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

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.

* 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, 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.



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


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.


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.



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®).


Please visit 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.

New VVIX Index Measures the Volatility of Volatility

Bonita Springs, Fla., March 14, 2012 – Today CBOE introduced the new “VIX of VIX® Index (ticker: VVIX(SM)).

The new VIX of VIX Index tracks the expected volatility of the CBOE Volatility Index® (the VIX® Index), the world’s most widely-followed market volatility index.

VVIX reflects the market’s consensus of expected volatility of the 30-day forward price of the VIX Index.  The VVIX Index offers investors a way to gauge the risk premium in VIX Index option prices, much like the CBOE’s VIX Index reflects the risk premium in S&P 500® Index options (SPX) prices.

The VVIX White Paper at made the following points:

  • The range of values of the VVIX is at a significantly higher level than that of the VIX.    The VVIX has ranged between 60 and 146, with an average of 86. The VIX ranges between 10 and 81 around an average of 24. The range of variation of the VVIX tends to widen at higher values of the VIX.
  • Except at high values of VIX, there is little correlation between variations of the VIX® and VVIX. The VVIX and VIX® both reached local peaks in October 2008, during the credit crisis of 2008 and in May 2010, the “flash crash” month. In general however, the relationship between their variations is weaker than the relationship between the VIX and the S&P 500.
  • Since the flash crash of May 2010, the VVIX has rarely dropped below 80.  This suggests that a new volatility regime came about after the flash crash. Market participants appear to have become more tentative about the future value of the VIX®.
  • The VVIX tends to revert to its historical mean.


Note that in 2011 the historic volatility was 139.9% for the VIX (spot) index, and 97.0% for the VIX near-term futures.  VIX options investors often look at the VIX futures prices (not VIX spot) to gain a better idea of the fair value of VIX options.  Please visit the FAQs at the VIX microsite at for more information.


Using the end-of week values of from Bloomberg for the 22-year period from Feb. 9, 1990 through Feb. 3, 2012, here are some key statistical measures for the 30-trading-day-historic volatility of spot VIX —

Maximum       245.0

Minimum       34.4

Average         93.1

Median           86.2


VVIX is calculated using the same methodology as the VIX Index.  VVIX is derived from the price of a portfolio of out-of-the-money VIX option puts and calls.

The average daily volume for VIX options rose from 93,181 in 2007 to 388,845 in 2011.

For more information on the new VVIX Index, please visit

VIX of VIX – an Update on Volatility of Volatility

Just as an update on my February 24th post on the Volatility of Volatility, the CBOE has announced the launch of an index that tracks the volatility of VIX itself, the VVIX.  The VVIX is calculated using the the same methodology as the VIX index, using VIX Options to calculate the volatility of VIX.

While my recent post on the “Volatility of Volatility” addressed the realized volatility of VIX, VVIX represents the expected volatility of the 30-day forward price of VIX.  This forward price is the price of a hypothetical VIX® futures contract that expires in 30 days.

As calculated by CBOE, the VVIX ranges between 60 and 145 with an average of around 86, while the VIX Spot values range from 10 to 81 with an average of 24.  Refer to the chart below.

This points to the relevance of looking  at the volatility of volatility and CBOE’S new index provides users with another way to easily access this information.  For additional information, please visit

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