Both volatility and trading activity increased in the S&P 500® index options market over the past month as investors evaluated proposed tariffs, trade negotiations, deficits, valuations, rising interest rates and the November 6 U.S. elections.
NEW MONTHLY VOLUME RECORD FOR S&P 500 OPTIONS
In October 2018, S&P 500 options set a new all-time record with 41.4 million contracts traded, the highest trading volume in a single month for S&P 500 options.
VOLATILITY AND OPTIONS VOLUME BOTH ROSE IN OCTOBER
The next two charts provide four-month overviews of volume for S&P 500 puts and calls, and for 30-day implied and historic volatility for S&P 500 options. End-of-day estimates for 30-day implied volatility at 90% moneyness, (which can be applied to SPX put options that are 10% out-of-the-money) topped 28.5 on seven days in October, but on zero days in the previous three months. Higher levels of implied volatility for the out-of-the-money put options and higher put options volume can be viewed as indicators of investor anxiety in the markets.
VOLATILITY SKEW CHART SHOWS HIGHER IMPLIED VOLATILITY FOR OTM INDEX PUTS
The volatility skew chart below, with estimates from LiveVol, shows that many of out-of-the-money SPX put options had implied volatilities ranging from 20 to more than 80 on November 1.
SPXW Weekly options have expirations on Mondays, Wednesdays and Fridays, and they provide opportunities for investors to implement more targeted buying, selling or spreading strategies.
HIGH RETURNS FOR BXMD INDEX
After seeing the market fluctuations over the past month, many investors are re-examining their asset allocations and exploring strategies that may have the potential to boost risk-adjusted returns and dampen portfolio volatility.
As shown in the next chart, over a period of more than 32 years, the Cboe S&P 500 30-Delta BuyWrite Index (BXMD) had higher returns than the other four benchmark indexes shown. The BXMD Index tracks a strategy that collects S&P 500 call options premiums every month, and also has the potential to participate in some of the upside moves of the S&P 500 stock index, because the BXMD Index writes out-of-the-money SPX call options.
LOW VOLATILITY FOR CNDR INDEX
For investors who wish to compare the long-term standard deviations for benchmarks that track a number of strategies, Cboe offers nine benchmark indexes that use S&P 500 options and that have hypothetical track records that cover more than 32 years.
The table below shows the annualized standard deviations for benchmark indexes over the period from June 30, 1986 to October 31, 2018. Note that all nine of the Cboe benchmark indexes had lower volatility than the stock and commodity indexes shown.
- 1 7.1% CNDR - Cboe S&P 500 Iron Condor Index
- 2 9.9% PUT - Cboe S&P 500 PutWrite Index
- 3 10.5% BXM - Cboe S&P 500 BuyWrite Index
- 4 10.5% CLL - Cboe S&P 500 95-110 Collar Index
- 5 10.7% BFLY - Cboe S&P 500 Iron Butterfly Index
- 6 10.9% CMBO - Cboe S&P 500 Covered Combo Index
- 7 11.4% CLLZ - Cboe S&P 500 Zero-Cost Put Spread Collar
- 8 12.1% PPUT - Cboe S&P 500 5% Put Protection Index
- 9 12.1% 30-yr Treasury Bond Index (Citi)
- 10 12.8% BXMD - Cboe S&P 500 30-Delta BuyWrite Index
- 11 14.9% S&P 500 Index
- 12 17.0% MSCI EAFE® Index (US$)
- 13 20.2% S&P GSCI Index
LINKS TO MORE INFORMATION
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