Weekend Review – Volatility Indexes and ETPs – 7/11 – 7/15

Short term volatility was the big loser among the four S&P 500 related volatility indexes as VXST lost over 10% last week.  This was more than two times the drop in VIX and more than three times the drop in VXV and VXMT.  The result is a pretty darn steep curve indicating concerns about the second half of this year for the stock market are lurking around in option volatility.

VXST VIX VXV VXMT

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Baseball, hot dogs, apple pie, and…VIX shortcake

If you can’t wear shorts in the summer, when can you?  At the time of my last writing, I was showing off a pair:  TVIX and UVXY, which everyone knows are really just two legs of the same thing (for my purposes, anyway).  Even though I had donned one leg before the other (I put my pants on one leg at a time, just like everyone else), I took them both off in one motion, as such:

But only one day later, my thoughts were consumed in the following manner:

From WikiHow’s “How to Short Sell” http://www.wikihow.com/Short-Sell

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The Weekly Options News Roundup – 7/15/2016

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.

More Than Just A Manic Monday
A new tool has emerged in CBOE’s suite of Weeklys offerings with the planned addition of Monday Weeklys on August 15th. Monday Weeklys allow investors to hedge over-the-weekend risks in addition to targeting event-driven hedging.  The new Weeklys contract shares the same characteristics of Wednesday and Friday-expiring Weeklys options but is differentiated by its Monday expiration and listing date.  For more information, see Press Release.

“CBOE to Add Mondays to SPX Weekly Options Suite” – Julie Aelbrecht, FOW
http://bit.ly/29RdpaM

“CBOE Launching SPX Monday-Expiring Weekly Options” – Mike Fox, LeapRate
http://bit.ly/29IOxkR

The Greenwood Project
On Wednesday, students under the tutelage of the Greenwood Project, toured the CBOE DSC_0397trading floor, enthusiastically interacting with trading professionals while receiving a rich new learning experience.  The Greenwood Project is an organization that has partnered with various financial trading firms in an attempt to familiarize minority students on available opportunities in the financial sector.  For more information visit the Greenwood Project .

VIX FIX :Volatility Exits With Brexit 
Investor panic surrounding implications of a British Exit from the European Union was short-lived, with markets shaking off recent tumbles, rising to record highs in the Dow Industrial and S&P 500 Indexes. VIX has subsided to levels just above the 13 mark, well below its historical average as fears have calmed. But do investors still have reasons to fear? After all, it is an election year.

“Using Options to Win During Market Chaos” – Steve Sosnick, Barron’s
http://bit.ly/29GIAVD

“VIX Hovers Near Lows Despite Brexit” – Ashley Coutinho, Business Standard
http://bit.ly/29EAysI

“Options Market Signals Little Fear of Election-Tied Volatility” – Saqib Iqbal Ahmed
http://reut.rs/29YFF9D

“Record High S&P 500 And Low VIX: Time to Think About Hedging” – Gaudi Schneider, Seeking Alpha
http://bit.ly/29WjHr0

“Dow Jones Industrial Average, S&P Hit New Highs” – Celeste Taylor, Schaeffer’s Investment Research
http://bit.ly/29AKOD4

 

CLL Index and the Collaring of Stock Portfolio Risk – Blog #9 on 30-Year Price History

The CBOE S&P500 95-100 Collar Index (CLL) invests in short S&P 500® (SPX) calls, long SPX puts and long stocks in order to gather premium income and manage downside risk. 

The histogram with the S&P 500 and CLL indexes shows that the S&P 500 had 13 months with declines of worse than 8 percent, while the CLL Index had only 1 such month. Certain index options strategies can be used to help manage left tail risk.

MM11

The SPX puts at 95 moneyness did help mitigate the downside moves of the CLL Index (see also the “Biggest Moves” table below).

The CLL Index engages in these 3 positions: (1) Holding the stocks in the S&P 500 index; (2) Buying 3-month SPX put options to protect this S&P 500 portfolio from market decreases; and (3) Selling 1-month SPX call options to help finance the cost of the put options.

The table below shows that, for the 5 months in which the S&P 500 Index fell by more than 10%, the CLL fell but not as much as the stock index did.

MM12

RETURNS AND VOLATILITY OVER 30 YEARS 

In the next 2 charts below, the CLL Index had higher returns than 2 of the other 4 indexes, and lower volatility than all 4 of the other indexes (including the Treasury Bond index).

MM13

MM14

IMPLIED VOLATILITY FOR SPX OPTIONS 

When constructing a collar or any other options trade, an important factor to keep in mind is – what are the levels of implied volatility at various strike prices and maturities? The table below provides Bloomberg’s estimates on July 12 to help answer that question. Note that there are two numbers in the table (at 95 and 110 moneyness) that are highlighted; these 2 implied volatility numbers could be near to the numbers used to implement the CLL Index – a three-month long SPX PUT at 95 moneyness, and a one-month short SPX call at 110 moneyness. Please be aware that implied volatility estimates can change quickly.

MM15

MORE INFORMATION 

[This is the ninth in a series of nine blogs that are being published in early July at the CBOE Options Hub on 9 CBOE benchmark indexes which have price histories that begin on June 30, 1986.] 

The microsite for the CLL Index is www.cboe.com/CLL.

For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts.

If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences

  • RMC EUROPE 2016, Sept. 26 – 28, 2016, Powerscourt Hotel, County Wicklow, Ireland
  • RMC ASIA 2016, Nov 30 – Dec 1, 2016, Conrad Hong Kong Admiralty, Hong Kong
  • RMC US 2017, March 8 – 10, 2017, St. Regis Monarch Beach, Dana Point, California

(The author thanks Paige Stodden for her assistance in creating charts for this Blog).

When VIX and SPX Rise Together – the 2016 Version

On July 11 and July 12 both the S&P 500 and VIX rose on the day.  This brought out an old blog I wrote in 2013 discussing what the stock market has historically done when both the S&P 500 and VIX rise two days in a row.  I updated the numbers from that last study and now we have 92 occurrences where both indexes rose two days in a row (today was number 93 and the jury is still out on the subsequent market action.  The table below summarizes what the S&P 500 did on average the following five trading days.  Note the percentage times the market was lower is right around the 50 / 50 range, but on average the market is lower after two consecutive SPX / VIX up days.  I have on my to do list next week to circle back and see how the 93rd time turned out.

VIX and SPX

 

CNDR Index and Portfolio Management – Blog #8 on 30-Year Price History

CBOE S&P 500 Iron Condor (CNDR) has a data history of more than 30 years, and it engages in call and put options positions in order to gather premium income and manage downside risk.

The histogram with the S&P 500 and CNDR indexes shows that the S&P 500 had 26 months with declines of worse than six percent, while the CNDR Index had 10 such months. Certain index options strategies can be used to help manage left tail risk.

MM1
The CNDR Index tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly S&P 500 Index (SPX) put option (delta ≈ – 0.2) and a rolling monthly out-of-the-money (OTM) SPX call option (delta ≈ 0.2); 2) buys a rolling monthly OTM SPX put option (delta ≈ – 0.05) and a rolling monthly OTM SPX call option (delta ≈ 0.05) to reduce risk; and 3) holds a money market account invested in one-month Treasury bills, which is rebalanced on option roll days and is designed to limit the downside return of the index.

The next chart shows a profit-and-loss diagram for an iron condor strategy.

MM2

The table below shows that, for the 8 months in which the S&P 500 Index rose or fell by more than 10%, the CNDR Index experienced moves that were not as severe as those of the S&P 500; during those 8 months the CNDR Index did not have any moves (up or down) of more than 10%.

MM3

RETURNS AND VOLATILITY OVER 30 YEARS

In the next charts below, the CNDR Index had higher returns than 2 of the other 4 indexes, and much lower volatility than all 4 of the other indexes (including the Treasury Bond index).

MM4

MM5

MORE INFORMATION

[This is the eighth in a series of nine blogs that are being published in early July at the CBOE Options Hub on nine CBOE benchmark indexes which have price histories that begin on June 30, 1986.]

The microsite for the CNDR Index is www.cboe.com/CNDR.

For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts.

If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences —

  • RMC EUROPE 2016, Sept. 26 – 28, 2016, Powerscourt Hotel, County Wicklow, Ireland
  • RMC ASIA 2016, Nov 30 – Dec 1, 2016, Conrad Hong Kong Admiralty, Hong Kong
  • RMC US 2017, March 8 – 10, 2017, St. Regis Monarch Beach, Dana Point, California

(The author thanks Paige Stodden for her assistance in creating charts for this Blog).

 

 

New SPX Monday-Expiring Weeklys Options To Launch Next Month

CBOE recently announced that it plans to list S&P 500® Index (SPX) Monday-expiring Weeklys options, beginning August 15, pending regulatory approval.  With the expected introduction of SPX “Monday Weeklys,” CBOE will offer SPX options with Monday, Wednesday and Friday expirations.

SPX Weeklys are one of CBOE’s fastest-growing products, with volume in 2015 setting a 10th consecutive annual record. The chart below shows that SPX Wednesday-expiring weekly options set new volume records in every month since their introduction last February.

MM1

COMMENTS BY CEO

The CBOE News Release noted that CBOE Holdings CEO Edward T. Tilly said –

We are pleased to further expand our SPX product complex and build off the successful February launch of SPX Wednesday Weeklys with the introduction of SPX Weeklys with Monday expirations. Weeklys provide greater trading precision and with new Monday Weeklys, investors will be able to efficiently hedge over-the-weekend risks.  With three different expirations in our SPX Weeklys product line, investors will have even more opportunities and flexibility when trading the S&P 500.”   

FEATURES OF SPX MONDAY-EXPIRING WEEKLYS OPTIONS

Trading Hours — Extended and Regular Trading Hours currently in place for the existing SPX/SPXW options will be followed.

Ticker Symbol — SPX Monday-expiring Weeklys series will be available for trading under option symbol SPXW.

Expiration and Final Trading Day

  • SPX Monday-expiring Weeklys options are PM-settled.
  • The expiration date (usually a Monday) will be identified explicitly in the expiration date of the product. If the Monday of the week in which the options expire coincides with an Exchange holiday, the expiration date will be on the next business day (usually a Tuesday). The expiration date for each option is also the last trading day for that option.
  • SPX Monday-expiring Weeklys may expire on any Monday of the month, other than a Monday that coincides with an End-of-Month (“EOM”) expiration date.
  • Expiring SPX Monday-expiring Weeklys options will cease trading at 3:00 p.m. Central time on their last trading day. All non-expiring SPX Monday-expiring Weeklys options will continue to trade until 3:15 p.m. Central time.
  • SPX Monday-expiring Weeklys option series will not be included in the strip of option series that will be used to calculate the CBOE Volatility Index (“VIX Index”) spot value or the exercise or final settlement value of VIX Index options and futures.

FEATURES OF WEEKLYS OPTIONS

Contracts with weekly expirations allow investors to implement more targeted buying, selling, spreading or hedging strategies. In addition, futures and options with weekly expirations can help investors take advantage of breaking news or known economic events, such as earnings, monthly U.S. economic reports and Federal Reserve announcements.  Additional information on Weeklys options and futures can be found at www.cboe.com/Weeklys. CBOE pioneered short-term options trading in 2005 by introducing the first weekly expiring options contract.

MORE INFORMATION

The microsite for SPX Weeklys options is at www.cboe.com/SPXW.

For an overview of SPX Monday Weeklys options contract specifications and other operational details, refer to CBOE Regulatory Circular RG16-119 at http://www.cboe.com/aboutcboe/legal/crclreg.aspx.

 

BXM Index – Leading Benchmark for Capturing the Volatility Risk Premium – Blog #7 on 30-Year Price History

On April 29, 2016, Morningstar added a new Option Writing category to its U.S Retail Category system, and the Category Index is the CBOE S&P 500 BuyWrite Index (BXM).

In the May 7, 2016, Striking Price column in Barron’s, Steve Sears wrote —

“…THE OPTIONS INDUSTRY has taken a major step onto Main Street. Morningstar, which millions of individuals rely upon to evaluate mutual funds, has created a category for options-trading funds. The significance of this can’t be overstated. It indicates options have become part of the mainstream investment landscape, like growth mutual funds and index funds. … Morningstar’s “options writing” category is limited to mutual funds that use options as a central and consistent part of their strategy. The funds sell puts, or calls against long stock, and may also use spreads and collars.”

In 2002 CBOE introduced the CBOE S&P 500 BuyWrite Index (BXM) as the first major benchmark index for options strategies, and over the past dozen years the BXM has facilitated increased and new uses of option by mutual funds, closed–end funds and pension funds. The BXM is a passive total return index based on (1) buying an S&P 500® stock index portfolio, and (2) “writing” (or selling) the one-month S&P 500 Index (SPX) “covered” call option, generally on the third Friday of each month. 

PERFORMANCE CHARTS

The first chart below shows that over the past three decades the BXM Index had less volatility than the 30-Year Treasury Bond Index and three other major indexes.

1

2
The BXM Index sells SPX covered call options that are close to at-the-money (ATM). With the ATM covered call strategy, and investor can collect quite a bit of gross options premium, but the investor forgoes the upside move on the stock position. The chart below shows that the S&P 500 grew faster than the BXM Index in recent years.

3

VOLATILITY RISK PREMIUM
A key source of strong-risk-adjusted returns for sellers of SPX index options has been the fact that, according to the chart below, these options have been richly priced in all the years since 1998 (except in 2008).

5

LESS LEFT TAIL RISK 
The histogram with the S&P 500 and BXM indexes shows that the S&P 500 had 26 months with declines of worse than six percent, while the BXM Index had 12 such months. Certain index options strategies can be used to help manage left tail risk. More

Weekly Market Outlook – Valuation Concerns as New All-Time Highs Approach

Following through on the surprising post-Brexit bounce from two weeks ago, the S&P 500 (SPX) (SPY) gained 1.3% last week, closing at 2129.90. Though that wasn’t the highest close ever for the index (nor did it reach a new intraday high), that was the highest weekly close ever for the S&P 500. And, we’re within easy reach of the pinnacle of 2134.72 hit in May of last year.

This is a do-or-die moment for the market. If it’s to muster any more upside, it’s going to have to plow into new-high territory and traders are going to have to effectively say valuations aren’t that important currently (a la 1999). It could happen though.

Or, this overvalued and overbought market could finally buckle under its own weight.

We’ll weight the near-term odds below, after painting the bigger picture with last week’s and this week’s economic news.

Economic Data

Last week was chock full of economic news, but there’s little doubt as to the highlight… June’s employment report. Though it was the proverbial grand finale, calendar-wise, let’s get to it first.

Bottom line? The U.S. added 287,000 new payrolls last month… the biggest increase since October of last year, putting the overall trend back on track. Don’t get too excited though, as most of June’s new jobs were taken out of May’s report. We initially thought there were only 38,000 new jobs made in May, but after a closer count, the tally was only 11,000. The average for the two months is 149,000, which is right at the average for the past several months.

The unemployment rate ticked higher — as expected — from 4.7% to 4.9%, though in some regards that’s a good thing. It indicates people are plowing back into the labor force (though not necessarily employed). This suggests they see enough good job opportunities to put forth a serious job search effort. Underscoring this idea is the reality that the total number of employed people ticked up from 151.03 million to 151.097 million, rekindling a long-term uptrend.

Employment Growth, Unemployment Rate Chart

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Source: Thomson Reuters

Jobs data wasn’t the only noteworthy economic news to come out last week though. We also rounded out the ISM picture with the ISM Services Index score, which followed the ISM Manufacturing Index score from two weeks ago. The former ramped up from 52.9 to 56.5, while the latter grew from 51.3 to 53.2 in June. Any reading above 50 for each is positive, but it’s encouraging to see both tick a little higher all the same. Better yet, each seems to be bolstering the uptrend.

ISM Index Chart

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Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar

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Source: Briefing.com

The coming week will be a bit busier, though only three items are of any major interest… inflation, retail sales, and capacity utilization/industrial production.

While both producer inflation and consumer inflation remain at tame levels, both inflation rates are on the rise. The current consumer inflation rate, not counting food and energy costs, stands at 2.2%. Producer price inflation — again, without food and energy costs counted — is 0.8%. Both are mostly on the rise. Yes, food and energy are cheap, but sooner or later both will become relatively more expensive. It will all have to be quelled soon, even if not immediately.

Consumer, Producer Inflation Chart More

Market Talk, Part 1: Words and Phrases to Avoid

We hear so much definitive market talk from the financial media, and most of it is careless and quite useless. The best advice is to follow the market action and not the anecdotes and phrases that will put you in the wrong frame of mind. Discipline and hard work trump complacency and laziness, so turn off the noise and be at your best.

‘It will be different this time’ — Mark Twain reportedly said, ‘History doesn’t always repeat, but it often rhymes’. Investor/trader emotions never change, driven by the fear/greed over wealth. Markets have been going higher over a longer period of time, and while there are always dips the track record of the stock market since inception is a pattern that I will continue to follow.

‘There is no Alternative (TINA)’ — We have been hearing this one quite a bit lately as money seems to flow consistently to the US for investment. This fallacy is the result of media hype trying to influence investors to be pushed into a certain country or asset class. The fact is diversification the best way to play markets, the only free lunch you will ever get. We have the choice of different asset classes – equities, bonds, gold, real estate, commodities and cash. The TINA proponents will scare an uninformed public into piling their money at the wrong time into one asset class.

‘There is too much cash on the sidelines’ — I really do not understand this one. There should always be ample cash on the sidelines to take advantage of dip buying opportunities. The assumption with too much cash on the sideline is ‘you better get in before all that sidelined cash rushes in’ and drives prices higher.

‘Time to go all in’ (Suz Smith) — The term ‘all in’ should NEVER be used as it relates to investing. This is just a set up for disaster. I often preach on my webinars, coaching sessions and chat room to always size positions correctly. The all in concept comes from the world of no-limit poker, where you push all of your chips in on one hand and leave it to the poker Gods on whether you will win big or get busted out.

Lotto ticket – (Suz Smith) — How often have you played the lottery and actually won? I would guess not many of you, so trying to play lotto tickets with plays, specifically options is a low probability event for coming true. Sure, sometimes these hit but understand this is not part of a regular investment strategy.

‘You have to buy this dip, you will never have another chance’ — We heard this one often during the 2008/09 financial crisis, all the way from SPX 1200 down to the low of 666. I cant tell you how many times I heard this one spouted in the social media, yet the market continued under severe distribution. The financial media was telling you to grab a falling knife, but the market was telling you there was more selling.

‘Gold is just an old relic, there is no value or use for the metal’ — For many years gold was seen as a store of value for times of war or as an inflationary hedge. With the unleashing of central bank authority to print more fiat currency it has given rise to the popularity of gold as an alternative. Currencies are in a race to the bottom, and since gold (and other precious metals) cannot be replicated it makes great sense to hold gold in case currencies continue to be slammed (as we saw recently with the British Pound Sterling). Gold is one of the best performing asset classes in 2016.

We’ll have part II next week.

Weekend Review – VIX Options and Futures – 7/5/2016 – 7/8/2016

VIX finished the week at 13.20 – only 0.10 higher than lowest 2016 close of 13.10.  The front month (July) futures contract was down slightly more than VIX this past week.  Anecdotally I’ve noticed in the past when we see VIX down significantly in reaction to the employment number that the front month contract seems to give up extra value.  I attribute this to a lack of anticipated market news after the employment number until expiration.

VIX Futures Curve

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Weekend Review – Volatility Indexes and ETPs – 7/5/2016 – 7/8/2016

I was participating in the Vol Views podcast Friday around lunch time and decided to take a look at the whole suite of volatility indexes and see if anything was higher.  None of the 29 volatility indexes CBOE quotes were higher at that time and none of them finished higher on Friday.  The list below shows the price changes ranked on a percentage basis for yesterday.

Vol Index Change

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Weekend Review – Russell 2000 Options and Volatility – 7/5/2016 – 7/8/2016

On Thursday there was a trending hashtag on Twitter #ThursdayThoughts or something like that.  I was tempted to tweet something like “Buy on any weakness #ThursdayThoughts” but was afraid CBOE wouldn’t find the humor in something that looks like a recommendation.  However, if I had done so I would have looked darn good on Friday.  The tide took all ships higher with RUT gaining 2.4% on the day and RUI up 1.5%.  The Friday rally helped place RUT up 3.65% for the year while RUI maintained a lead for 2016 at up 4.18%.

RUT RUI

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The Weekly Options News Roundup – 7/8/2016

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.

More Tools for “Target Outcome Investing”

CBOE announced this week that it has created a series of 13 “enhanced growth indexes,” the second in a family of options-based strategy performance benchmarks designed to target the outcomes of specific investment strategies. These benchmarks measure the performance of a hypothetical portfolio employing S&P 500 Index (SPX) FLEX options.   To learn more, see the press release or visit www.cboe.com/enhancedgrowth.    

“CBOE Unveils Enhanced Growth Indexes with 13 New Series Tied to SPX Options” – Steven Hatzakis, Finance Magnates

http://bit.ly/29kemVd

Wednesday is the New Friday

The listing of Wednesday-expiring Weeklys options on the S&P 500 Index (SPX) by CBOE in February has been a big hit with investors.  SPX Wednesday Weeklys options arm investors with greater trading precision and even more opportunities and flexibility  when trading the S&P 500.

“Industry Spotlight: Wednesday Expirations Anyone?” – The Ticker Tape

http://bit.ly/29qzo8E

VIX FIX: Where Does VIX Go Now?

The dust has settled from the Brexit market implosion.  The CBOE Volatility Index (VIX Index) fell 42 percent last week, its biggest one-week drop ever, and remained muted this week.  As markets staged a small comeback, the VIX Index was fairly quiet, hovering around 15, before dipping to 13.63 mid-day Friday.  Has the market regained its footing, or was Brexit merely the first shoe to drop?

“VIX, The Market’s Fear Gauge, Plunges in Historic One-Week Move” – Alex Rosenberg, CNBC

http://cnb.cx/29qTtM4

“Brexit? What Brexit?” – Chris Dieterich, Barron’s

http://on.barrons.com/29qVfg0

“After the Biggest Weekly VIX Drop Ever, What Now?” – Todd Salamone, Schaeffer’s Investment Research

http://bit.ly/29ziw0A

“Where Will Stocks Go After the VIX Implosion?” – Alex Eppstein, Schaeffer’s Investment Research

http://bit.ly/29BxC2Y