structure Index is close to zero.

2 – On average, the daily roll cost of the Short Term Index is around 0.18% while the daily roll cost of the Mid Term Index is 0.07%. So the Term Structure Index collects 0.02% roll yield every day on average.

Does this strategy work all the time? No. When the VIX futures curve is in backwardation, as what we saw in Q3 2011, the Term Structure Index tends to lose money.

For the majority of its history, however, the Term Structure Index shows a steady stream of positive returns at reasonable volatility. In Q1 2012, when the VIX futures curve was in deep contango, the index returned 6.16%. Unlike XIV, it dropped only 0.8% from 4/2 to 4/10. Most importantly, unlike most VIX products in the market (e.g. the Short Term Index, Mid Term Index and the S&P 500 Dynamic VIX Futures Index), it has a low correlation to both S&P 500 and the VIX spot.

Exhibit 1: Total Return History (click the image below to see it in full size)

Exhibit 2: Performance Statistics

S&P Indices General Disclaimer

Options on OVX Index Launch Tuesday, April 10th – Risk Management and Implied Volatility for Options on Oil Fund

On Tuesday April 10th CBOE is launching trading of options on the CBOE Crude Oil ETF Volatility Index (ticker – OVX), a key measure of the market’s expectation of 30-day volatility of crude oil prices that applies the VIX® methodology to United States Oil Fund (USO) options spanning a wide range of strike prices. www.cboe.com/ovx


The OVX spot index rose by more than 30% on three trading days – May 5, 2011, August 8, 2011, and August 18, 2011.

The table below presents the monthly percentage moves for the S&P GSCI Index, crude oil, and OVX spot index in 2008.  Note that in October 2008 crude oil spot was down 32.6% and the OVX spot index rose 35.3%.  Investors could explore the possibility as to whether the OVX options could be used for diversification and risk management purposes.

Please note that indexes are not directly investable.


The historical date on the OVX Index go back to May 2007.  The peak daily close for OVX was 100.42 in 2008.  www.cboe.com/ovx



Since May 10, 2007, the average daily closing values have been 41.6 for the OVX Index and 26.2 for the well-known CBOE Volatility Index® (VIX®).  www.cboe.com/ovx


Please visit www.cboe.com/ovx for more information and charts.


Video: CBOE Volatility Index – Fact & Fiction Part 4

Watch Part 4 of CBOE’s Fact & Fiction five part educational series, where Doug Prskalo of Blue Capital Group discusses the direction the S&P 500 and  VIX move in and how traders use the VIX.

Webcast – Volatility: Strategies for Diversification and Risk Management

Title: Volatility: Strategies for Diversification and Risk Management
Date: March 27, 2012
Time: 2:00 PM EST

1 CFP CE Credit

Register Here

What is volatility? How is it measured? What strategies can advisors use to manage risk and control swings in portfolios? Learn the answer to these questions and more as Tom Lydon, Editor of ETF Trends; Ed Egilinsky, Managing Director, Head of Alternative at Direxion; and Frank Luo, Vice President, Global Head of Index Research & Design at S&P Indices examine volatility and its impact on investment strategies including:

  • Why volatility matters in portfolio management
  • How to potentially manage volatility in client portfolios
  • Ways to decrease volatility exposure through ETFs

One hour of CFP Board CE Credit is approved for live Webcast attendees. For questions, call 949.794.0070.


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