Inside Volatility Trading: The Power of Gratitude & Adaptability

Kevin Davitt
December 1, 2020

Thank you, friends

Wouldn’t be here if it wasn’t for you

I’m so grateful for all the things you helped me do

Gratitude & Adaptability

There’s been a wealth of research done on the power of gratitude. One of the most frequently cited is a Harvard Health study that highlights the positive psychological impact of practicing gratitude. The potential significance can be measured in all aspects of our lives from interpersonal to work relationships. The Thanksgiving holiday is an annual reminder to practice gratitude and do so frequently.

This year has given us plenty of exasperating scenarios, which makes it that much more important to remind ourselves of the abundance of good. For example, I’m profoundly fortunate that Cboe has made an unwavering commitment to education. The exchange launched its education arm, The Options Institute, in 1985 and have made an ongoing effort since to increase investor IQ. Despite the challenging macro backdrop, the Institute has continued to champion investor education, especially as demand from the retail community for derivatives product increases

In thinking about this write up and the ability to adapt, I was reminded of the story behind Keith Jarrett’s Cologne (Köln) concert in 1975. The interview with Tim Harford is well worth your twelve minutes. So, too, is just about anything “The Undercover Economist” has written.

In short, Vera Brandes, a 17-year-old German girl with an affinity for jazz convinced Keith Jarrett, a renowned artist well-known for his peccadillos, to perform in Cologne’s opera house. Then, EVERYTHING went wrong.

Jarrett requested a very specific Bösendorfer 290 Imperial grand piano. On the performance date, the staff had access to a “badly out of tune” Bösendorfer baby grand. Jarrett had performed the night previous in Zurich, Switzerland. That was followed by a 350-mile drive through the Alps in January. To make matters worse, Jarrett had been having horrible back pain and had not slept in days. When Keith discovered the dilapidated piano, he threatened to cancel the event, but Vera Brandes persisted.

Brandes and the Cologne staff adapted; they made the best of a bad situation. So, too, did Jarrett who took the stage at 11:30 pm in a back brace and went on to record what is (to this day) the best-selling piano album ever. Ironically, The Köln Concert was released 45 years ago yesterday (11/30/1975). We adapt to our surroundings and often we come out the other end even stronger.

On a personal note, the work-from-home environment removed my daily commute. As a result, I’ve had far more time to read without the walk to and from the train. Recently I read Harel Jacobson’s Volquant piece entitled The Realized Volatility Puzzle. Then, as is often the case, I then read some Goldman Sachs research that seemed like the ideal addendum.

Over the past few decades nearly every facet of life/work has become more quantitative, nothing more so than derivatives trading. Volatility has a negative connotation embedded, but in capital markets, it’s a calculation. As Jacobson’s piece points out, the way one chooses to calculate change can yield very different results. Volatility plays a significant role in all markets and these two missives highlight the imperfect nature of quantifying changes over time.

Decisions are made with varying degrees of information. Harel points out that one’s method for measuring realized volatility ought to be informed by the individual’s role and goals in the market. Investors and traders will allocate capital based on their theses as well as their constraints. We might decide whether to buy/sell/spread (forward) volatility in the options market with access to historical volatility. Does one use close-to-close volatility calculations? Is that the BEST available information based on the thesis and position?

The Markets

As was noted in the previous Inside Volatility, realized and implied volatility levels have declined meaningfully over the past month. Both short (1-month/VIX®) and longer-term (VIX1Y) forward volatility measures have fallen to the lowest levels since February. 

The post-election market moves have been fascinating. The rising tide has lifted nearly all the proverbial boats, but some much more so than others. On November 24, the S&P 500® made a new all-time closing high. As of the same date, the SPX® was higher by more than 9.5% for the month.


While the equity markets continue to climb, the biggest beneficiaries have been the indices and constituents that were largely left behind earlier in the year. In short, rotation has been the name of the game in recent weeks. Investors and traders are adapting to the prospect of a different future, one influenced by the availability of an effective COVID-19 vaccine. Many have decided to allocate capital in new ways as a result.

Big tech has been the laggard, but it’s still up more than 7% in November. The distinct winner has been the small-cap Russell 2000® (RUT®). The RUT has catapulted in recent weeks and is up nearly 19% since the end of October.

Source: LiveVol Pro

My colleague in the Options Institute recently moderated a webinar with panelists from Wilshire Analytics, FTSE Russell, and Neuberger Berman that focused on small-cap volatility. November and December have historically been very strong months for the Russell 2000. Data going back to 1979 shows average November and December RUT performance of +2.1% and +2.2% respectively. If we look at the past decade, we notice a similar trend that the past month reinforces.

Source: Cboe Options Institute

In fairness, since 2010, December small-cap performance has been hampered by significant declines in 2015 (the first Fed rate hike since 2006) and 2018 (global slowdown concerns & Powell’s “a long way from neutral”).

Source: Cboe Options Institute

In “alternative” assets, it’s worth calling attention to the performance of cryptocurrencies, energies, and metals. The narrative that’s played out in the equity markets has been mirrored to a certain degree in the alternatives. Groups that underperformed in the “stay-at-home” backdrop, like crude oil have come roaring back. By contrast, the precious metals (gold in particular) have sold off as the world eyes some type of “normalization.” 

Bitcoin advanced nearly 40% in November and is trading back at all-time highs (December 2017). Ethereum has been the leader of late in the crypto universe. ETH is up about 57% since October but remains well below it’s early 2018 highs.

Leaders & Laggards

S&P Dow Jones research recently called attention to the outperformance of energies in November (2020). The chart below doesn’t include month-end data, but it points to an unusual spread between, in this case, the energy and utilities sectors. A 30+% spread between the best- and worst-performing S&P 500 sectors is uncommon and, in a handful of situations, have coincided with broader market inflection points.

Source: S&P Dow Jones Indices

October of 2002, April of 2009, and March of 2020 were at or very near an equity market nadir. In late 2001-early 2002, the S&P 500 reversed course following the 9/11 shock as well as the accounting scandals at Enron and WorldCom. During the bear market between 2000 and early 2003 the S&P 500 declined 49.1%. Similarly, between late 2007 and early 2009 (Financial Crisis) the SPX fell 56.8%.

Much more contemporaneously, and with far greater velocity, between February and March of 2020, the S&P 500 declined 33.9% over the course of 33 calendar days. Yardeni Research publishes great visuals of these corrections if you’re inclined to explore further.


The VIX Index declined from 40.28 on October 28 to 24.86 on November 6. That was the quickest collapse for the VIX Index from 40+ to sub 25 ever. As we move toward the end of 2020, the question becomes, is there a “new” higher floor in forward volatility measures or can the VIX Index and SPX options volatility move back into the teens?

The VIX futures curve has been persistently flat in the wake of the U.S. elections. In general, a flat VIX futures curve is indicative of uncertainty. Despite the ambiguity inherent in the VIX term structure, November 24 also marked a new volume record for call options in single name equities. While past performance is not necessarily a harbinger of what’s to come, we called attention to similar equity call buying before the June and September selloffs this year. There’s also a dearth of short sellers according to Bank of America Global Research. The chart below plots the median S&P 500 short interest in relation to its respective market cap. Cliff notes: short sellers have mostly exited stage left.

Source: Bank of America Global Research/The Daily Shot

Given the massive outperformance on the part of the Russell 2000 in November, here’s a look at the RVX-VIX spread going back just over 1 year. RVX is a constant 30-day forward volatility measure based on RUT options. On average, RVX has measured at a 23% premium to VIX over that time frame. It’s currently just above that average percentage spread.

Source: Cboe Global Markets/Options Institute

In point terms, the spread has vacillated between a 16.26 RVX premium (May14, 2020) to a -2.92 RVX discount to VIX on March 17, 2020 (bottom). One-month implied RUT volatility is almost always trading at a premium (in point terms) to one-month SPX options. That spread inverts very infrequently and typically only during times of very meaningful market turmoil.

Thank YOU

The market and the human spirit are resilient. Let’s reflect on all that we’re grateful for now and often. Thank you to our readers. Thank you to health care workers, those delivering packages, the people in grocery stores, and those cleaning to slow the spread of COVID-19. Thank you to the pharmaceutical industry for their tireless work to create and distribute an effective vaccine.

We learn, we adapt, and we forge ahead!

Dear, dear friends (thank you again)

Thank you friends

And again, and again…

Never too late to start

-Big Star

The Options Institute 

Interested in learning more?

Join leading derivatives experts and engage with industry thought leaders at our FinPro webinar series which starts resumes January 2021.

Prefer a lively podcast?

On December 2, I will be a guest alongside John Hiatt, Cboe’s VP of Derivatives Strategy, on the Meb Faber podcast. Cambria Funds launched their Tail Risk ETF on Cboe and as of last look has attracted roughly $380 million in AUM. For more information on the fund



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