May the Next Voice You Hear Be Your Own



A person who takes an opposing view. One who rejects the majority opinion as in economic matters.

What an emotional business this is. The uneasy market sell-off continued today with option implied volatility climbing higher. Radio and TV experts have no problem pumping fear into the average investor’s head. Fright sells. RIP Wes Craven.

New traders make the big mistake of watching and listening for every clue to help them place the perfect trade. Only to fill their heads and lead them on with too many opinions to sort through that they feel too handcuffed to place a trade.

Market moments like today create great opportunity. While others are buying puts I have been selling puts inflated by a downward market and increased volatility. Most of the time for income but on stocks I wouldn’t mind owning that I believe are “on sale”.

Factual information from the media is always welcome. A spirited market discussion you may have with others is too. But when it comes down to forecasting or following the herd don’t let anyone lead you on. May the next voice you hear be your own. Be a contrarian.

Easy Trading Before the Hurricane Came Through

As someone pointed out two posts back, I did tell everyone: “Follow along for a less wordy (because I’ve already explained it all) installation documenting the conclusion to this story pretty soon, as the story must end before the dates stamped on my only two current positions: Friday the 21st.”

So here it is, minus lots of words, because there’s not a ton to say other than when I opened, when I closed, and the prices (and the way I dodged being assigned a lot of shares at the associated strikes.)

A picture is worth a thousand words, but here are few on top of that, anyway:  On August 11th, with SVXY in the low 90s, and on August 12th, with SVXY in the mid 80s, I wrote puts for the 85 strike and the 77.50 strike (respectively), both to expire on August 21st.

On August 19th, feeling that anything could happen between then and Friday (good one, huh?) I bought back all, thinking I was being overly conservative on the 77.50s, but doing it anyway, just to raise cash, and because eight cents seemed like a fair price to get out of harm’s way.

The funny thing is that Friday ended with both of those strikes cut through like a red hot surgical scalpel through butter.  Even the 77.50s would have been assigned, had I sat there watching the market like a slacker watching TV.  This is not to say I didn’t get into more trouble later (I’m expecting a Santa sack full of early Christmas presents this week), but this is the story of last week.

I ended the week $918 richer (see above.)  Simple trade; not very challenging to monitor under stable market conditions; almost boring enough to fall asleep to.  If only every trade could be so easy, right?

Volatility, Economy & The Fed – Weekly Market Outlook

What a wild week! Perhaps the wildest we’ve seen in years, with a 5.3% plunge over the course of the first two days of last week more than wiped away by the 6.4% rebound seen over the course of the last three. We’re still in the hole by more than 5% since the pullback started two weeks ago, but given the swings we’re clearly capable of making now, that gap could be closed in just a couple of days.

On the other hand, volatility is a two-way street – we could just as easily be seeing new multi-month lows two days from now.

We’ll dissect the market’s key indices below, as usual, but also as usual, we want to paint a bigger picture using the broad brush strokes of economic data.

Economic Data

We got a fair amount of economic news last week, but none of it as curious or compelling as Q2’s second (of three) reading on GDP growth. Rather than GDP rising 2.3% last quarter as first expected, it actually grew 3.7%. It could change again with the third revision, but the number rarely changes between the 2nd and 3rd look.

GDP Growth Chart
Source: Thomas Reuters


The History of VIX Contango and Backwardation

This morning (Sunday) I got a request from Eric Thompson at Thompson Capital Management to look into streaks of backwardation in VIX.  There are different ways to measure backwardation.  You will hear pundits say we are in backwardation whenever VIX closes higher than the front month future.  Most market participants like to look to the relationship between the first and second month future since that relationship has a direct impact on the volatility oriented exchange traded products (think VXX).  I personally prefer a full comparison of spot VIX, the first month, and the second month future.

As of Friday VIX has closed higher than the front month future for seven consecutive days.  The front month future has closed higher than the second month for six straight days and my method of comparing VIX to both the futures has been in backwardation for six straight days.

So how do these numbers stack up to history?  The following tables sum things up nicely.

The top five streaks for VIX closing above the front month future appear in the first table.  Back in 2008 (no surprise her) there were sixty eight consecutive trading days where VIX closed higher than the front month VIX future.  The next closest streak was 21 times when occurred around the time of the May 2010 flash crash.

VIX - Mo 1

The second table is the one most people care about due to the impact on VXX.  For those new to all this VXX is actually based on a strategy that holds the front two month VIX futures contracts.  Each day VXX rolls a portion of the portfolio from the front month to the second month.  When we are in contango, which means the front month is lower than the second month, the strategy is selling less expensive contract and paying more for the new contract.  This actions is a drag on the performance of VXX.  However, when the front month future is higher than the second month the performance for VXX benefits.

I love when I run numbers and am surprised by the outcome.  Note the longest streak on this table is seventy six days and it occurred in 2011, not 2008.  That outcome caused a double take on my part.

Mo 1 - Mo 2

The final table shows the streaks for backwardation based on comparing VIX to the two near dated futures contracts.   All these streaks occurred during the great financial crisis or the credit downgrade in August 2011 so not big surprise here.

VIX - Mo 1 - Mo 2

So, regardless of how you measure it, we have been in backwardation for just over a week.  History tells us that if the markets continue to be volatile we could be in this situation for seveal more weeks to come.

The Week in Russell 2000 Trading – 8/24 – 8/28

Once a month I leave CBOE for a couple of days and turn into a student attending a residency at Oklahoma State.  I do my very best to leave the markets behind and focus on my studies.  I did a pretty good job of tuning out what was going on toward the end of the week.  This resulted in me being surprised that the Russell 1000 (RUI) gained almost 1% on a week over week basis with the Russell 2000 rising just over a half of a percent.  Both are lower on the year, with large cap stocks slightly outperforming when using RUI and RUT and large cap and small cap proxies.


We experienced a ‘first’ this past week in the volatility oriented markets.   A common method of comparing small cap versus large cap risk perceptions is on display with the diagram below.  Those of us that spend a good amount of time focusing on volatility like to compare the CBOE Russell 2000 Volatility Index (RVX) level to VIX.  Until this past week RVX had always closed at a premium to VIX, but that ten plus year streak was broken on Monday, Tuesday, and Wednesday.

RVX VIX End of Week

I came across two bull put spreads in the RUT arena from Friday that are targeting the September standard expiration series (AM settled on September 18th).  The first one was executed pretty early on Friday when RUT was at 1151.51.  A trader came in and sold the RUT Sep 18th 1150 Puts for 27.10 and purchased the RUT Sep 18th 1120 Puts for 17.30 and a net credit of 9.80.  RUT settlement over 1150 results in a profit equal to the credit of 9.80 while the worst case scenario would involve RUT settlement at or below 1120 and a net loss of 20.20.


The next bull put spread is more like a neutral to bull put spread.  Toward the end of the day there was a seller of the RUT Sep 18th 1110 Puts for a credit of 12.75 who purchased the RUT Sep 18th 1100 Puts for 10.85 and a net trade credit of 1.90.  This trade occurred as the RUT had moved to higher levels and was quoted at 1158.61.  As seen below this trade has quite a cushion to the downside and as long as RUT is over 1110 at settlement the credit turns into a profit.  A big move to the downside, placing RUT below 1100 would result in a loss of 8.10.


The Week in VIX – 8/24 – 8/28

I’m depending on my aging mental capacity in lieu of spending the time to go through the last four years of VIX recap blogs for the following statement.  I have no recollection of a shift in the VIX term structure curve that replicates what shows up below.  VIX lost value on the week, while all the futures contracts moved higher.  Last Friday, spot VIX ran up quickly at the end of the day, but the futures remained at lower levels.  To get back to a more ‘normal’ environment, we needed either a drop in VIX or a rise in the futures pricing.  We actually got both with the front month September contract gaining almost 23% while VIX dropped by 7%.

VIX Curve + Table

The next chart and table is relatively new to this space and is a depiction of VIX and the next five weekly VIX futures contracts.  For an apples to apples comparison the contracts are consistently rolled.  So Week 1 on 8/21 was the August 26th contract while Week 1 for 8/28 is the September 4th contract.   Do note that a week ago the near term future was at a discount of 3.255 while this past Friday the near term future is basically in line with spot VIX (for the quants it is actually at a slight premium).

VIX Weekly Curve + Table

As the week came to an end, which could not have come too soon for most traders, there was a fairly aggressive bear call spread traded in the VIX pit.  There was a seller of the VIX Sep 16 Calls at 9.00 who also purchased the VIX Sep 20 Calls for 5.94 for net credit of 3.06.  The payout at September expiration along with where VIX and the September future finished the week shows up below.


At expiration the trade makes money below 19.06 and if we get a dip to 16.00 or below then both call options expire with no value and the trader gets to keep the credit of 3.06 that was taken in when the trade was initiated.

The Week in Volatility Indexes and ETPs – 8/24 – 8/28

Under no circumstances does the week over week change in the VXST – VIX – VXV – VXMT curve tell the story of last week.  There’s something worth noting, but last week is not done any justice at all if a line showing Monday closing prices is not included, therefore it is.

VXST VIX VXV VXMT End of Week - Corrected

What strikes me as noteworthy about the week over week change in something that is very subtle on the term structure chart that appears above.  Note that VXV and VXMT actually rose last week.  That can be taken as an indication that option traders are still bracing for more downside in the equity market, however they aren’t concerned about near term price moves.

The little loved VIX of VIX (VVIX) popped up on Monday and screamed for attention.  Unfortunately, with the exception of Adam Warner from Schaeffer’s Research, the all-time high put in by VVIX on Monday was kind of lost in all the other stats being thrown around after Monday’s equity market drop.  The chart below shows the whole history of daily closing prices for VVIX and do note on the far left that line pops up about 20 points higher than the previous record high.


Giving credit where credit is due, Adam’s blog appears in the link below –

To quote a really smart guy, “VXX did what it is supposed to do” last week in conjunction with the dramatic move higher in volatility.  A common complaint pops up when VIX rises and VXX lags, interestingly the opposite happened on a week over week basis.  VXX is a mixture of September and October VIX futures, both of which were up over 20% last week.

VXX Table Corrected


Weekly Stock Market Commentary: Intermediate-Term Indicators Remain Negative

The relative calm of the stock market trading in a range for six months was shattered in recent days. As recently as August 18th, all was calm. But beginning with a sharp 17-point drop in $SPX on the 19th, the rout was on. The support area at 1980-2000 was blown away, but it may offer some resistance on the way back up. There should also be major resistance at the 2040 level. Meanwhile, Monday’s lows at 1870 represents support. If that is violated, last October’s lows at 1820 are the next support area.

Equity-only put-call ratios rolled over to sell signals about two weeks ago. They are still racing higher on their charts — indicating that they remain on sell signals, but they are in oversold territory since they are so high.

Market breadth was extremely weak during the decline, pushing the breadth oscillators into deeply oversold territory. They remain on sell signals, but they too are oversold.

Volatility indices exploded during the market decline. $VIX has given a “spike peak” buy signal, but a more negative development is that $VIX is now trending higher, which is bearish for stocks.

In summary, the intermediate-term indicators (trend of $SPX, trend of $VIX, put-call ratios, and breadth oscillators) remain negative. But there are several buy signals arising from shorter-term indicators, and they are actionable.

The Weekly Options News Roundup – 8/28/2015

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

VIX: Word on the Street
Markets have experienced a tumultuous week, to say the least.  Triple digit swings in the Dow and S&P caused the CBOE Volatility Indexâ (VIXâ Index) to catapult above 50 – a level not seen seven years – on Monday, before retreating to the mid-20s today.  Is this new volatility the new norm?

Blog Photo

*Photo courtesy of Scott Olson/Getty Images*

“Chartist to Cramer: VIX has Crucial Red Flags” – Abigail Stevenson, CNBC

“Get Used to it! Volatility is Here to Stay after China” – Wallace Witkowski, Market Watch

“VIX Futures Jump to Highest Level in Over 3 Years” – Tomi Kilgore, Market Watch

“Selling Volatility in an Era of Low Returns” – Michael Mackenzie, Financial Times

“Stock Bounce Rewriting the Books, Too — VIX Readings Matter” JJ Kinahan, Forbes

“What Created The Perfect VVIX Storm?” – Adam Warner, Schaeffer’s Investment Research

“What Does the Rapid Rise of the VIX Mean for Markets?” — Jim Strugger, MKM Holdings, Bloomberg – August 24, 2015

“Volatility on track for biggest month ever” – Jon Najarian, FMHR Trader, CNBC – August 24, 2015

“Options Action: VIX closes at 4-year high” – Brian Stutland, Equity Armor Investments, CNBC – August 24, 2015

CBOE, in collaboration with Eurekahedge, has launched 4 new benchmark indexes designed to track the performance of hedge funds using volatility-based investment strategies.  For more information on these indexes, visit

“CBOE Launches New Hedge Fund Benchmarks with Eurekahedge” – John D’Antona, Traders Magazine

“Amid Market Volatiity, Goldman Observes Performance Traits of Volatility Indexes” – Mark Melin, Value Walk


TYVIX Weekly Review: How This Week’s Mini-Crisis Impacted Volatilities Across Different Asset Markets

TYVIX Update Header

General Volatility Flash       

U.S. investors’ expectations of how China’s slower economic growth pace would impact the U.S. economy experienced a violent turnaround, setting the scene for Monday’s stock market tsunami. U.S. stocks spent the week recovering, and Figure 1 shows how the unfolding of this mini crisis impacted volatilities across different asset markets. Although the stock market plunged on Monday, it is clear from Figure 1 that trouble was brewing as early as Thursday, August 20.  By Friday, August 21, all VIX measures were up on a closing basis. In fact, the percentage increase in VIX was even higher on Friday than on Monday on a closing basis.

The CBOE Volatility Index (VIX Index) rose because demand for puts increased as investors feared a market correction.  On the other hand, the volume of calls on 10-year Treasury notes was greater than the volume of puts, suggesting the rise in Treasury volatility was mostly caused by the potential for an increase in Treasury prices.

Figure 1. Expected volatility across markets before, during and after August 24, 2015. 828Fig1

Federal Fund Target Rate and Volatility

Equities have mostly recovered from Monday’s decline, but volatility levels are still up from last week. However, except for the VIX Index, they are not significantly different than median values since 2003. Futures on TYVIX also dropped from Monday’s values, but they are up from last Friday’s .

Figure 2 and 3: Weekly Roundup TYVIX and futures on TYVIX828Fig2 828Fig3

 Post written by Catherine Shalen, CBOE Research





Interested in Managing Global Portfolio Exposure? Explore Options on MSCI Indexes

Interest in managing global portfolio exposure has grown in recent weeks.

As shown in the price charts below, over the five-trading-day period from August 17 through August 24 –

  • Two key global stock indexes – the MSCI EAFE Index (MXEA) and MSCI Emerging Markets Index (MXEF) – both fell by more than 5%;
  • Several volatility indexes rose considerably – the CBOE Emerging Markets ETF Volatility Index (VXEEM) rose 120%; CBOE EFA ETF Volatility Index (VXEFA) rose 112%, and CBOE China ETF Volatility Index (VXFXI) jumped 92%. M - EAFE and EM stock prLL2 - M - Vola Indexes


Return of the Big VIX Trade

Beginning back in the spring there was a very large 1 x 2 VIX Call spread that was rolled from month to month for several months.  With the excess volatility it appears the trade was exited earlier this week.  But that is apparently not the end of the story….

Yesterday there was a buyer of about 92,000 VIX Oct 15 Calls for 8.00 who sold about 184,000 VIX Oct 21 Calls at 4.80 which boils down to a credit of 1.60 per spread.  The payoff, if held to October expiration, appears below along with yesterday’s close for standard Sep VIX Futures and spot VIX.

BIG VIX Payoff

There is no way of being certain that the same entity behind this trade is the same group involved in the 1 x 2 that was rolled several times this year and then exited earlier this week.  However, assuming it is and it continues to be managed in the same manner, there will be a roll sometime in early October.  Needless to say I’ll be keeping an eye on the VIX Oct 15 Calls and VIX Oct 21 Calls and if anything changes I’ll report back in this space.

For information on the origin of this trade check out the blog linked below –


Surviving Market Volatility Again

This past week was a difficult one for markets.  That is probably an understatement, as the SPX 500 fell a stunning 5% during the week, the Dow Industrials dropped more than 530 points, or more than 3%.  It was the worst week in nearly a year and set the indices back to losses in 2015.  Seems like a big move, right?  It was ‘only’ 3%, but to put that into context – in 1987 the Dow Industrials dropped a similar amount, or 508 points.  But that was a massive crash, falling 22% in one session.  For the week, the Industrials lost about 1000 points, and it happened with amazing speed.

I was asked several times during Friday’s move as to where/when the slide would end, almost as if some were trying to exactly time that bottom or turn.  That is not my game, so I had to ignore the guessing, however when a market makes extreme moves in an emotional outburst you can pretty much void any support and resistance lines.  Looking for those are futile, because price will slice through those levels like a hot knife through butter.

We have been talking about the trouble of the markets for a few weeks now, and decided to be proactive and take on some protection.  Especially when it was cheap (it was just a week ago, with the VIX coming in at 12%). It paid off this week – bigtime.

Aside from the price action being as bad as it was, we saw some other statistics that were simply off the charts.  First things first.  Will there be a rally? Of course there will be a rally, but it’ll come when you least expect it – but being ready for it when the indicators hit extremes and waiting for it is the best tactic with options.  Yet, trying to time it is a useless exercise.  Wait for the turn, let it confirm and if there is a trend go with it.  Friday was certainly a 90% down day, and that sets up for a snap back rally.


Checking in on VIX Weeklys Futures Price Action

Tomorrow morning we will get the settlement print for the August 26th VIX Weeklys Futures contract.  You never know how a product is going to trade until it is set free upon the marketplace.  The assumption with respect to VIX Weeklys Futures was that the nearest expiring contract would closely track price action in spot VIX.  The past couple of days has been a heck of a time to test this out, but so far it appears the expected price behavior of the nearest expiring future in line with expectations.  The chart below is a five minute price chart using the mid-point of the August 26th VIX Futures contract and spot VIX running from the market open last Wednesday August 19th through the close today.

Aug 26 Future 5 Minute Chart

The red line represents the price action for the Aug 26th contract and the blue line shows the price action for VIX.  At times they disconnect slightly, but even with the excessive volatility in the markets over the past few days they tend to move in sync with each other.

Finally, for full disclosure, there is a small gap in VIX data from the open on Monday.  This was discussed in the blog linked at the end of this posting.  However, note that the VIX Futures contract was a fairly decent predictor of where VIX was initially quoted shortly before 9:00 am Chicago time on Monday.