Weekend Review – VIX Futures and Options – 6/13 – 6/17

I’ve been around long enough to remember when the time in the markets between Memorial Day and Labor Day were quiet enough for traders to spend several afternoons at Wrigley field without feeling they were missing anything. This past week no one could have gotten away with playing hooky.

As the stock market came under pressure, VIX climbed to the highest levels we have seen since February. Everyone is focused on Brexit as the ‘reason’ for the markets to be doing what they are doing. I’m going to use that excuse for a couple of things in this blog as well. First, note the curve is basically in contango despite VIX being at relatively high levels. I believe, if it weren’t for the big vote next week, that either VIX would be lower or if VIX were this close to 20.00 the July contract (which doesn’t expire until July 20th) would be at a discount to spot VIX.

VIX Curve table


The Weekly Options News Roundup – 6/17/2016

Social Powers That Be

On Tuesday, CBOE announced it plans to develop a series of social media-based strategy benchmark indexes using Social Market Analytics’ (SMA) state-of-the-art analytics. SMA chief executive officer Joseph A Gits IV, commented:  “CBOE is an unrivaled product innovator and a leader in the index space and SMA is a leader in providing actionable social media metrics.  We look forward to working with CBOE to create these first-of-their-kind indexes.”  For more information, see the Press Release.

“CBOE Taps SMA for ‘Social’ Benchmark Indexes” – Max Bowie, Waters Technology


“This is How Hedge Funds See Market Moves Before the Rest of Us” – Lynne Marek, Crain’s Chicago Business


“CBOE Unveils Plans to Create Sentiment Benchmarks from Social Media Data” – Steven Hatzakis, Finance Magnates


“CBOE to Develop Series of Social Media-Based Strategy Benchmark Indexes” – Markets Media


VIX FIX – The Brexit Effect

With the “Brexit” vote looming next Thursday, and polls now indicating for the first time that “leave the EU” is ahead of “stay in the EU,” volatility returned to the market this week. The CBOE Volatility Index (VIX Index) rose to 22.89 intraday yesterday, its highest level in four months.  And since June 8, the VIX Index has surged more than 50 percent.  The VIX Index has dipped back below the 20 level this morning, but it might just be catching its breath ahead of the big vote next week.

“VIX Pops Above 20 on ‘Brexit’ Angst” – Chris Dieterich, Barron’s


“Here’s What the VIX is Saying About Brexit and Volatility” – Bob Pisani, CNBC


“Watch the VIX: It Matters This Time, Justin Lahart, The Wall Street Journal


“Brexit Poll Sees VIX Jump on Low Liquidity” – Daniel O’Leary, EQ Derivatives


“The VIX Just Had a Huge Day” – Saumya Vaishampayan and Ben Eisen, The Wall Street Journal


“‘Fear’ Index Soars Ahead of EU Referendum Vote” – Laura Dew, Investment Week


“Seeing the Surging ‘Brexit’ Volatility in the British Pound” – Ben Eisen, The Wall Street Journal


“Elevated VIX Provides Relief to Long Vol Managers” – Daniel O’Leary, EQ Derivatives


“Market Reprices VIX as Call Buying Takes Hold” – Daniel O’Leary, EQ Derivatives


“VIX Rises to August Swoon Levels” – Market Pulse


“The VIX is Starting to Get Jumpy” – Helene Meisler, The Street




A Quick Look at Options versus Futures

When short dated options were introduced on stocks and ETFs I made an assumption. We all know assumptions may be wrong, and that is the case here. I thought the major use of short dated options would be to take advantage of at the money time decay.   I was actually half wrong as we do see option short sellers come into the market place fairly frequently when expiration is approaching.

The use I did not foresee involves using a short dated options as a substitute for a futures trade. A few years ago I noticed a deep in the money RUT call purchase for an option that had three days remaining to expiration. I conferred with the other instructors at The Options Institute and we decided to take a look at the cost of this option versus the margin required for a Russell 2000 futures contract. My recollection was that it was a deep in the money RUT Call option that had about 1 point of time value and cost 40.00 or $4000 in real money. At the time I believe the Russell 2000 futures margin was closer to $6000 which gave a trader basically the same exposure to the Russell 2000, but at a higher cost.

Fast forward to recent history. We now have S&P 500 Index (SPX) options expiring two times a week, typically Wednesday and Friday. Since the market was under pressure for the first half of this week, I decided to compare purchasing a deep in the money SPX Put versus shorting an S&P 500 E-Mini futures contract.

From Friday June 10th to Wednesday June 13th the S&P 500 dropped from 2096.07 to 2071.50 or 25.57 points. If you had seen that coming you may have considered selling short a September E-mini S&P 500 futures contract.  The S&P 500 futures contract  closed on that Friday at 2087.25. If held to the close on Wednesday, the result would be a profit of 27.50 points as the contract settled that day at 2059.75. In dollar terms this is a profit of $1375 as the dollar multiplier for these contracts is $50 a point. I checked the CME website and the maintenance margin for this trade is $4200. Let’s think of that as the cost of the trade as well, since I’m going to use this amount again in the next paragraph.

So what about options? Since this is the CBOE Blog site you knew this was coming. Late Friday last week, with the same bearish outlook, you may have chosen to purchase a SPX Jun 15th 2135 Put for 40.50 or a cost of $4050. This is slightly less than the margin number for the futures contract. This option settled on the close this past Wednesday and was 63.50 points in the money for a profit of 23.00 points. That’s a little less than the profit for the futures contract, but that is in terms of index points. The multiplier for the SPX put is $100 so that 23.00 profit is worth $2300, substantially higher than the profit for selling short futures. It appears the option trade gives you a bit more bang for the buck.

SPXW Wednesday-Expiring Weekly Options Volume Grows to More Than 100,000 Per Day

On February 23, 2016, CBOE launched trading of weekly options on the S&P 500® Index which expire on Wednesdays.

The average daily volume for SPXW Wednesday-Expiring Weekly Options grew from 74,114 in May, to 105,768 so far this month (through June 14).



CBOE’s February press release noted –

“We are pleased to further expand our SPX product complex with the introduction of SPX Weeklys with Wednesday expirations,” said CBOE Holdings CEO Edward T. Tilly. “Wednesday Weeklys, in addition to end-of-the-week expirations, will increase opportunities to trade SPX and enable investors to better target specific expirations. Wednesday Weeklys will align with VIX Weeklys futures and options, which also expire on Wednesdays, to provide greater trading flexibility for the increasing number of customers who use both our SPX and VIX product suites.” 


Exhibit 8 of a paper by UIC Professor Oleg Bondarenko – An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016) shows that the gross premiums generated by writing SPX weekly options 52 times a year could be greater than the gross premiums generated by writing SPX standard expiration options 12 times per year. One important caveat – taking in more gross premiums does not necessarily mean that net returns will be higher; net returns can be negative with a strategy of selling weekly options.



On May 24 CBOE issued Regulatory Circular RG 16-102 that provided in part –

“… Going forward, CBOE will continue to list new SPXW Wednesday-Expiring Weekly Options, generally on Tuesdays, to maintain expirations in at least four consecutive weeks. A vendor notice listing the new strikes for the mentioned expirations can be found by accessing the following link on the business day prior to the listing date: http://www.cboe.com/tradtool/DailyNewListings.aspx. … “ 

The table below shows the expriation dates and estimated implied volatility over the next month for the out-of-the money SPX 2050 puts —



Key features of the SPXW Wednesday-Expiring Weekly Options include –

  • SPXW Wednesday-Expiring Weekly Options may expire on any Wednesday of the month, other than a Wednesday that coincides with an End-of-Month (“EOM”) expiration date.
  • SPXW Wednesday-Expiring Weekly Options are PM-settled; that is, their exercise settlement value is based on the closing level of the S&P 500 Index on the day the options expire.
  • Their series will be available for trading under option symbol SPXW.
  • SPXW Wednesday-Expiring Weekly Options expirations will typically be listed to begin trading on Tuesdays at least one week prior to their expiration date.
  • SPX Wednesday Weeklys will cease trading at 3:00 p.m. Central time on their expiration date. All nonexpiring SPX Wednesday Weekly options will continue to trade until 3:15 p.m. Central time.
  • SPXW Wednesday-Expiring Weekly Options are cash-settled, have European-style exercise and have a $100 multiplier.
  • Margin requirements, including customer portfolio margin requirements, are the same as those that apply to other SPX options. Please refer to CBOE Rules 12.3 and 12.4 for more information.


To learn more about S&P 500 options, please visit www.cboe.com/SPX.





The Smooth Process Known as Russell Reconstitution

June means a lot of different things to different people. For my kids it’s get out of school time. For my wife it’s how long until my kids go back to school time. For me it is Russell Reconstitution time.

Before joining CBOE I would monitor the reconstitution process and try to trade around stocks that were going to be added or deleted from the Russell 2000. Now as an employee of CBOE I monitor the process since we are home for options trading on many FTSE Russell Indexes. Four of those indexes will be impacted through changes occurring on the market close on June 24th.

The specific indexes with brief descriptions are

Russell 2000 (RUT) – The Russell 2000 is basically the bottom 2/3rds of the largest 3000 stocks in the US. Being comprised of the smaller companies in the Russell 3000 makes RUT the standard small cap benchmark index in the US.

Russell 1000 (RUI) – RUI is comprised of the top 1/3rd of the stocks that comprise the Russell 3000. Comparisons are often made between RUI and RUT with respect to large cap and small cap performance.

Russell 1000 Growth (RLG) – RLG is best described as a Large Cap Growth index. Stocks in RLG generally have high price to book ratios and high forecasted earnings growth.

Russell 1000 Value (RLV) – stocks in the RLV would be considered Large Cap Value stocks that generally are not experiencing exceptional earnings growth but do have lower price to book ratios that stocks in RLG.


#Brexit Update from Social Market Analytics

Over the weekend I noticed the headlines regarding Brexit.  It appears the polls are starting to point to a shift in sentiment with respect to Britain exiting the EU. Those leaning toward leaving seem to slightly outnumber those who consider staying in the EU a good idea. To see how the situation looks from a social media standpoint I asked the guys at Social Market Analytics for a quick update.

This first graph shows that over the last 24 hours 213,595 tweets have included the hashtag #brexit – this is about three times the traffic we noted in a blog late last week. Of those tweets exactly 42,100 also included the hashtag #voteleave with 9,576 commenting in hashtag speak #leaveeu. #remain (15,354) and #strongerin (10,927) total about half as many as the tags saying let’s go on our own.

Brexit 06132016




Market Outlook – Market Looks Vulnerable Here

The market was on pace to a decent gain last week…. until Friday. With that day’s stumble, an intraweek gain of 1.0% turned into a 0.14% loss for the five-day span. Worse, the shape and location of last week’s intraweek reversal hints that the tide may have finally turned bearish.

Of course, in this market, such hints don’t necessarily mean a lot.

We’ll dissect it all below as usual, after painting with some broad brush strokes of economic data.

Economic Data

As was noted a week ago, there simply wasn’t on the economic news worth reviewing on the dance card. We’ll move straight into what’s in the lineup this week.

Economic Calendar


Source: Briefing.com

While last week was lame in terms of economic events, this week more than makes up for the dry spell; several of them are worth a closer look headed into the reports. In order of appearance…

On Tuesday, look for May’s retail sales report. There were no available estimates as of print-time, but recall that April’s consumer spending was especially strong following March’s slight but disappointing lull. All the same, April’s retail sales of this year were higher than April-2014’s sales on almost all fronts. Despite a bevy of Q1 earnings misses from many of the market’s more prolific retail names, overall spending remains solid, even if not overheated.

Retail Sales Chart


Source: Thomson Reuters

On Wednesday and Thursday we’ll get last month’s producer price inflation and consumer inflation rates, respectively. Both are expected to edge higher, on a core as well as a non-core basis, though not to a concerning degree. And, as of last month’s data, not only are the annualized inflation rates at levels palatable to the Federal Reserve, but they’re sinking. The trend adds to the reasons the Fed can postpone the next rate hike (not that there weren’t enough already).

Inflation Chart


Source: Thomson Reuters

Also on Wednesday look for May’s capacity utilization and industrial productivity numbers. The pros are looking for lower figures on both fronts, bringing a quick end to the glimmer of hope that developed a month earlier when each ticked a bit higher. The bigger trend remains bearish for both. The demise of oil gets the bulk of the blame, though the cause doesn’t matter. Falling productivity and capacity utilization tend to coincide with major market headwinds.

Capacity Utilization and Industrial Productivity Chart


Source: Thomson Reuters


Volatility Kicking Up Again – Seen This Movie Before

Friday’s risk off day was certainly one we have not seen in a few weeks.  Bulls have had the advantage of late, and any spike in volatility was sold down.  Take a look at the VIX chart and you’ll see the last two spikes prior to Friday (to 16 and then 17) were pulled down sharply by the end of the day.  Yet, some fear seemed to seep in as we headed to the weekend.  Was it warranted? I’m not so sure, but as we’ve seen when volatility has spiked previously, it may be time to be contrarian and look for the markets to reverse higher.


When we awoke Friday and saw Germany’s DAX index down 2% and other European markets down sharply, it seemed the bulls were in for a challenging day.  A no bid market with little to do but sell holdings and/or buy protection. On these risk off days, not only does volatility get bought, but we see a rise in the dollar, bonds and maybe gold as equities are shed.  That was the case last Friday.

Why does the VIX run higher?  Many call it the ‘fear gauge’, I prefer to call it the uncertainty index.  Volatility rises not because of a fearful outcome, rather it rises when there is uncertainty about an outcome on the horizon.  Currently we have a couple of outcomes that the market continues to wrangle with:  Fed policy and a vote on British exit from the EU, or ‘brexit’.  For the former, the odds for a rate hike were raised sharply after some hawkish statements from Fed Governors – several of them in fact.

The chief complaint was that the market was not pricing in a potential rate hike at the June meeting, which in their view continues to be live.  Expectations for a rate hike quickly surged from single digits to over 40% probability, but then the ugly jobs report on June 3 brought those expectations down to almost nil.  The next meeting would be in July and that is currently a 1 in 5 chance. So, clearly the market is not worried about a rate hike or not, rather it’s the confusion that persists around the event.  Once the meeting is past I suspect the fear will again be removed.  We have seen this happen at just about every meeting where there is confusion that ultimately gets settled.  Markets move along their merry way.

Brexit is a completely different issue, and certainly there is no precedent yet for the outcome.  The people of England will decide in a referendum whether they should leave the EU and their commitments.  The latest polls show the outcome is a toss up – hence uncertainty over the result.  The media has hyped this as something of an extreme material event, but in all likelihood this will just see currencies move wildly up and down.  We nearly had a Greece expulsion from the EU last summer (Grexit), and the fear rose sharply but only to decline once the issue was settled.


As we can see from the from the VSTOXX Futures chart (volatility from the Euro Stoxx 50 index) the curve is in backwardation.  Simply put, market players are fearful of the unknown and buying short term protection via market puts, just in case something really bad occurs after the Brexit vote.  The media continues to show polls in favor or out of favor of Brexit – that is going to capture everyone’s attention.

The bottom line is this:  When uncertainty rises and investors are unsure about an outcome, we see them looking for the exit door quickly.  Volatility spikes, but as history has shown this is a temporary moment of insanity, and when the smoke clears markets often resume their previous path.


Weekend Review – VIX Futures and Options – 6/6 – 6/10

June VIX settlement is on the horizon, just two trading days and an overnight to Wednesday’s AM settlement. I mention that as a lead off in this space as I find the June futures at a premium to spot VIX kind of interesting considering VIX rose 26% last week. Admittedly, a 0.50 premium isn’t all that much, but any premium at all makes me think traders are still on edge after the S&P 500 price action last week and now going into two weeks with big known unknowns (FOMC this week and Brexit the following week).

VIX Table Graph


Weekend Review – Volatility Indexes and ETPs – 6/6 – 6/10

Last week VIX rose every day which isn’t all that unusual.   What was ground breaking was that VIX rose each of the first three days last week despite the S&P 500 moving up as well. I decided to take a look at what has happened in the past when both the S&P 500 and VIX rise together for three consecutive days. The result, it’s not as uncommon as I thought, we’ve had 17 occurrences of three up together.  However, the last time was in January 2013.



Russell 2000 Index: Re-Pricing Risk

Russell 2000 Index (RUT) Hits a 2016 High

The bellwether benchmark for U.S. small-caps, the Russell 2000 Index tracks the performance of U.S. companies that derive most of their revenues domestically.

Since the middle of May, as the Russell 2000 Index moved to its year’s high (1190.17) on June 8th.  In comparison to the S&P 500 the Russell 2000 slightly outperformed on a year-to-date basis (+2.33% vs. 2.27%) as of today. Please note the Russell 2000 Index ticker is (RTY) in the Bloomberg chart below.


Rising Put/Call Ratio

As the Russell 2000 Index moved towards its highs, the put-call ratio measuring trading volume of put options to call options reflected a lack of confidence in the rally. The put-call ratio for options on iShares Russell 2000 ETF (IWM) was x4 times greater than RUT and SPX reaching a high 5.97 on June 9th.


RUT Volatility Skew

Highlighted in the RUT skew chart below, demand for protection using out-of-the-money (OTM) puts on RUT is significantly greater than the at-the-money (ATM) put options.


CBOE Russell Volatility Index (RVX) Rising

RVX measuring the market’s expectation of the 30-day volatility in the near-term Russell 2000 options climbed to 20.18 (+ 12.7%) since the Russell 2000 gave back some gains after posting a high on June 8th.  A widely followed view on volatility indexes is they tend to revert back to the mean.  Over the last 12 months mean for RVX is 20.76, the rising volatility in RUT indicates there less certainty of a continued upward trend.

RUT & RUTW (Weeklys) offer investors the opportunity to express a market view, manage risks, and enhance yields. For additional information please visit www.cboe.com/RUT



The Weekly Options News Roundup – 6/10/2016

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.

CBOE Plans Its London Debut
On Tuesday, CBOE announced that it will open its first international office in London next month, located in the Leadenhall building, aka “The Cheesegrater” building. This new initiative is one of many that allows CBOE to increase its global presence in the region and directly engage with its customers and partners. For more information see the press release.

“CBOE Opens First Overseas Office” – Lynne Marek, Crain’s Chicago Business

“CBOE Holdings (CBOE) Plans to Start London Office in July 2016” – Christian Mills, Street Register

“CBOE Unveils New London Office to Expand Reach into Europe and Globally” – Steven Hatzakis, Finance Magnates

CBOE Powerful Outcomes
Last week CBOE was bestowed with the honor of being named ‘Exchange of the Year’ at the GlobalCapital Americas Derivative Awards 2016. This is one of many awards the exchange has received over the years for its commitment to technological innovations in the industry and creation of groundbreaking products that support powerful portfolio performance.

“CBOE Named ‘Exchange of the Year’ At GlobalCapital Americas Derivative Awards 2016” – MondoVisione

“The Winners: GlobalCapital Americas Derivatives Awards 2016” – GlobalCapital

VIX FIX – Volatility’s Crucial Conflict
Several macro events are creating uncertainty in the markets, causing the CBOE Volatility Index to take notice, rising 19% this week and firmly over the 16 mark, but well below its 10-year average. Stocks drifted lower today, but recent trades in VIX futures suggest that investors aren’t overly concerned about any significant moves in the near-term. Is complacency warranted by investors, or should potential increased volatility give them pause?

“VIX Futures Don’t Signal Stress Even As VIX Rises” –

“How to Exploit the Options Market’s Fear Premium” – Steven Sears, Barron’s


Block Trade Analysis – VIX July Ratio Call Spread

June VIX futures and options settle next Wednesday on the open so we are starting to see traders look ahead to July standard expiration. Of course those that want to be more strategic can explore the VIX Weeklys, but that is an argument for another blog.

This morning, exactly an hour into the trading day there was a buyer of 8,500 VIX Jul 17 Calls at 1.99 who then sold 17,000 VIX Jul 21 Calls for 1.03 each and a net credit of 0.07 per spread. The result is a small credit and a payoff at July expiration that looks like the diagram below.


As highlighted on the chart VIX was at 14.71 and the July futures were trading at 17.20 when this trade was executed. Odds are a spike in VIX over the next few weeks would result in our trader getting out of the spread with some sort of profit or altering the composition on the trade. However, if held to expiration all is well all the way up to just above 25.00 (25.07 to be exact) with a best case scenario of VIX settlement at exactly 21.00.