Inside Volatility Trading: Innovation and Visibility in Capital Markets

Kevin Davitt
December 16, 2021

Visibility is not something I consider often, but I am bound by gravitational forces. In aviation, visibility is a measure of the distance at which an object or light can be clearly discerned. Take off and initial climb as well as approach and landing for aircraft are directly impacted by visibility.

In capital markets, visibility is also paramount. Markets look forward and the degree to which the future appears clear impacts the willingness of market participants to remain “in flight” (invested). When visibility becomes limited, some market participants look for the nearest spot to land. In other words, they reduce exposure.

“Normal” markets are akin to an airplane at cruising altitude. The pilots can likely see many miles in front of them. Expectations for turbulence would be minimal.

Two unexpected “weather fronts” collided in late November/early December. The Omicron variant of the SARS-CoV-2 virus was identified by scientists in South Africa, and the World Health Organization designated it a “variant of concern.” Based on preliminary data this version has more mutations and may be more transmissible.

Next, Fed Chair Powell indicated that inflation pressures were likely to persist well into 2022. As a result, the Fed may reduce their monthly asset purchases more quickly than previously anticipated. They could also start tightening monetary policy (rate hikes) sooner as a result.

Central banks operate like an air traffic control tower. They attempt to manage monetary policy goals that “foster economic conditions that achieve both stable prices and maximum sustainable employment”. In short order, market visibility went from relatively clear skies to significantly overcast. 


Here is a look at Google search trend results for “VIX” over the past twelve months with Cboe Volatility Index® (VIX® Index) levels added at relative highs. 

VIX Index Google Search Trends (12/6/20 - 12/6/21)

Source: Google & Cboe Global Markets

There appears to be a positive correlation between the direction of the VIX Index and search interest. For example, the two early peaks in Google’s data came the weeks ending January 30 and February 27, 2021. On January 27 the VIX Index closed at 2021 highs (37.21). In late February, the VIX Index moved back up to 28.89. The third peak is recent; in early December, the VIX Index closed at 31.12.

So, what could the VIX Index, and Google search be telling us about the current market environment?

There’s increased attention and desire for understanding when market volatility moves significantly higher. We desire clarity. We want visibility. It’s another example of how visibility and volatility are endemic to the human experience. The ebb and flow of interest in VIX Index is very similar to other trends (market and non-market related). Events capture our attention periodically and then we move on.

To demonstrate further, here’s a five-year history of Google search trends for the S&P 500 Index and VIX Index.

Google Search Trends for S&P 500 Index and VIX Index

Source: Google & Cboe Global Markets

The VIX Index Family

As regular readers know, the VIX Index is based on real-time prices of options on the S&P 500 Index (SPX options) and is designed to reflect investors’ view of future (30-day) expected stock market volatility. The VIX Index is the flagship of Cboe’s volatility franchise, which includes VIX futures and options. The VIX Methodology has been licensed and applied broadly.

Interested in 30-day expected volatility in Apple, Amazon, Google, and Goldman Sachs? They exist: VXAPL, VXAZN, VXGOG, VXGS! Curious what’s going on in crude oil or silver ETF volatility? Check out: OVX and VXSLV. Your focus is on emerging markets? No problem, there’s VXEEM for that.


The VIX Index, when combined with the futures term structure, could be considered a visibility barometer. As of early December, the average closing level for the VIX Index in 2021 has been 19.64. The VIX futures term structure has traded in contango for most of the year. For our purposes, contango is defined as when the front month VIX futures close at a discount to the second expiry. That’s a historically normal environment (albeit with higher average VIX Index and VIX futures levels). 

New to term structure? Check out this week’s Simply Put to learn the basics.

Here’s how the VIX futures term structure closed on November 24 before Omicron was classified as a variant of concern

VIX Futures Term Structure in Contango (Upward Sloping) 11/24/2021

Source: Cboe LiveVol

That’s the normal state-of-affairs for VIX futures. The January (month two) futures contract settled at a 2.13 premium compared to the December contract (22.38 – 20.25). The longer dated futures were higher than short-dated contracts. The instrumentation in a cockpit is saying, “things look clear for now”.

Compare that to how the VIX futures closed on December 3. The S&P 500 Index had declined by 3.5% between November 24 and December 3. During five of the previous six sessions the S&P 500 Index moved by more than 1%.

VIX Futures Term Structure in Backwardation (Downward Sloping) 12/3/2021

Source: Cboe LiveVol

Market participants were confronted with uncertainty surrounding this new form of coronavirus as well as the prospect of tighter monetary policy.

At that point the January futures settled at a 0.35 discount to the December contract. The market was concerned about volatility here and now as indicated by a term structure in backwardation. The longer-dated futures were below near-term contracts.

From a flight standpoint, the aircraft was experiencing significant turbulence. The weather front became front and center. Visibility was far more limited but could be expected to improve in time. 


That calls to mind the limited visibility and persistent turbulence that characterized 2020. Last year the average closing level for the VIX Index was 29.25. There were long stretches in 2020 where the near term VIX futures traded at a premium to the next expiry. Generally, that’s not been the case in 2021.

The visual below is an illustration of the largest S&P 500 Index drawdowns since 2020. We’re familiar with the onset of the pandemic. The S&P 500 Index fell nearly 35% in the most violent selloff in the market’s history. The subsequent drawdowns were both less severe and had a shorter duration.

As of December 10, the S&P 500 Index is only fractionally below the all-time closing highs from early November. The rebound in U.S. equities is increasingly rapid, but the next one could be very different. 

Duration for S&P 500 Index to Recover to Peak Levels After Pandemic-Related Declines

Source: New York Times

At present, we know so much more about the virus, and effective vaccines are readily available. That reality lends itself to the price action illustrated in the scatterplot below. Daily returns for the S&P 500 Index have mostly clustered in the green highlighted range between +/-1%. There have only been five sessions where the S&P 500 Index closed more than 2% below the previous settle. Those dates are labeled and highlighted in orange. 

S&P 500 Daily Percent Change

Source: Cboe Global Markets/Options Institute

On average, the S&P 500 Index moves less than 0.7% over the course of a day. When we evaluate the absolute value for daily changes in the broad market this year, the average move comes to 0.61%. How does that figure compare to last year?

The average move for the S&P 500 Index last year (absolute value) was 1.35%. That’s more than double the average move in 2021.


From a longer-term perspective, 2021 has not been a particularly volatile year. The chart below plots the number of 1% or more declines (daily) for the S&P 500 Index by year. The colors denote the severity of daily drawdowns with blue signifying between 1% and 2%. The orange corresponds to pullbacks between 2% and 3%. Red shows days with 3% or more selloffs. 

Using data from 1990 – 2020, on average the S&P 500 Index has slightly more than twenty-one sessions per year where it declines between 1% and 2%. To date in 2021, there have been fourteen of those days. There are typically six days where the large cap index falls by more than 1%, but less than 3%. Moves of more than 3% are rare except during periods of significant volatility (2020/2009/2008). There were eight days where the S&P 500 Index fell by 3% or more between 2012 and 2019. Last year there were sixteen such occurrences. This year there have been none.

S&P 500 Index Daily (1%) + Sessions

Source: Cboe Global Markets/Options Institute


The most recent spat of macro volatility arguably felt worse against the backdrop just described. There’s been a dearth of realized volatility this year. The S&P 500 Index has mostly moved higher with short and shallow pullbacks. Investors typically expect the near future to resemble the past. Omicron and inflation rattled the collective outlook. 

In fact, November 26 was the fourth largest single day jump in the VIX Index ever. Turbulence on a flight always feels bad, doesn’t it? As passengers, we prefer to know that the path ahead might be bumpy. Proactive investors and many institutions choose to utilize tools like VIX futures or options and/or SPX overwrites to potentially define their exposure during periods of turbulence. 


Elevated measures of bond market forward volatility, covered in the November Inside Volatility, could have been viewed as harbingers of tumult for equity markets.

In capital markets, the evolving relationship between the S&P 500 Index and VIX Index (or futures) may provide signals. For example, in January of 2018 the S&P 500 Index was establishing new highs and was positively correlated to the VIX Index. That’s unusual and could indicate a concerning forecast. Typically, when the S&P 500 Index is moving higher, the VIX Index declines. When two measures move in the same direction, SPX options may be pricing greater future uncertainty.

The flip side can also hold. For example, following the 2016 presidential election the VIX Index and futures started to fall (overnight session) in advance of the S&P 500 futures finding a bottom. That inflection point has become lore for some well-known investors. Famously, Carl Icahn is said to have left a party around midnight when “he saw the markets tanking” and used the opportunity to get long.

Speaking of overnight markets, Cboe Global Markets recently extended their global trading hours for S&P 500 Index (SPX/SPXW) options and VIX options. You may need approval from your brokerage firm, but these two products are now available to trade nearly 24 hours a day, five days a week. 


It can be difficult to maintain perspective in tempestuous markets. Whether it feels like it or not, it’s been a very good year for the S&P 500 Index. The market is up almost 25% YTD (reference 4685). Average calendar year returns going back forty years are ~13%. The largest peak to trough drawdown was only 5.1% (early September to early October). In a “normal” year, the S&P 500 Index falls about 14% from highs at some point.

S&P 500 Index Drawdowns

Source: Morningstar

It’s also been a blockbuster year for options. According to data from Cboe's Trade Alert, roughly 9.5 billion equity (ETF/Index) options will trade in 2021. That would be a 26% jump from 2020 (7.52B), which was a banner year. The previous high-water mark for volume was 2018 with 5.24B in OCC cleared options. 2021 is on pace to be 81% above that record setting year. It’s absolutely incredible. 


  • Total option volume for the week ending 12/3 ~236M contracts. That’s roughly the number of options that traded during calendar year 1993.
  • Friday Dec. 3 was the highest VIX Index put option volume (965k) since March 13, 2020 (1M).
  • Russell 2000 Index options (RUT) average daily volume in November was 75.1k.
  • Highest monthly RUT ADV in three years
  • The S&P Case-Shiller US National Home price index is up 19% over the past year.
  • Phoenix and Tampa top the list of cities with gains of 33.1% and 27.7% over the last year
  • The market capitalization of U.S. financial and nonfinancial equities sits near $68 trillion.
  • U.S. GDP is ~$23 trillion, so market cap is roughly 3 times annual GDP
  • At the peak in 2000, market cap (financial + nonfinancial equities) was about 1.9 times annual U.S. GDP (Source: Hussman Advisors)

Significant overall exposure can also impact our ability to navigate periods of low visibility. Sticking with our analogy, pilots-in-training don’t begin flying huge aircrafts like an Airbus A380 or Boeing 747. Students of air travel will take early flights in much smaller planes. With that in mind, Nanos by Cboe are an innovative new product with a 1-multiplier and short dated expiries for exposure to the S&P 500 Index. Stay tuned for more in the New Year.

If you like our monthly missive on market volatility, tell a friend to sign up.

Cboe and the Options Institute wishes you a happy, healthy 2022!

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