Trade in Which I Get a Black Eye, but Escape a Worse Black Eye

It was a black eye I gave myself, of course.  If this blog were all sunshine and lollipops – well, that would be great.  I’ll work on it.  For now, it’s not happening.

So last week I got it into my head to sell some UVXY 55 calls, thinking that strike was unlikely to hit.  Under “normal” market conditions, that would be a reasonable belief.  As everyone and their kid’s kindergarten teacher knows by now, the market has had a “correction.”  I got sent to the house of corrections along with the market.

After seeing margin calls in my account so high they cannot be comprehended by the human brain, I sat through – crunching peanut-butter-smeared granola bars and chasing them with coffee – and watched the carnage subside.  Too proud to close a position for a loss just to avoid possible future damage, when I firmly (no, shakily) believed the damage would not become a reality, I sat there and tried to live on a steady diet of hope and lip-biting.  My belief was (still is, but it’s moot now) that if the market bounced back fast enough, everyone would be amused by the idea of UVXY 55 and I’d be able to tell everyone the story of how I made 400 lousy dollars from the hardest trade in my life.

Instead, as my honest suspicions told me would happen, a second VIX spike happened today (August 25th) with UVXY following suit trying to get a senior discount at all the diners in town with its 65+ card.  $66.81 is the highest print I see today.

$16.90 is the highest price someone paid today to negotiate UVXY 55, expiring this Friday (the 28th) and it was done just before the close.  I don’t have that kind of money to throw away, so thankfully I threw away just $5.95 earlier in the day (would have preferred the $2 range, but at least I didn’t ruin my account.)  On 11 contracts, that’s enough money to cause all-day grouchiness, especially since I still don’t think UVXY will be at 55 on Friday, but to satisfy the brokerage which does not wish to ask their employees to mortgage their house to protect my account, I did it.  Because I am not working with play money, and must make good on the contracts I have written, I got out of a contract that I know deep down has the potential to cost me money my pockets are not deep enough to produce.  When your broker calls and says “we are watching this,” it tends to nudge you to dispose of the miserable headache-causing mess.

Shouldn’t I have hedged it?  Yeah – coulda, shoulda, woulda.

In addition to this I sold puts, both prior to the “corrective phase” and in the midst of it, for SVXY at prices people will laugh at me for during the foreseeable future.  So I will have a large pile of “stock” to work with, and how long my account total remains depressed due to it remains to be seen.  I’ll sell the dickens out of calls, though, and make what money I can.

Prepare for some boring times on this blog (maybe.  You never know.  No one knows, or more people would be profiting like geniuses from current market conditions.  The genius count does not get added to by this writer.)

Around-the-Clock Trading of VIX and SPX Soars in Recent Days

CBOE Holdings now offers Extended Trading Hours (ETH) on key popular index futures and options contracts — to provide investors with tools to hedge and to take advantage of market opportunities as they happen.

In recent days many investors have become concerned about falling share prices on stock exchanges in Asia, and on August 24 the trading volumes during ETH soared to 140,811 for VIX futures, 21,612 for VIX options and 8,407 for S&P 500 (SPX) options.



VIX and Volatility Markets Today – 8/24/2015

First, a quick discussion of the VIX quotes from early today.  Just as the equity market opened the S&P 500 E-mini futures went limit down.  Market makers in the SPX pit at CBOE use the futures for hedging purposes so it was difficult for the traders in the pit to asses where the equity market was going and this created a pause is quoting.  Following the limit down situation there was spotty quoting in SPX and SPXW options so VIX values were not being disseminated.  The VIX quotes that were being generated, but not disseminated, were extremely spiky.  Once this spotty quoting began to smooth out CBOE began to disseminate VIX values.  This occurred at 8:58 am or 28 minutes into the trading day.  It should be noted that the regular session VIX futures and option trading commenced at 8:30 am.

Now on to the day.  VIX closed over 40.00 for the first time since early October of 2011.  Also, and I steal this from Wallace Witkowski from MarketWatch who informed me this was the first time in history that VIX was up over 40% two days in a row.  For that to happen you have to start with a pretty low base and have two consistently volatile days in a row.  I think that describes what we all just lived through.  Looking at the traditional VIX curve the September contract, which settles on the 16th lagged the index only rising 26% to settle at 25.125.

VIX MO Plus Table

Taking a look at the shorter term contracts, the August 26th VIX future, which settles on the open the day after tomorrow, moved higher by over 50% to play some catch up with the spot VIX index.  We thought that the Weeklys would track VIX closely and this current market selloff and subsequent spike in volatility is proving that theory right.

VIX Plus Table

A final look at S&P 500 Volatility appears below where the 9-day, 30-day, 3-month, and 6-month volatility index price changes from Friday to Monday are on display.  VXST rose 40% to 54.61, as we know VIX was up by 45% to 40.74, VXV gained about 33% to finish at 31.14 and VXMT was higher by 22.5% to finish the day at 27.36.  Across the board volatility was higher and when we see 3 month volatility in the 30’s you have to wonder if traders believe the past couple of days are just the beginning of a very rock ride for the equity markets.


One other market I want to note is the CBOE Russell 2000 Volatility Index (RVX) which finished the day at 39.63 just a tad lower than VIX’s final print of 40.74.  Those of us that eat, sleep, and dream about volatility know that RVX is always at a premium to VIX.  That truism is true no more as today was the first time in the 2,931 day trading history of RVX that it closed lower than VIX.  We are most definitely in unusual times.


Record Volume Day for CBOE and SPX Options, as VIX Index Has Its Biggest One-Week Jump

This past week the CBOE Volatility Index® (VIX®) rose 118.5%, its largest move ever (in percentage terms) in one calendar week. On Friday CBOE®, C2 Exchange and the CBOE’s S&P 500® (SPX) options all experienced record volume days, with estimated volume of 11 million options contracts traded on CBOE.  A news report at Marketwatch noted –“Across the globe, investors dumped anything with a whiff of “risk” as an economic slowdown in China accelerates, resulting in rapidly plunging oil prices and complicating the Federal Reserves aim of normalizing interest rates.”


As shown in the charts below, trading volume in key index contracts – VIX futures and options on the S&P 500, the Russell 2000, and VIX indexes – grew tremendously in the second half of the week. The put/call ratios for the SPX options were much higher the ratios for VIX options. For portfolio protection, some investors were buying SPX protective puts and collars, and/or taking long positions in VIX call options and VIX futures. MM1 SPX and RUT volumeMM2 VIX fut opt volume one week jpg


As shown in the table below, the biggest one-week moves (in percentage terms) for the VIX Index have been upside (rather than downside) moves.  MM3 More

The Week in Russell 2000 Trading – 8/17 – 8/21

Small cap stocks held up (generous term here) well versus large cap stocks last week.  The Russell 2000 (RUT) was down 4.61% while the large cap focused Russell 1000 (RUI) lost 5.73%.  The drop for RUI was the biggest one week lost since mid-September 2011.  For the year RUT and RUI are down 3.98% and 3.89% respectively.  I’m going to say that’s a tie with just over four months to go.


With RUT holding up relative to RUI small cap risk, as measured by the CBOE Russell 2000 Volatility Index (RVX) did not rise as quickly as the CBOE Volatility Index (VIX).  VIX was up a record 118% last week while RVX gained ‘only’ 63%.  The result of this price action shows up in the RVX / VIX premium chart below.  The right side of that chart reminds me of the Millennium Force roller coaster I rode with my eight year old a couple of weeks ago – a violently quick drop.


I mentioned above that the last time we saw a big Russell 1000 drop was in September 2011.  It has been a while so I felt like a small history lesson on 2011 was in order.  The chart below shows the weekly price changes for RUI in 2011.  I’ve highlighted a couple of data points for emphasis.

Russell 1000 2011 Performance

Note that September drop was preceded by a couple of other pretty bad weeks for the equity market.  We have been so conditioned to buy that dips due to the market action over the last three years or so I felt the need to note that always doesn’t work.  This is in no way a prediction, but just a warning of what can happen.

The Week in VIX – 8/17 – 8/21

VIX more than doubled last week in what was the biggest week over week percent change for VIX in history. Specifically VIX rose 118% from Friday to Friday.   This past week was August settlement week for VIX futures and options. In the past this would mean that the next expiring future would have weeks of trading left. However, we now have VIX Weeklys trading at the CBOE Futures Exchange. More on that in a minute.

The curve shifted higher and into backwardation last week. The cheapest future among the standard monthly expiring contracts was the December contract. Note the September contract rose over 31% as the biggest gainer among the futures on this table.

VIX Monthly Cuve Plus Table

Below is a new graphic that I will start including as part of this weekly update.   A little explanation is in order. Week 1 represents the change in price between the VIX future than expired last week and the Friday close for the future that will expire this coming Wednesday. The idea is to have a comparison of the near dated futures along with the levels of the soon to expire contracts relative to each other and spot VIX.   Note the VIX future expiring on August 26th settled Friday at 24.775, just over 3 points lower than spot VIX. This is much more in line with the current VIX index price of 28.03 than the September future that finished the week at 19.90.

VIX Weekly Curve Plus Table

I searched around for volatility sellers on Friday and they appeared to be out in force. I wanted to find something a little out of the ordinary which is never really an issue in the VIX space. Mid-day on Friday there was a seller of the VIX Sep 14 Calls at 5.15 who also sold VIX Sep 20 Calls at 2.55 and then finished up by purchasing the same number of VIX Sep 30 Calls for 0.85 and a net credit of 6.85. The result is a trade that is not for the faint of heart and results in the payout at September expiration that is displayed below.


Break even for this trade is 20.85 and then losses mount quickly until VIX hits 30, then a partial hedge slows thing down a bit. However, theoretically that line continues to move lower past the 30 price level.

The Week in Volatility Indexes and ETPs – 8/17 – 8/21

The S&P 500 was down 5.77% and S&P 500 related volatility indexes did exactly what traders would expect. They shot higher and the curve became as inverted as it has been in the last three to four years. I’m pretty sure the last time the VXST – VIX – VXV – VXMT curve was in this sort of backwardation was in August 2011.


For the record VXST was up 231%, VIX rose 118%, VXV gained 51%, and VXMT was higher by about 34% for the week.   Before the week began, XIV and SVXY were higher by about 40% for 2015. After the pummeling those funds took last week, the year to date performance is ‘only’ a gain of 15%. I’m sure that is not much consolation to holders of the funds that experienced the one week 25% drop.

VXX Table

I got questions about the underperformance of the long volatility funds last week relative to the huge gain in VIX. Those funds give holders exposure to the front month VIX futures. As of Friday this is the September and October contracts. As last week was August expiration, the September contract dominates the performance of those funds and that contract gained 31% last week.

Since I’m a company man, I will just mention that there are VIX Weeklys available and the VIX future that expires this coming Wednesday on the open gained 70% last week and was up by 35% on Friday.

With VXX has gained 30% over a five day period I look around for trades taking the other side of the volatility spike.   I didn’t have to look too hard as close to the end of the day there was a seller of the VXX Aug 28th 21.00 Calls at 1.46 and paid 0.93 for the VXX Aug 28th 23.00 Calls for a net credit of 0.53. The risk is 1.47 if the market drop and volatility rise continues next week while the reward for a calming of the markets is equal to the 0.53 credit received.


The Weekly Options News Roundup – 8/21/2015

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.

CBOE in collaboration with Eurekahedge has launched 4 new benchmark indexes measuring the performance of volatility-based investment strategies.  For more information on these indexes visit

“CBOE adds hedge fund volatility benchmarks” – Alice Attwood, FOW

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

“CBOE teams up with Eurekahedge to launch hedge Fund benchmarks – Maria Nikolova, Leap Rate

“Eurekahedge and CBOE Launch Four Benchmark Indices Tracking Volatility-Based Investment Strategies” – Value Walk

“CBOE Launches Hedge Fund Benchmarks With Eurekahedge” – headoftrading

Things Just Got Volatile
Worries surrounding China sent stocks in a tail spin this week causing the VIX to experience its biggest weekly jump ever.  The Dow Jones and S&P 500 declined by more than 3% this week, leaving investors wondering if this the end of the bull market.

“Bulls Against Wall as Seven-Month S&P 500 Trading Range Caves” – Joseph Ciolli and Callie Bost, Bloomberg

“Don’t Sleep on the CBOE Market Volatility Index (VIX) Just Yet” – Adam Warner, Schaeffer’s Investment Research

“Just When You thought It Was Safe, China Strikes Again” – Adam Warner, Schaeffer’s Investment Research

“Trading Post: What To Read From Volatility Gauges” – Jamie Chisholm, Financial Times

Strategic Moves With VIX 
With markets in a free fall, VIX is increasingly being used as a hedge in the protection of portfolios, causing VIX options volume to top 820,000 contracts each day this week through Thursday.

“Jared Woodard’s Option Strategy For CBOE VIX” – Ritesh Anan, Benzinga

“The 3 Best ETFs to Tackle Market Volatility” – Kent Thune, InvestorPlace

TYVIX Weekly Review: Will the FOMC Lift the Lid on the Federal Fund Target Rate?


ty3 TYVIX Update HeaderFederal Funds Target Rate and Treasury Volatility

With 26 days left until the September 16th meeting of the Federal Reserve Open Market Committee, and signals for U.S. rates diverging amid continued China and Europe economic weakness, it is still uncertain whether the FOMC will lift the lid on the federal funds target rate (FFTR) on September 16 or later. The FOMC is concerned that a rate hike will stall the U.S. economy and market participants are concerned that a rate hike will depress Treasuries and increase volatility.  So it’s is a good time to examine how the CBOE TYVIX Index and Volatility Index (VIX) have behaved after past changes in monetary policy.

To get a longer perspective, we plotted realized Treasury volatility as a proxy for TYIVX and realized S&P 500 volatility as a proxy for VIX. As illustrated in Figure 1 for TYVIX and VIX, expected and subsequent realized volatility are broadly in line.

Figure 1. Expected versus subsequent Realized Volatility, 10-Year Treasuries and S&P 500 Fig1-82115 Federal Fund Target Rate and Volatility More

The Eurekahedge Report highlights impressive YTD performance of Relative Value Volatility Managers

As noted in our previous blog post, CBOE® and Eurekahedge announced the launch of four new benchmark indexes that measure the performance of hedge funds that employ volatility-based investment strategies. The four new indexes:

  • CBOE Eurekahedge Short Volatility Index
  • CBOE Eurekahedge Long Volatility Index
  • CBOE Eurekahedge Relative Value Volatility Index
  • CBOE Eurekahedge Tail Risk Index

According to Eurekahedge’s August monthly newsletter, The Eurekahedge Report, the newly created CBOE Eurekahedge Relative Value Volatility Hedge Fund Index** has performed quite well throughout 2015.  While past returns are no guarantee of future performance, Eurakehedge highlights the Index’s performance metrics and notes that:

  • “The CBOE Eurekahedge Relative Value Volatility Hedge Fund Index is up 5.12% year-to-date, coming in second place among all hedge fund strategic mandates. Relative value volatility funds have shown great consistency posting annualised returns of 10.33% at a low annualised standard deviation of only 3.75% since 2005.”


**For further information on the CBOE Eurekahedge Relative Value Volatility Index go to


Launch of Four New Indexes to Track Performance of Hedge Funds Using Volatility-Based Investment Strategies

CBOE and Eurekahedge announced the launch of four new benchmark indexes that measure the performance of hedge funds that employ volatility-based investment strategies. Eurekahedge is a Singapore-based hedge fund research and data collection company. Values for the new indexes are available on websites of CBOE and Eurekahedge. The four new indexes, the first of their kind, were created to meet the demands of institutional hedge fund investors seeking benchmarks that measure the performance of distinct volatility-based strategies.


The CBOE Eurekahedge Volatility Indexes are equally weighted among the constituent funds and most have been reconstructed by Eurekahedge since 2005 using a rules-based methodology (CBOE Eurekahedge Tail Risk Index is reported from 2008). The combined assets under management (AUM) of the constituent funds exceed $50 billion as of June 2015.

Below are descriptions of the CBOE Eurekahedge Volatility Indexes. Please note that the number of funds within the indexes can vary throughout the month as funds disseminate returns, and the reporting of returns by hedge funds is voluntary.

  • CBOE Eurekahedge Short Volatility Index (Bloomberg Ticker: EHFI450) — The short volatility index is an equally weighted index of 15 constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers who take a net short view on implied volatility with a goal of positive absolute return. The strategy often involves the selling of options to take advantage of the discrepancies in current implied volatility versus expectations of subsequent implied or realized volatility.
  • CBOE Eurekahedge Long Volatility Index (Bloomberg Ticker: EHFI451) — The long volatility index is an equally weighted index of 10 constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers who take a net long view on implied volatility with a goal of positive absolute return.
  • CBOE Eurekahedge Relative Value Volatility Index (Bloomberg Ticker: EHFI452) — The relative value volatility index is an equally weighted index of 39 constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers that trade relative value or opportunistic volatility strategies. Managers utilizing the strategy can pursue long, short or neutral views on volatility with a goal of positive absolute return.
  • CBOE Eurekahedge Tail Risk Index (Bloomberg Ticker: EHFI453) — The tail risk index is an equally weighted index of 8 constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers who specifically seek to achieve capital appreciation during periods of extreme market stress.


Alexander Mearns, CEO of Eurekahedge said, “In 2008 the global stock market [MSCI AC World Index (Local) Index] went down 43% but long volatility funds were up 46%. After 7 years without a major correction in developed markets, investors are increasingly looking at volatility and downside protection, so to that end Eurekahedge are delighted to have teamed up with Chicago Board Options Exchange to offer this new suite of indices to address investors’ demands.” EurekaH in 2008


Block Trade – Near Term Neutral – Long Term Bullish Trade in $TGT

Target (TGT) reported earnings before the open this week on Wednesday the 19th. It appears a trader who is long term bullish, but short term neutral came into the market Tuesday and expressed this outlook using a diagonal spread.   Specifically they purchased TGT Sep 18th 82.50 Calls for 1.18 and sold the same number of TGT Aug 21st 82.00 Calls for 0.68 and a net cost of 0.50. All this was done when TGT was trading around 80.35. The payout for August 21st expiration appears below and an explanation follows.


The payout diagram above uses the assumption that the TGT Sep 18th Call has an implied volatility of 20%, which is a tad lower than where it is as I write this blog. The stock has held up fairly well since earnings, despite the stock market coming under pressure. The trader probably would like to see TGT closer to 82.00 than 80.00, since the goal here is for the 82.00 call to expire with no value and have the maximum potential value for the remaining open position.

Assuming the stock closes tomorrow (August 21st) under 82.00 the result will be a long position in the TGT Sep 18th 82.50 Call with a net effective cost of 0.50. With this result the payoff is a traditional ‘hockey stick’ looking long call position which appears in the diagram below.


Unusual Option Pricing in SHAK Explained

After what seemed like a long wait for some anxious traders, options on Shake Shack (SHAK) commenced trading last week. The chart below is a depiction of weekly price action in SHAK since the company went public early this year.   I can see why traders were clamoring for the listing of SHAK options.

SHAK Pricing Fixed

Something in the SHAK option arena that has gotten a lot of attention is what appears to be a breakdown in put-call parity. Using options, a trader can create a synthetic long position in SHAK that has an effective price much lower than where shares are trading. The reason that put-call parity does not hold for SHAK option pricing is because the stock is difficult for short sellers to borrow. The common term for this is that SHAK is ‘Hard to Borrow’.


Long August VIX Puts Into Expiration

Author’s note – over the weekend I discussed the price behavior of VIX futures and options into monthly settlement.  I start this blog off restating the idea behind this sort of trade and then follow up with the outcome based on Tuesday closing prices and today’s August VIX Settlement of 14.78. 

The Backstory

Something I have been watching for some time is the futures pricing relative to spot VIX the Friday before settlement. The spread, when very little is going on, is usually about a point of premium in the soon to expire VIX future relative to the index. As noted above, the August VIX futures settlement was well over a point higher than VIX on Friday. This means if VIX does not move at all between Friday’s close and Wednesday’s settlement (I know, a reality stretch, but work with me here), a short position in the future would result in a profit. This trade can also be done through purchasing VIX put options as VIX option pricing reflects the level of the underlying futures contacts. I decided to take a look at several August VIX Put option prices from the close on Friday.

VIX Option Quotes

The pricing above is the offer price at the end of the day Friday, along with a break even at expiration, and finally the difference between the break-even level and where VIX closed Friday. As an example the VIX Aug 17 Put was offered at 2.90. Purchasing this option with the intent of holding it to expiration would mean that august VIX settlement would need to be under 14.10 for this trading to make money.


Note the payoff at expiration in the diagram above results in a profit as long as VIX remains around current levels into Wednesday settlement. This is common when expiration is approaching, which is currently once a month. However, beginning in early October, CBOE will begin offering VIX options that expire each week. I’ll be watching closely to see if this sort of price behavior is as consistent with Weeklys as it has been with standard VIX futures and options.

The Outcome

I’m going to address two different potential outcomes based on buying VIX August Puts on the offer price on last Friday.  The first involves exiting the position using the bid price for each option from Tuesday’s close and the second involves holding the position through today’s settlement.

The prices and losses (there were no gains) in the table bellow are based on paying the offer last Friday on the close and selling on the bid price on the close Tuesday.  As VIX settlement can differ greatly from the previous day’s closing level, especially if the equity market sells off, many traders like to exit positions instead of holding them through settlement.

VIX Put Quotes

Note that each trade is a loss, but a pretty small loss considering VIX rose almost a point from 12.83 to 13.79 from Friday to Tuesday.

The second outcome was much worse than the first.   This morning August VIX settlement came in at 14.78 as equity markets were under pressure.  This is a risk associated with AM settlement and is accentuated by the volatility of VIX, especially when stock prices are lower.

VIX Put Quotes 2

Any put with a strike below the settlement value of 14.78 ended up out of the money and a purchase of those puts based on Friday’s close would have resulted in a loss equal to the premium paid.  The higher strike, in the money options, have some value, which offsets the potential cost of those options from Friday.