On September 27 in New York City, fifty financial professionals attended a panel discussion on Current Dynamics of the VIX Market.
I moderated the session that featured expert speakers Bob Dwyer of ProShares; Aymen Boukhari of Societe Generale, Joanne Hill of CBOE Vest Financial; and Vinit Srivastava of S&P Dow Jones Indices.
SOME OF THE TOPICS AND ISSUES DISCUSSED
Among the topics discussed were investor strategies and recent volume records for VIX futures and for VIX options. Some of the many topics and issues discussed are highlighted below.
IS VIX “LOW”? In the past year, many observers and press people have questioned how the VIX Index could be well below its long-term average of around 20, in light of much worldwide geopolitical uncertainty. Panelists noted that a key stat to watch is the difference between implied volatility (as represented by the VIX and other indexes) and historic or realized volatility. In 2017 year-to-date the average daily levels were around 11.4 for the VIX Index, and only 7.2 for the 20-trading-day historic volatility of the S&P 500 (SPX) Index. In 2017 the S&P 500 has not had many big moves, and so one probably should not have expected many VIX levels above 20 in 2017 so far. Both the panelists and the audience engaged in quite a bit of discussion as to the factors that are keeping both SPX historic volatility and VIX levels below their long-term averages in 2017.
HIGH VOLATILITY OF VOLATILITY. The volatility of volatility can be quite high. Over the past decade, the average 20-trqading day historic volatilities were around 112.4 for the VIX Index, 35.5 for crude oil spot (WTI), and 17.1 for the S&P 500 Index. Products with high volatility of volatility, and that can move up in times of crisis, often are explored by expert traders.
NEGATIVE CORRELATIONS DURING CRISES. From 1989 through 2016 –
- the monthly correlations of VIX and the S&P 500 indexes were negative 0.67 in periods of positive returns and negative 0.79 in periods of negative returns.
- the monthly correlations of MSCI EM and the S&P 500 indexes were 0.68 in periods of positive returns and negative 0.85 in periods of negative returns.
These correlation figures show that certain long VIX strategies could be explored to see if they have diversification potential in times of market stress.
RESPONSIVENESS OF VIX FUTURES; HOW CLOSELY DO VIX FUTURES TRACK THE VIX SPOT INDEX?
As shown in the beta chart below, the closer VIX futures are to expiration, the more closely they generally track the VIX Index. New weekly expirations for VIX futures and options are listed on Thursdays (excluding holidays) and expire on Wednesdays. CBOE and CFE may list up to six consecutive weekly expirations for VIX futures and options. With the addition of VIX weekly futures and options, qualified investors now have access to VIX weekly futures and options with several near-term Wednesday expirations (rather than only one Wednesday expiration per month). The addition of weekly expirations to standard monthly futures and options expirations offers volatility exposures that more precisely track the performance of the VIX Index. The closer VIX futures and options are to expiration, the more closely they generally track the VIX Index. By 'filling the gaps' between monthly expirations, investors may obtain new opportunities to establish short-term VIX positions, and fine-tune the timing of their hedging and trading activities.
SEASONALITY. It was noted that there appear to have been some seasonal differences in VIX levels during different times of the year. Over 25 years, the average monthly highs for the VIX Index have ranged from 22.1 in May, to 29.4 in October. One panelist suggested looking at historic volatility for seasonality.
CONTANGO, ROLL COSTS AND SELLING VIX FUTURES. In recent years on most days the VIX futures have been in contango (rather than backwardation) and this year the roll costs associated with contango generally have benefitted strategies that sell VIX futures or buy inverse VIX exchange-traded products (ETPs).
GROWTH IN VOLUME AND OPEN INTEREST.
The panel discussed the relationship of VIX Index levels to the growth in the volume and open interest for VIX futures, VIX options, and VIX-related ETPs.
Recent all-time record highs include –
- VIX futures record open interest – 720,230 on Sept. 20, 2017
- VIX futures record average daily volume in a month – more than 397,000 in August 2017
- VIX options record daily volume – 2,612,952 on Sept. 25, 2017
I told the panel that that investors often were told to buy low and sell high, and I asked the panel – why is there now so much interest in selling VIX futures when the VIX level often recently has been in the 10 to 12 range? A panelist noted that the contango curve often is steeper when VIX is below 12, and with steep contango many investors find that the strategy of selling and rolling VIX futures can look attractive. However, one should note that the strategy of selling VIX futures does have big potential risks in the event that the VIX spot index and VIX futures indexes were to spike sharply upward.
MONTHLY MOVES OF S&P 500 AND VIX FUTURES BENCHMARK INDEXES
The panel engaged in extensive discussion of the performance of the S&P 500 Index, and two indexes that buy and roll VIX futures (and that serve as benchmarks for several VIX-related ETPs) - the S&P 500 VIX Short-term Futures Index and the S&P 500 VIX Mid-term Futures Index.
Since January 2006 the S&P 500 VIX Short-term Futures Index rose more than 60% in three different months – October 2008, August 2011, and August 2015. However, in recent years the index usually also has struggled with a headwind of contango and high roll costs, and the index has fallen more than 20% in 21 calendar months since January 2006. Investors are cautioned to be careful about making a large, long-term allocation to the products tracking the index because of the possibility of contango and high roll costs.
I did note that some plan sponsors have said that making a small allocation (around 2% of a portfolio) to costly hedging/diversification/tail risk products still has the potential to add value from a “total portfolio” point of view, if the hedging and diversification instruments allow the investor to be more aggressive and flexible in the rest of the portfolio. Some plan sponsors are very interested in trying to avoid a repeat of the damage that the 2008 financial did to their portfolios.
VIX EVENT IN CHICAGO ON OCT. 19
An upcoming event on Current Dynamics of the VIX Market will be held at 4:00 p.m. CT on Thursday, October 19, at CBOE. For more information and to register, please visit http://bit.ly/VIX-Oct-19 - the event is for financial professionals only.
More information on how VIX-related products can help with management of your portfolio is at www.cboe.com/VIX and www.cboe.com/volatility.