Weekend Review – VIX Futures and Options – 5/23 – 5/27

With the strength in stocks last week VIX finished the week just 0.02 higher than the 2016 closing low of 13.10. Always remember that part of the equation on Fridays when looking at VIX performance relates to a weekend impact where the market is closed for two days. This is accentuated when we have a three day holiday weekend so don’t be surprised if VIX rebounds a little on Tuesday regardless of what the stock market is doing.

VIX Table Curve

About 20 minutes after the open on Wednesday last week someone came in and placed an order that has my attention. With VIX at 14.15 someone bought the VIX Jun 1st 16 Calls for 0.35 and then also sold VIX Jun 15th 18 Calls for 0.63 and a net credit of 0.28. Since we all know that the best underlying for a VIX option contract is the corresponding future I should note that the June 1st VIX future was at 15.10 and the June 15th contract was at 16.15. This may be a case of a trader taking advantage of the price difference between the June 1st and June 15th futures using options as a substitute.

Weekend Review – Russell 2000 Index and Volatility – 5/23 – 5/27

Small cap stocks continue to show some strength with the Russell 2000 (RUT) beating the Russell 1000 (RUI) for the second week in a row. Is this the beginning of a streak? RUT rose 3.43% last week while the large cap focused RUI gained 2.28%. For the year RUT is now up 1.28%, still lagging RUI which is up 2.63%.



The Weekly Options News Roundup – 5/27/2016

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast, online and social media outlets.

CBOE Expanding its Orbit with Eris

CBOE announced on Monday that it has made minority equity investment in Eris Exchange Holdings. Eris is a U.S.-based futures exchange group that offers swap futures as a capital-efficient alternative to over-the-counter swaps.  CBOE’s stake in Eris, much like its partnership in CurveGlobal, positions CBOE to tap into this space and help bring new capital efficiencies and exchange-traded products to the interest rate marketplace.

“CBOE Takes Stake in Rival Eris Exchange” – Philip Stafford, Financial Times


“Eris: New Money, New Opportunities with CBOE Partnership” – Doug Ashburn, John Lothian News


“CBOE Takes Stake in Eris Exchange Holdings” – Julie Aelbrecht, FOW


“Eris and CBOE Team up for Derivatives Solutions” – Helen Bartholomew, International Financing Review


“CBOE Makes Minority Investment in Eris Exchange, Announces Partnership” – Dan DeFrancesco, Waters Technology


“CBOE Takes Minority Stake in Eris, Aims at Product Develoment” – Daniel O’Leary, EQ Derivatives


“CBOE Takes Equity Stake in Eris Exchange, Announces Product Collaboration” – Renee Caruthers, Fierce Finance IT


“CBOE Holdings Takes Equity Stake in Eris Exchange Holdings” – Options Insider


“CBOE Purchases Stake in Eris Exchange” – Joe Parsons, The Trade


Data King

Last Wednesday, CBOE’s Tom Knorring, Vice President, Business Development, became the 31st inductee into the Inside Market Data Hall of Fame.  Throughout his nearly four-decade career at CBOE, Tom has played an instrumental role in the development, management and expansion of CBOE’s market data services.  We’d again like to say congratulations Tom.

“Hall of Fame: CBOE’s Tom Knorring, ‘The Mathematician’ – Melanie Wold, Waters Technology



VIX FIX – Janet Speaks


VIX History Lesson – The Fiscal Cliff of 2012

I got a question on Twitter today about the potential for a volatility short squeeze. I think the question was rooted in how much activity and open interest there is in volatility oriented derivatives, but the instance I recall that felt like the move was overdone occurred in late 2012.

As the end of 2012 approached it appeared that the President and Congress were at an impasse over extending the Bush Tax Cuts from 2001. The pending result was commonly referred to as the ‘fiscal cliff’. Financial markets were very concerned and the S&P 500 lost 3% between December 18 and December 28. Over that same time period VIX rose over 30% from 15.57 to 21.79. The chart below shows VIX and the front month January 2013 VIX Futures contract from December 3, 2012 through January 16, 2013 (expiration date).

VIX Squeeze

Note the area I have highlighted with the purple box above. That is when the fiscal cliff news dominated the markets and caused a spike in VIX. Usually the front month futures contract, especially where there a couple of weeks remaining to expiration, will not move in sync with a spike in VIX. This was not the case with the fiscal cliff and one of the theories is that this piece of news coincided with the year coming to an end.

Here’s the theory. Make sure to use Billy Ray Valentine’ voice as your narrator. There’s a couple of days left to the end of the year and you work for a hedge fund. One of your strategies that worked so well in 2012 was being short VIX futures playing the drift down the curve to spot VIX into expiration. You look up at your screen on December 28th, and you see VIX moving higher, you are short January futures and the futures aren’t acting like they are ‘suppose to’, that is lagging the move in spot VIX. Your year-end bonus and performance is quickly going downhill. Maybe you jump in and cover your VIX futures short and salvage what is left of your year.

Earnings Next Week – 5/31 – 6/3

It’s a short week, next week as we move into the summer months.  Despite that we still have a few companies set to report earnings next week.  As always the data below is based on the last three years of earnings results, unless the data is in italics.  In those cases less than three years worth of history is available.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.


Smart Volatility(TM): Dynamic Management of Volatility as an Asset Class

Editor’s note – David Skordal, Partner/Portfolio Manager, ABR Dynamic Funds, LLC, is the author of this blog

The dips in August 2015 and January 2016 have served as reminders that the U.S. equity markets are now in the eighth year of a bull run, and equity crises happen on a regular basis. In the last 30 years, there was Black Monday, the Savings & Loan Crisis, the Russian Financial Crisis, the Tech Bubble Collapse, the Credit Crisis, the Flash Crash, and the Greek Crisis, just to name a few. Based on the Shiller P/E Ratio and the real bond yield (nominal yield minus inflation), stocks and bonds are more expensive than they have been at least 90% of the time over the last century. As a result, the typical 60% stocks and 40% bonds portfolio appears poised to disappoint investors whenever the next crisis does strike (and perhaps in the interim). Savvy investors should be diversifying out of “60/40” and into other asset classes.

Shiller P/E Ratio:


Source: www.multpl.com/shiller-pe/

Nominal U.S. Treasury yields:


Source: www.multpl.com/10-year-treasury-rate/

There is one asset class, in particular, that is well-suited to complement equities in a crisis: volatility. Volatility assets can be very useful in a portfolio because they tend to spike precisely when equities tumble (“Smart VolatilityTM: Dynamic Management of Volatility as an Asset Class,” pages 1-3).  Unfortunately, over the long-term, they create a drag on a portfolio (“Smart VolatilityTM,” page 3).  The tendency to spike in an equity crisis and the long-term decay are the two main characteristics of volatility instruments.  Combined, they ensure that a static allocation to this asset class is problematic: a static long volatility allocation can cause an investor to “bleed out” from the decay, and a static short volatility allocation can cause an investor to “blow out” from the spike.

The solution may be Smart VolatilityTM.  Smart Volatility is the dynamic management of volatility as an asset class.  It rebalances into varying static volatility holdings depending on market conditions.  The rebalances are intended to capture the spikes and avoid the decay.  Therefore, Smart Volatility may unlock the significant potential of volatility assets in a crisis while mitigating their costs in the long-run.

However, “armchair” dynamic rebalancing is not prudent, even for an experienced investor who is willing to sit in front of stock monitors and pick spots for rebalances. Aside from the considerable time and effort that must be invested, the problem with this approach is that volatility assets do not behave according to most people’s intuition or training.  For example, “buy and hold,” “buy low and sell high,” and “buy the dips” are just a few of the missteps people make when they manage volatility like any other asset class (“Smart VolatilityTM,” pages 4-6).  Instead, because volatility behavior runs so contrary to intuition, it may be better to manage volatility assets systematically, without manual intervention, according to carefully tested quantitative principles of volatility behavior (“Smart VolatilityTM,” pages 7-8).

Some of the best Smart VolatilityTM indices include multiple holdings.  For example, a Smart Volatility index could primarily utilize equity holdings during a bull market, which experiences rallying stocks and decaying volatility assets.  It could then rotate into volatility holdings in a crisis, which experiences spiking volatility assets and tumbling equity assets.  In this manner, the use of multiple holdings may allow Smart Volatility indices to perform favorably in various market conditions.


Click here to download the full paper Smart VolatilityTM: Dynamic Management of Volatility as an Asset Class 

There are risks involved with investing including the possible loss of principal. Investing is subject to risk; investment return and principal value will fluctuate, and upon redemption, shares may be worth more or less than the amount originally invested. The Funds may be non-diversified, and fluctuations in individual holdings will have a greater impact on the Funds’ performance. The Funds may also invest in derivative instruments, and a small investment could have a large potential impact on the performance of the Funds. Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information please call (855) 422-4518 or download a prospectus online at www.volfunds.com.  Read the specific Funds’ prospectus carefully before you invest. Distributed by Foreside Fund Services, LLC. © 2016 ABR Dynamic Funds, LLC

BigTrends.com Weekly Market Outlook – Neutral With Downside Risk

The bulls and bears ended up in a stalemate last week. Both sides of the table looked as if they were going to take control at different points, but when all was said and done, neither side had the conviction need to rock the market out of its rut. The S&P 500’s (SPX) (SPY) close of 2052.32 was only 0.27% better than the week-earlier close, and still right in the middle of some major support and resistance. The BigTrends TrendScore (for stocks) is a slightly anemic 56.6 out of a possible 100.0 – a neutral rating currently. That’s 7.2 points better than the score from a week earlier, but still below the 60 threshold we need to surpass to say stocks are in a confirmed uptrend. In fact, broad market charts are closer to slipping into confirmed downtrends than uptrends.

We’ll dissect the upsides and downsides below, as always, after a quick review of last week’s and this week’s economic news.

Economic Data

Though none of it helped the market move much – higher or lower – we got a pretty big dose of economic news last week. In order of appearance (and limited to just the most important items)…

Inflation is perking up a little faster than economists were expecting it to. For April, overall consumer inflation grew 0.4%, and core (ex food and energy), inflation grew 0.2%. On an annualized basis, the overall inflation rate now stands at 1.13%. Granted, gasoline prices are still at the low end of their usual scale, but without gas and food, inflation now stands at an annual pace of 2.1%…. above the Fed’s target. Consumers are feeling the pain, and the Fed is apt to be more interested in nipping it in the bud earlier rather than trying to reel it in later.

Consumer Price Inflation Chart


Source: Thomson Reuters

It was also a big week for real estate news, and it was decidedly good. Housing starts and building permits both grew, and both outpaced expectations, for last month, and on Friday we learned existing home sales also rolled in higher and much better than expectations.

Housing Starts and Building Permits Chart


Source: Thomson Reuters

We got some much-needed improvement in capacity utilization and industrial productivity. One good month doesn’t undo several bad months in a row, but it does prevent this data from moving into panic levels. More

A Market Under Distribution

The stock market is under distribution, this is a fact. Simply put, professional selling overwhelms the buying and prices head lower.   As the markets ebb and flow with the money coming in/out we are constantly reminded about the psychological effects of a bear market.  Yes, even after the huge rally off the February lows this could still be considered a bear market.  Some of the strongest rallies occur during bear markets, but we cannot dismiss the internal characteristics.  Each day we compound and analyze the activity which gives us enormous clues as to the current sentiment and project that onto a future probability, based on prior patterns. But how do we navigate around a market in distribution?

Some of the biggest rallies have occurred in bear markets, likewise some of the most spectacular declines have happened in bull market runs.  Therefore, we have to be on our toes and ready if/when a shift in trend happens.  You recall the amazing 200 SPX point run in October 2014, followed by a mess of volatility and then a tremendous move a year later, October 2015 of more than 200 SPX 500 points. 

Just this past March/April saw an incredible spring of more than 230 SPX points upward after a devastating decline over the first six weeks at the start of 2016.  Standing by as an observer one would just marvel at the extreme and extended moves.  Yet, opportunity is always right in front of us. 

A market under distribution is not difficult to see but certainly a challenge to trade.  When institutions are net sellers we find breadth figures slump.  The advance/decline (A/D) ratio is one of the more important indicators of market health.  A rising line detects participation and sponsorship by the big money players.  Publication Investor’s Business Daily grades the SPX 500, Dow Industrials and Nasdaq A/D daily.  On a scale of A-F (A being best), they currently score these indices a D – hence a market uptrend under pressure. 

A deep dive into accumulation/distribution analysis comes in when grading the quality of an advance or decline each day.  A decline on higher volume than the previous day indicates distribution, while a higher volume increase says the market is under accumulation. Now, one or two days of distribution, or institutional selling is not a big deal – markets don’t go straight up every single day. 

The McClellan Oscillator also gives us a good read on the market’s behavior.  When this is heading lower and below the zero line it is also a sign of market distribution or professional selling. This indicator has been trending down and has bee in the negative for all of May and making lower highs since the start of March.


All of this data can be seen each day after the close. By taking an objective and non-biased view of the data we can determine how to proceed when certain conditions exist.

However, several of these in a series indicates the institutions are selling, and when that happens investors and traders should not be picking up the pieces – rather, take advantage of the action and go with the trend.  if long stocks, that would mean selling some and/or buying some protection using put options, inverse ETF’s or just shorting stocks. Will the condition change?  Sure it will, and we should be able to figure it out when it happens but won’t guess when it will occur.


Weekend Review – VIX Options and Futures – 5/16 – 5/20

The combination of VIX moving lower and June becoming the front month put some pressure on the June futures last week. I think maybe the lack of news flow expected over the next couple of weeks has something to do with that as well. Note the bifurcated futures performance from last week with many longer dated futures rising, which maybe could be the risk of higher rates or an ‘interesting’ presidential election hovering over the markets. Finally, I always like to periodically point out the ‘dip’ that is December futures. It’s already showing up and is due to the number of holidays that occur between December VIX expiration and the S&P 500 Index options (SPX) that are used to settle VIX in December. This year it may be also be function of the markets assuming the election uncertainty will be behind us.

VIX LT Curve Table


Weekend Review – Volatility Indexes and ETPs – 5/16 – 5/20

With the S&P 500 zig zagging this week, but finishing up by just over a quarter of one percent the curve was little changed. With one exception, VXST dropped 10% after we got past the FOMC minutes and the markets started to look forward to nothing for the next couple of weeks. VIX and VXMT rose and VXV was lower. I can’t remember the curve shifting like this ever, but since three out of the four moves were pretty small I wouldn’t read too much into it.



Weekend Review – Russell 2000 Options and Volatility – 5/16 – 5/20

Talk of the Fed raising rates after the June 16 – 17 two-day meeting that is looming has been heating up. If those that control such things are seeing pockets of growth in the US economy and consider it safe to raise rates, then growth must be back in fashion right? Well, that’s how the Russell 2000 (RUT) acted last week relative to the Russell 1000 (RUI) with the small cap benchmark rising a little more than 0.5% more than the Russell 1000 gained. RUT is still down on the year, but made some baby steps toward turning the year to date from red to green.



The Weekly Options News Roundup – 5/20/2016

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast, online and social media outlets.

William Brodsky: Legacy Continues
CBOE held its Annual Meeting of Shareholders yesterday.  The company announced the billaddition of William M. Farrow III, President and CEO of Urban Partnership Bank, to its board, and that Chairman William Brodsky revealed that he would not be a candidate for director in 2017.  After a long and prosperous career with CBOE, Brodsky will continue in the industry, joining his son’s investment firm.  For more information see press release.

“Brodsky, CBOE Chairman Who Took Exchange Public, to Retire” – Brian Louis, Bloomberg

“CBOE Chairman Bill Brodsky to Exit Board, Company” – Lynne Marek, Crain’s Chicago Business

“CBOE Veteran William Brodsky to Step Down” – Alice Attwood, FOW

Tom Knorring – Hall of Famer Number Thirty 1
For the past six years, the Inside Market Data Hall of Fame has honored leaders in the market bbbbdata industry who have made considerable contributions over the years that have inspired and affected change within the industry.  On Wednesday, CBOE’s very own Tom Knorring, Vice President, Business Development, became the 31st inductee into the IMD HOF.    Tom has played an instrumental role in the development, management and expansion of CBOE’s market data services for nearly four decades.  For more details, see the press release.  Congratulations, Tom!

“CBOE’s Thomas Knorring Inducted into Inside Market Data Hall Of Fame” – Mondovisione

OIC Highlights
The 34th annual Options Industry Council (OIC) Conference was held last week.  The gathering in Rancho Palos Verdes, California attracted exchange representatives and trading professionals from across the options industry to exchange ideas and discuss the issues facing the business.   Personnel from CBOE were on hand to highlight some of the exchange’s key initiatives.

“Market Data, Surveillance, and User Experience. Who Knows Better than LiveVol?”
Options Insider- Catherine Clay, Vice President of Business Development, CBOE Livevol

“Talking Weeklys, Auctions and More with CBOE”
Options Insider – Bill Looney, Director, Global Client Services, Head of CBOE New York

“Double Miles?: CBOE’s Frequent Trader Program Looks to Reward Traders and Provide a Window Into Traders’ Worlds” – Jim Kharouf, John Lothian News

“The 34th Annual Options Industry Conference – An Update from This Financial Markets Sector- Jessica Darmoni, The Glass Hammer

“VIX and S&P 500 Gems Keep CBOE Ahead Despite Nasdaq’s Big Leap” – Brian Louis, Bloomberg

VIX FIX- Out of Sight
Stocks rose today setting course for the market to break free of its three week losing streak with the Dow Jones Index and S&P 500 steadily advancing. Investors are dismissing worries of future Fed hikes and mixed results on retail earnings, sending the CBOE Volatility Index lower for the week, closing near 15.50 on Friday.  As summer quickly approaches, will volatility begin to sizzle?

“Traders Target June VIX Calls as Fed Meeting Looms” – Daniel O’Leary, EQ Derivatives

“Placid VIX Tells Little of Volatility Story as Futures Take Off” – Joseph Ciolli, Bloomberg

“Has ‘VIX’ Bottomed?” – Peter Tchir, Forbes

“Volatility ETFs: Buy or Sell Now? – Sweta Killa, Yahoo Finance

“Goldman: Time to Hedge Market Risk; Here’s How” – Steven Sears, Barron’s

Earnings Next Week – 5/23 – 5/27

Again, next week is all about retail which should be interesting since the results have been pretty mixed.  As always the data below is based on the last three years of earnings results, unless the data is in italics.  In those cases less than three years worth of history is available.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.  In the case of HPE (in italics below) there was less than 3 years of data to work with.


The United Kingdom has Options….and So Do You

The CBOE is the leader in listed Index and Equity options – and every so often there is a geopolitical event that can have reverberations in our financial markets. In just the past handful of years, we have experienced significant moves in volatility (both realized and implied) from elections and referendums, typically stemming from the other side of the Atlantic Ocean.

On Thursday June 23rd, a referendum will be held to decide whether or not Britain should leave the European Union.

Keep in mind that it can be easy, but inappropriate to see causation when there is just a correlation, but there has certainly been a tendency to see volatility well bid into events like the June “Brexit” vote.

Don’t Know Much History…….

Dubai World – November 2009 tried to delay a debt payment, which could have triggered the largest government default since Argentina in 2001. VIX moved from around 22 in late October to a high of 30.80 in November.

Vix Dubai World

Source: Google Finance

The most well-known example is Greece, with their ongoing debt (and restructuring) crisis. In April and May of 2010 it became clear that the government’s debt to GDP ratio was unsustainable. Ratings agencies downgraded their sovereign debt. On May 2, 2010 the Troika (ECB, European Commission, and IMF) launched the first Green bailout (110 million Euro).

Likely wholly unrelated, but the very same week, the U.S. markets experienced what would become known as “The Flash Crash” (May 6, 2010).

Between late April and late May 2010, VIX moved from lows of 15.50 to highs of 48.20 (closing high of 45.79).


Source: Google Finance

In 2011 there was a cascade of events that shook markets across the globe. Portugal, Italy, Ireland, Greece, and Spain (PIIGS). In Q2 of 2011, the SPX suffered an 11% pullback from high to low. After regaining traction, and trading very near 1500, the SPX fell 9% on the heels of the first ever U.S. debt downgrade (Friday – August 5, 2011).

VIX dropped to 17.14 on July 22nd and rose to an intraday and closing high of 48 on August 8th.


Source: Google Finance

2012 was, on the whole a march higher for global equity markets, but they hit speed bumps in April and May when the French elected Socialist party leader, Francois Hollande. Over the same time frame the Greeks held elections with the flashpoint being the imposition of “austerity” measures, which many Greeks disagreed with entirely. There was concern that if the Samaras coalition (New Democracy Party) was defeated, Greece would also leave the European Union and abrogate the Euro and as well as their debt.

Ultimately, the “anti-austerity” party (SYRIZA) and their leader, Alexis Tsipras won considerable parliamentary inroads. Eventually Tsipras became president (2015), but to this point, Greece remains part of the EU.

The SPX dropped about 7.5% over this time frame and VIX moved from lows of 16.01 to highs of 25.14. More

Big VIX Spreads, the Fed, and the Flattening Yield Curve

Tomorrow afternoon (1 P.M. Chicago time) the market will digest the minutes from the April FOMC meeting. In advance of that release (which happens after every FOMC meeting) two (non-voting) Federal Reserve Board Presidents, John Williams (San Francisco) and Dennis Lockhart (Atlanta), both gave speeches that indicated the Fed could hike rates again as soon as June.

The next FOMC meeting takes place on June 14th and 15th and includes a “Summary of Economic Projections” as well as a press conference by Chair Yellen. The spread between the 2 and 10 year notes fell to its narrowest (flat) since late 2007 (around 94 basis points) on the news.


Regular cycle VIX options expire the morning of the next FOMC announcement (June 15th). Interestingly, over the past few weeks there has been considerable interest in the June 20 – 25 call spread. June VIX futures, which govern the June options have vacillated between 17 and 18.50 over the past 7 sessions. Early in May they traded as high as 19.45. The June futures haven’t closed above 20 since March 15, 2016.

Open interest (OI) on the June 20 calls is over 165,000, and on the June 25 calls, OI topped 273,000 today. The June 25 calls outright (not spread) have traded over 100,000 in the past two sessions.

In arguably related news, the CBOE Skew Index, which derives its value from the price of S&P 500 (SPX) tail risk, has been sanguine. The Skew Index has fluctuated between 120 and 130 of late. That’s compared to a range between 130 and 140 for most of late 2015 and early 2016.


The June VIX 20/25 call spread is trading around 70 cents today with futures at 18. We will keep an eye on this spread following the Fed Minutes and moving into the next FOMC meeting and expiration.