Cboe Global Markets

Inside Volatility Trading: Here and Now

Kevin Davitt
April 7,2020

Am I protecting or breaking an oath

For Sigma oasis, it’s neither and both

You’re finally weightless, so take to the air

Sigma oasis you’re already there

You’re already there


Sigma is the 18th letter in the Greek alphabet and there are three distinct notations. The Greeks developed an incredibly robust culture with advanced comprehension of the natural world including mathematics, medicine, and economics.

Uppercase sigma (Σ) is used to denote “the sum of.” You can explore (potentially alongside your children who are learning at home) more with the folks at Khan Academy here or here.

Lowercase sigma (σ) is used in standard deviation analysis. There’s tremendous utility in understanding standard deviations if you’re an investor. Standard deviation is the square root of the variance for a set of data. It’s a calculation of how much values/outcomes (prices) are spread out from the mean (μ). You’re likely at least somewhat familiar with this standard normal distribution curve.

Source: Toward Data Science

Prior to its launch in the early 1990s, some referred to what would become the “VIX® Index” as the “Sigma Index.” Cboe’s VIX Index methodology uses strips of S&P 500® (SPX) Index options with greater than 23 days and less than 37 days (time-weighted) to calculate a consistent and dynamic forward volatility expectation. The VIX Index is expressed as an annualized 1-standard deviation measure. Alternatively, you could view the VIX Index as the volatility of a variance swap because it’s quoted as the square root of expected variance.

Practically speaking, with the S&P 500 Index at 2500 and the VIX Index at 50, the annualized 1-standard deviation expectation is +/- 1250 points, or a SPX price range of 1250 – 3750. That’s quite the range and speaks to the massive amount of uncertainty being priced into the options market at present.

To further illustrate, when the SPX Index closed at 3386.15 (all-time high) on February 19 the VIX Index closed at 14.38. At that point in time, the annualized 1 -deviation expectation for the broad market was +/- 487 points.

Quick Math: (3386.15*0.1438) = 486.93

(1194/487) = 2.45

Just over a month later (3/23) the SPX measured as low as 2191.86. That constitutes a move of just over 1,194 handles. In other words, over the course of 23 trading days the broad market realized 2.45 times the expected ANNUALIZED volatility range.

Here’s the current 1-month (rolling) realized volatility measure for the S&P 500 going back five years.

Source: S&P Dow Jones Indices

Here and Now

According to data from Trade Alert LLC. Q1 of 2020 was by far and away the most active ever for OCC cleared options. Total volume across Index, ETF/ETP, and individual equity options surpassed Q4 of 2018 (previous record) by roughly 24%. 

Source: TradeAlert, LLC

In late February the S&P 500 Index cratered and the industry set three separate records for daily options volume. This is arguably a testament to the broad utility of options, particularly during times of market duress, and greater understanding on the part of all market participants.

Source: TradeAlert, LLC

Listed options have come a very long way since the first call option was created and traded at Cboe in April 1973. The industry now has Index options that expire every Monday, Wednesday, and Friday as well as other non-standard expiries like end of quarter options. Such non-standard options are ideal for passive money managers looking to offset specific portfolio risks over critical time frames (end of quarter).

The snapshot of the tape below is a likely example of a firm/asset manager using options to shape their risk exposure over the next quarter. It is far less likely that these prints represent an investor “timing the market.”

Source: LiveVol Pro

Specifically, it appears like the investor sold what became deep in the money quarterly puts (SPX Mar 31st 3055 puts). These options traded actively on Dec. 31st 2019 and settled at 39.50. At the end of the quarter, they were worth 443.60.

The investor then appears to have initiated a put spread collar that expires at the end of Q2 (2020). They likely bought the June 30th 2465/2075 put spread (paid 89.13) and sold the 2785 calls with the same expiry for 95.6750 (average price). This put spread collar was executed for a small (6.545) credit with the SPX Index at ~2343.

We can’t be certain, but if this firm/asset manager is handling capital for outside investors, chances are this passive, straight-forward options overlay will have significantly improved their performance during Q1. When the proverbial tide goes out, effective risk managers can shine.

Quick observations:


VIX values

  • Over the course of Q1 2020, the low close for the VIX Index was 12.10 on January 17.
  • The highest close ever occurred on March 16 with a measurement of 82.69.
  • The average VIX Index value between January and March was 31.22.

Source: Bloomberg

VIX term structure: Contango vs Backwardation

Typically, the VIX term structure is in contango, a relationship where shorter-dated futures trade at a discount to longer-term VIX futures. Historically, when the S&P 500 Index declines (with velocity) the VIX term structure has a tendency to invert (backwardation). In those scenarios, the shorter-term VIX futures trade at a premium to longer-term contracts.

The VIX futures curve has been inverted since February 24. April VIX futures remain at a significant premium to May as of April 3, which marks 30 consecutive sessions of Mo 1 over Mo 2 futures. That’s the longest persistent backwardation since late 2008.

The current inversion has not exceeded the pinnacle (~22 handles over) from 2008, but it’s possible that could change. Since March VIX futures and SPX options rolled off, the VIX term structure has flattened. Nevertheless, April futures are trading at a 4.30 point premium to May (12.50%).*

Source: Bloomberg

Below is a look (as of March 31) at the 30-day forward ATM options IV (first column) and 1-month historical vols (third column) for the DJIA, SPX, NDX, RUT, and VIX**. The spreads between realized HV and 1 month IVs is highly unusual.

Source: LiveVol Pro

The RVX Index uses the VIX methodology with Russell 2000 (RUT) Index options as inputs. The chart below has a line marking the handful of times that the VIX Index exceeded RVX. The overwhelming majority of the time RVX runs at a premium to VIX. When US equity markets reversed toward the end of March, VIX was over RVX (atypical).

Since that point, there’s been a spectacular reversal in the relationship. At present, the implied volatility premium of 1-month Russell 2000 Index (RUTSM) options is as wide as it’s been in more than five years. As you can see in the chart above, the RUT had a 1-month realized vol of over 117.22% on March 31, which compares to the SPX 1-month realized vol of 99.75%.

Facts and Some Stunning Figures

  • Average daily March move for the S&P 500 ~5%
  • Worst Q1 ever for DJIA & worst Q since 1987
  • Worst Q1 since 1938 for SPX & worst Q since Q4 of 2008
  • Worst Q ever for Russell 2000 (-31.84%)
  • Highest ever VIX Index close (82.69)
  • Lowest ever U.S. 10 year yield (54 basis points on March 9th)
  • All-time SPX high close (2/19) followed by 34% peak to trough (closing) decline
  • Longest VIX term structure inversion (2/24 – present) since 2008
  • 10 million unemployment claims between BLS data released March 26th and April 2nd
  • Goldman Sachs revised Q2 GDP (US) forecast to -34% and unemployment expectations to 15%

Forward looking volatility measures (VIX/variance swaps/etc.) continue to price in significant expected volatility. As Q2 begins, there’s seemingly no oasis from large sigma macro moves. An understanding of the tools available to traders as well as more passive asset managers can be empowering. If you have questions about Cboe’s suite of proprietary products and how they may benefit you/your firm, send questions to [email protected]

*As of April 3, 2020 (10am CDT)

** Reference VIX Index ~53