I recently participated in VIX roadshow panel discussions in Boston, New York, and Chicago.
Last week at Cboe I moderated a discussion of the Current Dynamics of the VIX® Market
that featured these four expert panelists:
- Anand Omprakash, Director, Equity Derivatives Strategy and Structuring, BNP Paribas
- Dominic Salvino, VIX Option Specialist, Group One LLC
- Rich Ledee, CFA, Head of Capital Markets, ProShares
- Joanne M. Hill, PhD, Chief Advisor for Research and Strategy, CBOE Vest Financial LLC
The panelists offered insights on:
- The links between equity market volatility and macroeconomics;
- Products linked to futures-based benchmark indexes on the Cboe Volatility Index® (VIX®), and the value they can provide;
- Long volatility strategies and their potential "total portfolio" benefits; and
- Short volatility strategies and their potential for enhancing risk-adjusted returns.
Below are some of the many topics and charts discussed by the panelists.
HAS THE VIX INDEX RECENTLY BEEN “LOW”?
Over the past year a number of media stories have noted that the VIX Index appears to be somewhat “low” in light of worldwide geopolitical tensions. At a conference I heard Professor Richard Thaler opine that the “low” level of the VIX Index is one of the biggest financial mysteries of our time. Earlier in 2017 the minutes of a meeting of the Federal Reserve Board “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty …”
However, at the October 19 panel, it was noted that –
- In 2017 the average daily closing levels were around 11.3 for the VIX Index and 7.0 for the 20-trading-day historic volatility of the S&P 500 Index (SPX). Thus, when compared to SPX historic volatility, the VIX Index usually has not been ”low” this year.
- The average daily closing values for the Cboe SKEW Index (SKEW) were 118.4 in 1990 – 2016, but a much higher 135.1 in 2017 year-to-date. The relative high levels for the SKEW Index are indicative of relatively high demand and relatively higher implied volatility for out-of-the-money S&P 500 index put options (which can be used to protect an equity portfolio from huge losses). www.cboe.com/skew.
HIGH VOLATILITY OF VOLATILITY
The panel noted that, over the past decade, the average 20-trading-day historic volatilities for spot indexes were approximately 112 for the VIX Index, 17 for the S&P 500 Index, and 15 for the Citigroup 30-year Treasury Bond Index. A useful gauge for vol of vol is the CBOE VIX of VIX Index (VVIX), which is an indicator of the expected volatility of the 30-day forward price of the VIX. The VVIX Index values are related to the nearby VIX option prices. www.cboe.com/VVIX.
TERM STRUCTURE, CONTANGO AND BACKWARDATION
Factors such as the VIX term structure, contango or backwardation all can have a big impact on the performance of strategies that use VIX futures. The VIX has been in contango for most trading days in very calendar year over the past decade (including 2008), and this fact can provide a headwind for strategies that buy VIX futures, and a tailwind for strategies that sell VIX futures.
VIX INDEX, AND RECORD HIGHS FOR VIX FUTURES VOLUME AND OPEN INTEREST
Despite the fact that the average daily closing value for the VIX Index in 2017 year-to-date was only around 11.3 –
- August 10, 2017, was an all-time record volume day for both VIX futures (volume of 942,109 contacts) and for VIX options (volume of 2,538,121 contracts).
- The average daily volume for VIX futures was 398,256 in August 2017 (an all-time high for any month).
- VIX Futures open interest topped 700,000 for the first time ever in both September and October 2017.
There is both buying and selling demand for VIX futures from investors.
MORE THAN $4 BILLION IN ASSETS IN VIX-BASED ETP’S
The aggregate amount of assets invested in VIX-based exchange-traded products (“ETP’s” include both exchange-traded notes and exchange-traded funds (ETF’s)) has grown to more than $4 billion. In recent months the aggregate amount of assets invested in inverse VIX-based ETPs has grown to more than $2 billion. The panel discussed the fact that many of inverse VIX-based ETPs had strong performance this year (due in part to contango), but also discussed potential risks for inverse VIX-based ETPs if the VIX Index were to have a sharp upward spike. Investors should read closely the applicable prospectus before investing in any ETP, and S&P Dow Jones Indices LLC and Cboe do not endorse or solicit for VIX-based ETPs.
VOLATILITY INDEXES, VIX FUTURES AND THE BREXIT VOTE
The panel discussed volatility indexes, VIX futures and VIX-based ETPs during a number of time periods, including the weeks surrounding the Brexit vote on Thursday, June 23, 2016. In the weeks just prior to the Brexit vote, many pundits thought that the “yes” vote proponents would not be successful. However, the Cboe/CME FX British Pound Volatility Index (BPVIX) rose from 9.40 on May 2, 2016, to 29.1 on June 14, 2016 (a rise of 210%). www.cboe.com/FX.
On June 24, 2016, the VIX Index closed at 25.76 (49% higher than the previous day), and VIX futures volume was 721,468 (one of the top six days for VIX futures volume over the past decade).
In an October 23 JLN newsletter, Spencer Doar wrote – “… Anand Omprakash, director, equity derivatives strategy and structure for BNP Paribas, had a great chart overlaying the VIX with varying QE implementation periods. It's hard to look at that chart and then try to argue that central bank actions have not had a dampening effect on market volatility. … VIX may be low, but SKEW is elevated.”
To learn more about how VIX futures and options can help with portfolio management, and to see price charts, price history and more analyses, please visit www.cboe.com/VIX.