VIX and the Holiday Season

I’m currently spending the Thanksgiving holiday in Singapore talking VIX and other market related topics on behalf of CBOE and SGX.  There is some downtime on this trip where I have time to think about important things such as what I’m thankful for and how VIX behaves during the period between Thanksgiving and New Years Day relative to the rest of the year.

I ran some quick numbers and came up with the table below.  I love it when the numbers are a bit different than what I expected and this is one of those cases.  We have 26 yearly observations since 1990 where I could compare the closing average for VIX before and then after the Thanksgiving holiday.  The percentages represent how much of a premium or discount the holiday VIX average is relative to the rest of the year.  Stated another way, a positive number shows years where holiday VIX was elevated relative to the rest of the year and a red number shows years where holiday VIX was lower than the average for the rest of the year.




Block Trade Analysis – MDT Earnings

Shares of Medtronic (MDT) took it on the chin Tuesday in response to their most recent earnings report.  The average move for the stock over the last three years was up or down about 2% and the biggest drop over that time period was just over 4%.  Those numbers truly contrast with the recent 8.7% drop.

Midday Monday, someone who had a pretty bearish outlook for MDT shares purchased 2500 MDT Nov 25th 79 Puts for 0.38.  To help pay for those options they also sold 2500 MDT Nov 25th 84 Calls for 0.21 which takes the cost of this trade down to 0.17.  Note on the payoff diagram below that the risk is much greater than the cost of 0.17 if shares had rallied instead of dropped.



I highlighted a couple of price levels on this payoff diagram.  First when the trade was executed MDT was trading at 81.30.  The more interesting level is today’s close of 73.60 which places the long 79 put 5.40 in the money.  Let’s just say someone now has a little extra scratch to spend this holiday season….


Earnings Week of 11/21 – 11/25

Apologies for the lateness of this post.  However there are still some interesting stocks left to report on this holiday shortened week.  As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.  Finally, double check the earnings dates as not all were confirmed.


New Hedging Regime with Higher Levels for CBOE SKEW Index the Past 3 Years

When the CBOE Volatility Index® (VIX®) drops below 14 (as it did in recent days), we sometimes hear questions such as – Is there still strong interest in portfolio hedging with index options?

One metric that shows relative demand for out-of-the-money S&P 500® (SPX) put options is the CBOE SKEW Index (SKEW), with a daily price history that begins in 1990. Prior to 2014, the highest average daily closing value in a year for the SKEW Index was 122.5, but in each of the years 2014, 2015 and 2016 (through Nov. 17) the average daily closing level for the SKEW Index was 127.5 or higher.

The average daily closing values in 2016 (through Nov. 17) were 127.9 for the CBOE SKEW Index (see the table above), and 16.3 for the VIX Index (see the table below).


The levels of the CBOE SKEW Index indicate increased demand for out-of-the-money (O-T-M) SPX puts during the past couple of years. The average daily closing levels of the CBOE SKEW Index have been — (a) 118.4 since its start date in January 1990, and (b) 129.8 in 2014 (the all-time high for any year).
On Nov. 3, 2016, the SKEW Index hit 141.18, its highest level since June 2016.
The value of the SKEW Index increases with the tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. Historically, SKEW has varied in a range of 101.2 to 153.66. The FAQ on the SKEW Index notes that – “The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.”


The volatility skew charts below show that Livevol’s estimates for SPX implied volatility were quite a bit higher for SPX options at 80% and 90% moneyness when compared with SPX options with moneyness at 100.

In a December 2015 Bloomberg news report – “Who’s the Bear Driving Up the Price of U.S. Stock Options?” – Joseph Ciolli wrote – “For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks.”

At his comprehensive presentation at the First Annual CBOE Risk Management Conference (RMC) Asia in Hong Kong a year ago, Buzz Gregory of Goldman Sachs discussed skew and noted that — (1) The skew for the S&P 500 is the highest of any major market in the world, and (2) The S&P 500 skew may remain high because of regulatory pressure on big banks to hedge big downside risks. Regulatory initiatives include – (a) Comprehensive Capital Analysis Review (CCAR), an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress, (b) Dodd-Frank Act stress testing is a forward-looking component conducted by the Federal Reserve and financial companies supervised by the Federal Reserve to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.


If you expect that the SPX skew levels will be relatively high in upcoming months or years, what are some options strategies that an investor might consider? One of the most straightforward strategies to consider would be the sale of O-T-M cash-secured SPX put options. To learn more, please visit the Strategies and Education tabs at
Qualified institutional investors also are welcome to register at for an upcoming Risk Management Conference hosted by CBOE –
* RMC Asia 2016: Nov 30 – Dec 1, 2016 at the Conrad Hong Kong Admiralty, Hong Kong
* RMC US 2017: Wednesday – Friday, March 8 – 10, 2017 at the St. Regis Monarch Beach, Dana Point, California. Weekly Market Outlook – Can The Rally Continue?

Even though the market didn’t end the week on a wildly bullish foot, it ended the week with another respectable gain. The S&P 500 (SPX) (SPY) was up 0.8% for the five day span following the previous week’s 3.8% gain…. and all of that 3.8% gain came in just the last three days of that election week. Either way, the persistent bullishness has left the S&P 500 within striking distance of record highs. It’s still got a bit of a valuation problem, but between the momentum and this bullish time of year, traders would do well to respect the upside potential.

Of course, it never hurts to prepare for an adverse move either… particularly the way the market has been a bit unpredictable for the past several months.

We’ll take a detailed look at the near-term possibilities after dissecting the direction the longer-term economic tide is moving.

Economic Data

As difficult as it may be to believe, in between all the post-election banter last week, economic announcements were still being made right on schedule. Most of them point to strength.

The party started on Tuesday with October’s retail sales. Consumer spending was up 0.8% overall on a month-to-month basis, and grew 0.5% when taking cars out of the picture. Year-over-year, we saw growth rates on the order of 2% across the board. Consumerism is holding up pretty well despite what otherwise looks like a headwind.

Retail Sales (Year-Over-Year Growth) Chart


Source: Thomson Reuters

It was also a big week for inflation – there’s a healthy amount of it, on all fronts. The Fed’s probably going to have to make a move sooner or later, especially with producer price inflation swinging back into positive territory after a two year rut. The benefit of low-cost food and energy has been cycled out and doesn’t factor in anymore.

Inflation Rates (Annualized) Chart


Source: Thomson Reuters

Residential construction, after slowing down in September, roared back to life in October. In fact, housing starts jumped to a new multi-year high pace of 1.323 million units. Permits grew firmly too. The longer-term uptrend is still intact after all.

Housing Starts and Building Permits Chart


Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar




Bond Market Moves May Lead to – ‘Normal Markets’?

The amazing sell off in the bond market over the past couple weeks since the election ended did not go unnoticed by market players. I’ve seen a ton of articles now proclaiming the ‘bull market in bonds is over’, and the ‘bear is going to growl over bonds’. Yet, the long bond has not even reached the highest levels seen in 2015! All the sudden, the calls for the end of the bond bull are everywhere? It might be true, but color me skeptical (so far).

How many calls for this bond market bull to end? Year after year we hear it, yet it never materializes. Like the boy who cried wolf?

While the selling has been quite intense since Donald Trump was made President-elect, the assumption is bond investors are going to flee the market and rates will rise. Well, we should all know that would ONLY happen if inflation expectations start to rise. They have been rising somewhat but not to the extent many have been calling for the ‘end of the world’ in the bond market.

With the 10 year bond at 2.3% it is hardly a major cost to the government and corporations have not been rushing deals out the door to capture low rates, either. I understand trends, trajectory and momentum are important – certainly something that matters greatly to me as a technician.

If the bond market bull run is truly over, as it has been predicted 100 other times since the run started in 1981, then I’m quite sure there will be some major signal and trend. Some analysts have been wrong-footed for years, trying to predict the end has been an exercise in futility, but many look for the glory of being the ultra contrarian. Not my game, just take me where I can make money.

Yet, If that is indeed the case, there is some inflation on the horizon – and the Federal Reserve open market committee will do its job by snuffing it out with a more hawkish policy. Just like previous inflation cycles. We’ve seen bond selloffs before, and actually live to tell about it. This could actually put is in a more normal market, which is what everyone seems to want – how great would that be?

The Weekly Options News Roundup – 11/20/2016

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

RIA Forum on Options Strategies
riaOn Thursday, CBOE hosted the Registered Investment Advisor (RIA) Forum on Options Strategies.  The day-long event featured roundtable discussions and presentations with leading options industry professionals, including portfolio managers, ’40 Act Fund providers and CBOE and OIC staff.

Joanne Hill, PhD, Head of Research and Investment Strategy, CBOE Vest Financial, and recipient of the William F. Sharpe Lifetime Indexing Award, discussed CBOE strategy benchmarks and their effect on investor portfolios.

VIX FIX: Volatility’s Déjà vu
The U.S. Presidential election has been placed in the history books, and as the dust begins to settle, market volatility has followed suit.  After a surprise Donald Trump win came into focus, the CBOE Volatility Index (VIX Index) shot up 55% election night to a high of 23.46 before retreating to levels below 16 the next trading day.  The VIX Index continued to retreat over the week, closing around the 13 mark on Friday, as markets rallied to new highs as  investors reassessed the implications of a Trump presidency.  As America counts down to Inauguration Day, volatility may be down, but not out.

“Trump Bounce Saves Clinton Vol Traders from Pain” – Dan Alderson, Global Capital

“VIX Update: The VIX is Ready to Take off Again” – Seeking Alpha

“What’s Behind the Recent Surge in Volatility” – Value Walk

“Sailing the Chaos of a Trump Rally” – Steven M. Sears, Barron’s

“CBOE VIX: Volatility Continues to Plummet in the Wake of Trump Election Win” – Sam Bourgi, Economic


Weekend Review – Russell 2000 Options and Volatility – 11/14 – 11/18

The Russell 2000 (RUT) widened its lead on the Russell 1000 (RUI) after trouncing the large cap index the previous week.  For the year, RUT is up about 15.8% while RUI is up one basis point under 7%.  If you had been fortunate enough to pick the bottom in RUT you would be up just shy of 38% since February of this year.



Weekend Review – VIX Options and Futures – 11/14 – 11/18

VIX returned to being a ‘tween’ this week finishing with a twelve handle.  The rest of the curve shifted lower as all fear with respect to a Trump administration seems to have dissipated.  At least for the moment.  There are some risk events between now and the end of 2016 which I’ll address after the table below.


CBOE’s partner LiveVol has a great option analyzing tool and one of the features is that you can easily see At-the-Money implied volatility for different expirations.  This is particularly cool with respect to SPX options which have multiple expirations each week.  I’ve started playing around with the numbers and comparing them with different events that we know might move the markets in the future.  This is still a work in progress so suggestions are welcome.


Implied volatility rises as we go farther out in time, but I do think it’s interesting to see the lull then move up into December 14th on the chart above.  I’ve included the Electoral College even though it’s doubtful that anything dramatic may happen on that date.  But of course I was on a panel a few months ago where one of the participants refused to discuss even the possibility of a Trump presidency since he, “didn’t want to waste time on something so impossible”.


Finally, next week is a holiday shortened week that give the US markets the closest thing to a four day weekend we will ever get.  I think someone believes volatility will remain low and used the VIX Weeklys options to express this outlook.  Early Friday, when VIX was still in the 13’s there was a buyer of about 10,000 VIX Nov 23rd 13 Puts in several lots between 0.15 and 0.20.  The payoff appears below with Friday’s VIX close highlighted and any settlement 0.05 lower than Friday’s close will turn this trade into a winner and give one person some extra $$$ for next week’s Black Friday.

Block Trade Analysis – Bearish RUT Broken Wing Butterfly

I got a heads up this morning about a pretty darn interesting trade that came into the Russell 2000 (RUT) pit this morning.  With RUT around 1300 there was a put butterfly that is looking for the small cap benchmark to be about 100 points lower on January 20th of next year.  Not only is that standard option expiration date it is also the day we will inaugurate our next president.

The specific trade involved buying 7,000 RUT Jan 1240 Puts for 20.50, selling 14,000 RUT Jan 1200 Puts at 12.80, and then finishing up by purchasing 7,000 RUT 1170 Puts for 9.05.  The net result is a cost of 3.95 per spread and a payout that looks like the diagram below if the trade is held through expiration.



Note the broken wing nature of this spread means that anything under 1236.05 results in some sort of profit at expiration.  Needless to say, this trader would be very happy with RUT settlement on the open January 20th to come in right at 1200.00.

Since the Russell 2000 has had quite a move lately I decided to open my LiveVol Pro platform and check out how this trade matches up with the price action.  On the chart below I highlighted the break-even point on this chart and found it interesting that this trade does well if we just give back most of the post-election gains by inauguration day.


If a Trump Presidency Is Scary Why Is VIX So Low?

The world continues to adjust to the idea of a Trump presidency and there seems to be a lot of fear abounding.  For instance, I recently heard an economist state that he didn’t think even Donald Trump knows what action he’ll take as President.  We will all know the answers to what he’s going to do soon enough.  A question I recently got was, “If Trump is so scary why is VIX low?”  That’s a question I can answer.

There are two types of government related policy that can impact the economy.  Monetary policy is the one that we are all use to hearing about.  The big focus right now is what will the FOMC do and say next month.   The markets are pricing in just over a 90% chance of a hike at the December 13-14 meeting.  I’d say that’s the market showing some certainty.

The other type of policy that can impact the economy is fiscal policy.  This is government oriented such as taxation, tariffs, regulations, etc.  Those are the things that a Trump administration will address more quickly than what the Fed does.  Fiscal policy may have a quicker impact on the fixed income markets than on the stock market.  Therefore the bond market is where the fear has been showing up since the election.   There’s no better indicator of bond market volatility than the CBOE/CBOE 10-Year Treasury Note Volatility Index (TYVIX).


The chart above shows the change in VIX and the change in TYVIX since November 8th.  VIX is down over 28% since the election while TYVIX has gained over 25%.  The gain in TYVIX was over 37% as of yesterday and the index took a breather today.  So VIX may be low as the prospects for stocks is positive for the near term.  However, the fear is in the bond market, and this probably relates to the uncertainty of the fiscal policies we will learn more about early next year.

Yield-Hungry Investors Explore CBOE’s Option-Selling Benchmarks During Bond Market “Rout”

Here are some highlights from recent news stories on the bond markets

  • A Wall Street Journal story had the headline “Government Bond Rout Deepens on Trump’s Economic Plans,”
  • A Barron’s story noted that Jeffrey Gundlach, CEO of DoubleLine Capital, sees “a rise in bond yields that could lift the yield on the 10-year Treasury note to 6% in the next four or five years.”
  • A New York Times story stated that “From Indonesia to the United States, government bonds are undergoing a sharp sell-off as investors — large sovereign wealth funds and hedge funds, as well as the accounts of American retirees — restructure investment portfolios to try to capture the fruits of what they expect will be a free-spending Trump presidency.”
  • A CNBC headline – “’Trump Thump’ Whacks Bond Market for $1 Trillion Loss.”

I recently spoke with several investors and advisors who are interested in yield-oriented investments that have the potential for positive returns in a rising interest rate environment, and there appears to be increased interest in CBOE’s option-selling benchmark indexes, such as BXM, PUT, BXR, and WPUT. 


While many of the recent stories on the bond markets provide data and charts on rising interest rates, a key question for investors is – how have yield-oriented indexes and investments recently performed?

The first two charts below show comparative performance since mid-2016 for select CBOE option-writing benchmark indexes versus select fixed-income benchmark indexes.


In the chart above the percentage changes since mid-year (through November 14) were up 7% for the PUTR Index, up 4% for the PUT Index, and down 13% for Citigroup’s 30-year U.S. Treasury Bond Index. In addition, Citigroup’s 30-year U.S. Treasury Bond Index had a 17% drawdown from its July 8 peak through November 14.

In the chart below the percentage changes since mid-year (through November 14) were up 9% for the BXRD Index, up 3% for the BXMD Index, and down 5% for the Bloomberg Barclays Global Aggregate Index. It is possible that indexes related to the Russell 2000 Index recently have done relatively well in part because the Russell 200 stocks tend to focus more on U.S. (rather than multi-national) markets.


The chart below shows a drop in prices for the iShares 20+ Year Treasury Bond ETF (TLT) from 143.6 on July 8 to 121.31 on November 14. (This chart reflects daily closing prices, but does not show total returns with reinvested dividends).




A Quick Look at Market Risk Through the End of 2016

As the recent election drew near I would periodically post a chart showing the implied volatility for ATM SPX options over the many expirations we have available for trading.  Just for the heck of it I checked in on SPX implied volatility for every expiration available until the end of 2016.  The shape was interesting with a couple of bumps that occur around known events which may impact the equity market.  I decided to get out a calendar and see what other potentially market moving events are coming up and where they fall on the chart below.  The line tells an interesting story.


More Post-Election Weekly Market Outlook

To call last week as wild week would still be an understatement of epic proportions. The S&P 500 (SPX) (SPY) gained 3.8% last week, which was big, but it was a victory made even more amazing by the fact that a Trump victory was supposed to be bad for the market (and for a few hours before Wednesday’s open, it was very bad for stocks). A few hours after Donald Trump was confirmed as the next President though, the S&P 500 was not only up, but had cleared a key technical hurdle.

The bulls don’t need to get too excited just yet. The rally ran out of gas on Thursday, and is once again stuck between a rock and a hard place. It just so happens that it happens to now be stuck on the bullish side of that rock and hard place.

We’ll dissect it all below, after a quick run-down of last week’s and this week’s economic news.

Economic Data

It was a light week in terms of economic news last week, which is perhaps for the best – all eyes were on the election anyway. With the dust now settling from the voting process and fallout though, there was one announcement worth looking back and exploring – the JOLTS (job opening and labor turnover survey) report showed a slight contraction in the number of advertised jobs. That’s not terribly unusual, but when one takes a step back and looks at the longer-term trend here, we can see a bit of stagnation of this data.

JOLTS (Job Openings and Labor Turnover) Chart


Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar



This week’s economic dance card is going to make up for last week’s lull.

The party starts on Tuesday with a report of October’s retail sales. Economists are looking for another month of solid growth, with or without cars. Growth has been pretty healthy on the consumer spending front for a while. As the chart of year-over-year retail spending growth shows, it’s up in every stratification except for gasoline stations, and weak gasoline station sales are a function of low oil prices (and even then we’re seeing forward progress there).

Retail Sales (Year-Over-Year Growth) Chart


Source: Thomson Reuters