During the first half of 2014 I got to have several conversations about whether or not VIX was ‘broken’ since the average level for VIX was so low. Needless to say I haven’t fielded a single call or email about VIX being broken since October. 2014 was a pretty interesting year in volatility trading. More market participants have become involved in the volatility markets through VIX future, options, or ETPs.

Index ETPs - Corrected

The table below shows the year over year change for the S&P 500, volatility indexes that focus on the S&P 500, and several volatility oriented exchange traded products. Year over year changes in volatility indexes don’t mean anything to me as a single day (think the last day of 2014) can dramatically change the year over year number. The average for the year is a little more meaningful. I’ll get to that after discussing the ETPs in 2014.


Something that observant readers will notice in the table above is the performance of the long ETPs in 2014 (VXX, VIXY, VIIX). These three funds all lost about 26% so logic would dictate the place to be in 2014 were the short funds. Not so fast, XIV and SVXY were both down a little over 9% in 2014.   These long and short funds have a slightly different structure. The long funds are designed to give returns based on a strategy that is long the front two month VIX futures. The short funds are designed to return the daily inverse performance based on a strategy that is short the front two month VIX futures. The key word is daily. I find pictures help with these sort of concepts so I created the chart below. This depicts the return of $100 invested in VXX and SVXY on the last day of 2013 and held through the end of 2014. The bottom line shows the daily closing prices for VIX.

SVXY - VXX - VIX 2014 Early in 2014 VIX moved up to the low 20’s and VXX benefitted from the spike in volatility. SVXY lost value and it took several weeks for SVXY to move back to positive on the year. As volatility was very calm for the middle part of 2014 VXX moved much lower. The spikes toward the end of the year, benefitted VXX again, but not nearly to the extent needed to get back in the black for 2014. Those spikes had a negative impact on SVXY which resulted in a loss for 2014 as well.

Something else that stands out on the table is VVIX finishing the year well over 100. I know I said year over year doesn’t mean much.   The average VVIX for 2014 was about 83 which was slightly higher than the average in 2013, but lower than the average for the previous three years. The chart below shows the high – low range and average for VVIX from 2007 through 2014. The 2014 average doesn’t seem like a big deal, but the average for the fourth quarter of 2014 was over 97 – that’s a clear indication of excess nervousness in the equity markets as of late. Well over 100 going into 2015 may be a red flag for the equity market in the new year.

VVIX Annual Comp

One last thing I would like to show for 2014 is the term structure for S&P 500 volatility as indicated by the VXST – VIX – VXV – VXMT curve. The chart below shows three term structure curves – the max, min, and average curve for the year. It is always interesting to see just how high volatility gets relative to the average for the year. In what was really not that eventful of a year the range for VXST was from a low of 8.54 to 31.12 – almost a 400% range.

2014 Curves

For more insight and thoughts about 2014 join me for a 2014 volatility wrap up webcast this coming Monday (1/5/15) at noon Chicago time – register at www.cboe.com/webcasts