Is Index Protection Inexpensive in Light of Fiscal Cliff Concerns?

With all the press coverage surrounding the fiscal cliff, many investors are looking for ways to adjust the overall risk in their portfolios, and some of the most popular tools to do so include S&P 500® index options and VIX® futures and options

The average daily closing level of the VIX index (from Jan. 1990 through Nov. 2012) was 20.46.

At around mid-day today (Friday) the spot VIX was at 16.69and the VIX Jan. ’13 futures were at 17.24 (updated delayed quotes are in a table at

Many observers are surprised that the price levels for VIX spot and nearby VIX futures are at relatively low levels, and we there recently were some VIX futures volume records as some investors sought relatively inexpensive catastrophe protection.

A Dec. 11th blog on looked at VIX futures prices and noted —

“ … there is less demand for protection than might be expected. So the Street expects a deal … what will it be? Republicans cave in on the tax increase for the wealthiest two percent, and the shift immediately goes to a deal on entitlements? … How about this theory, which I espoused two weeks ago: Market sells off whether there is a deal or not. This is the start of American Austerity. That is what the cliff means: Higher taxes and cutting expenses. That deal will be a headwind for stocks, not a tailwind.”


For a time this morning when the S&P level was around 1416 –

below is a table that shows implied volatility level estimates by Bloomberg for S&P 500 put options at various select strikes and expiration dates. 

Note that the implied volatility for the out-of-the-money put options with strike prices at 1405 is higher than the implied volatility for the implied volatility for the in-the-money put options with strike prices at 1420 at the same expiration.

If you would like to see some good charts on the SPX implied volatility skew, please click on the 50-page slide presentation by CTC that was delivered at the CBOE Risk Management Conference.  


The VIX term structure [link to ]  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.

Below are a couple of today’s charts at the VIX term structure [link to ]  page.



The forgoing information is presented in order to give readers a better understanding of some of the costs involved with S&P 500® index options and VIX® futures and options, which can be used for portfolio risk management purposes. One could argue that protection with index options is at relatively inexpensive levels in light of many worldwide concerns. Please visit for some benchmark indexes and studies on use of SPX and VIX-related products.