The Cboe Volatility Index® (VIX® Index) is widely considered the proxy for market sentiment in the U.S. equity market.  VIX measures the 30 day expected volatility on the S&P 500® Index (SPX). 

Cboe’s Russell 2000 Volatility Index℠ (RVX℠) applies the same methodology for calculating 30 day anticipated volatility, but it uses Russell 2000 Index options. (RUT).  As such, RVX is considered the benchmark proxy for 30 day expected volatility of U.S. Small-caps.

During recent periods of low volatility, the correlation between expected U.S. large-cap vs. small-cap volatility indexes (VIX/RVX) has been high (approx. 88%).  Historically, small cap equities move with a greater velocity than large cap equities.  As such, RVX Index levels are typically higher compared to the VIX Index.

RVX Index vs. VIX Index

From 2013 – 2017, the RVX premium over VIX ranged from a high of 8.08 to a low -1.11 and averaged around 4.0.  Only 10 trading days where RVX end of day index levels were lower than VIX.  

Source: Bloomberg & Cboe

In 2018, the RVX Index was at a discount relative to VIX on 12 consecutive trading days in February reaching a low of -6.02 on February 6th as seen in the chart below.

Source: Bloomberg & Cboe

RVX Futures

The Cboe Russell 2000 Volatility Index (Ticker: VU) futures contract was launched in late 2013.  The trading activity measured by avg. daily volume is (approx. 38) avg. daily volume compared to VIX futures (approx. +300k).  Jane Street Capital, LLC serves as the Designated Primary Market Maker (DPM) for the RVX Futures contract.

There’s a spread relationship between the VIX futures (Ticker: VX) contract and RVX futures (Ticker: VU) however, it’s not quoted nor executed as a spread.  Please note, some order management platforms do offer an auto-spreading function that will execute each leg at pre-specified spread levels automatically. 

Cboe’s current VX-VU spread margin requirement is significantly lower than the speculative customer initial margin applying a -75% inter-commodity spread credit. 

RVX Futures Contract Specifications: http://cfe.cboe.com/cfe-products/vu-cboe-russell-2000-volatility-index-rvx-futures/contract-specifications

RVX Futures Margin Requirements: http://cfe.cboe.com/framed/pdfframed?content=/publish/CFEMarginArchive/CFEMargins20180315.pdf&section=MARGINS&title=CFE+Margin+Update+-+March+15%2c+2018+%7c+Effective+-+March+19%2c+2018

Vendor Tickers:

RVX (VUH8) – VIX (VXH8) March Futures Spread

As a result of the elevated VIX levels, there was an opportunity to buy the RVX (VUH8) futures and sell the VIX (VXH8) futures with the anticipating the spread relationship would revert to its mean.

The chart below highlights the difference between the VXH8/VUH8 futures closing prices from February 1st –March 15th.  On February 12th, VUH8 was at a -1.125 discount relative to VXH8 offering investors with an opportunity to buy RVX Futures (VUH8) and sell VIX Futures (VXH8) as outlined below.


Source: Bloomberg & Cboe

For illustration purposes let’s assume the following trade using the closing prices of VUH8/VXH8 futures:

February 12th:                                         February 15th:

Buy 1 VUH8 @ 18.70                           Sell 1 VUH8 @ 18.70

Sell 1 VXH8 @ 19.825                          Buy 1 VXH8 @ 17.525

Initial Margin: $11,550 – 75% = $2,887.50

Profit/Loss:

VUH8 profit/loss = 0

VXH8 profit = $2,300

Spread Profit = $2,300*

*no transaction costs, fees, etc.

Conclusion:

Volatility levels in the U.S. Equity market have increased and VIX levels were at a premium over RVX on 12 trading days this year.   With RVX and VIX futures, investors have the opportunity to trade the relative value of volatility between large-cap- small cap equities and benefit from significantly reduced margin requirements. 

For more information, please visit the following websites:

VU – Cboe Russell 2000 Volatility Index℠ (RVX℠) Futures: http://cfe.cboe.com/cfe-products/vu-cboe-russell-2000-volatility-index-rvx-futures

VX- Cboe Volatility Index® (VIX®) Futures: http://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures

Historical data on RVX (VU) and VIX (VX) futures: https://markets.cboe.com/us/futures/market_statistics/historical_data/

Cboe Russell 2000 Volatility Index: www.cboe.com/RVX

Cboe S&P 500 Volatility Index: www.cboe.com/VIX