A number of new volume and price records were set for Cboe index products in 2017, as customer demand for index options and volatility product solutions continued to grow.
These records were remarkable in light of the fact that many experts said that that the markets appeared to be very complacent, as the Cboe Volatility Index® (VIX®) hit a record low in 2017.
RECORD #1 – RECORD HIGH NOTIONAL VOLUME FOR SPX OPTIONS – MARKET CAPACITY
When I am discussing the Cboe’s BXM and PUT indexes with institutional investors, common questions that I hear include – What about the capacity of the options markets? Can the options markets handle an influx of billions of dollars of new allocations by pension and endowment funds? In my answer to these questions, I usually present a chart on the notional value of average daily volume for the S&P 500® (SPX) options. The average daily notional value of the SPX index options volume grew to a record of more than $280 billion in 2017, the highest ever figure (by far) for an equity-based listed option offered on an SEC-regulated exchange. www.cboe.com/SPX
RECORD #2 – HIGHEST VOLUME FOR VIX OPTIONS
In 2017 the average daily volume for options on the VIX Index rose to 722,356 contracts, up 23% over the 2016 levels. www.cboe.com/VIX
RECORD #3 – HIGHEST VOLUME FOR VIX FUTURES
In 2017 investors engaged in record amounts of both buying and selling of VIX futures, as the average daily volume for the contract rose to more than 294,000 contracts, up 23% over the 2016 levels. www.cboe.com/VIX
RECORD #4 – LOWEST LEVEL FOR VIX INDEX
The Cboe Volatility Index (VIX) has a price data history beginning in 1990, and in 2017 the VIX Index set a number of records for low values, including: (1) the VIX closed at 9.14 on November 3, its all-time daily closing low value; and (2) the VIX Index closed below 10 on 52 trading days, another all-time record. While some people ask how the VIX could be so low when worldwide geopolitical uncertainty was so high, I suggest that these people (1) examine the relationship of the VIX Index levels (which averaged 11.1 in 2017) and compare these to the 30-trading-day historic volatility of the S&P 500 (which averaged a very low 6.8 in 2017), and (2) also look at the Cboe SKEW Index to gather insights on demand for tail risk hedging (see below). www.cboe.com/VIX
RECORD #5 – LOWEST AVERAGE DAILY CLOSING LEVELS FOR FIVE VOLATILITY INDEXES
In 2017 implied volatility was relatively low across many asset classes. All five of the following volatility indexes had their lowest average daily closing levels in 2017 - RVX - Cboe Russell 2000 Volatility Index, GVZ - Cboe Gold ETF Volatility Index, VXEFA - Cboe EFA ETF Volatility Index, VXD - Cboe DJIA Volatility Index, and VIX - Cboe Volatility Index. www.cboe.com/volatility.
RECORD #6 – HIGHEST LEVEL FOR SKEW INDEX (WITH CONTINUED DEMAND FOR TAIL-RISK HEDGING)
While several observers questioned whether too much complacency in the equity markets in 2017 (in light of the relatively low levels of some volatility indexes), and early in 2017 the minutes of the Federal Reserve “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook” for President Trump to deliver on pro-growth campaign policies.
When asked about the perception of allegedly too much complacency, I do like to highlight the fact that the Cboe SKEW Index indicated that there was quite a bit of investor concern about tail risk in 2017. The Cboe SKEW Index (1) hit an all-time high of 154.34 on March 17, 2017, and (2) had an average daily closing value of 134.8 in 2017, a new record high value. A relatively high level of the SKEW Index indicates that there is investor fear of big future losses in the markets. www.cboe.com/SKEW.
RECORD #7 – HIGHEST LEVEL FOR BXMD INDEX – STRONG BUY-WRITE INDEX PERFORMANCE
Cboe Options Exchange offers dozens of benchmark indexes designed to show the hypothetical performance of strategies that use index options. As shown in the chart below, from mid-1986 through the end of 2017, the Cboe S&P 500 30-Delta BuyWrite Index (BXMD) rose 2399% to a new record monthly closing value, and the BXMD had higher returns that the other indexes on the chart. In addition, the BXMD had much less volatility than the S&P 500 and S&P GSCI indexes. www.cboe.com/benchmarks.
RECORD #8 – HIGHEST CONTRACT VOLUME FOR CBOE S&P 500 OPTIONS
Average daily volume for S&P 500 options at Cboe rose to a new record of 1,163,466 contracts. www.cboe.com/SPX
RECORD #9 – RECORD HIGH VOLUME FOR CBOE OPTIONS ON MSCI EAFE AND EM
Total volume for Cboe’s options on MSCI EAFE Index (MXEA) and options on MSCI Emerging Markets (MXEF) hit new record in 2017, and investors explored tools to manage their global portfolio exposures.
Key features of the MXEA and MXEF options include:
- Large Notional Size — (approximately 24 times that of related options on ETFs)
- No Early Exercise of MXEA and MXEF Options – European-style Exercise
- Cash-settlement with No Delivery of Stocks or ETFs
- Price and Quote Transparency with Competitive Auction Markets for Leading Option Contracts
- Daily Mark-to-market for SEC-regulated securities
- Clearance of Transactions is guaranteed by the Options Clearing Corporation
- Tax Treatment under section 1256 of the Tax Code. Profit and loss on transactions in certain exchange-traded options, including MXEF options, may be entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the U.S. Tax Code.
To learn more about how Cboe index products can help in managing portfolios, please visit the links above. Information on dozens of volatility indexes is at www.cboe.com/volatility, and information on benchmarks and white papers is at www.cboe.com/benchmarks.