Inside Volatility Trading: Volatility Through the Years

Kevin Davitt
February 23, 2021

People like us we play with a heavy balloon

Keep it up to keep the devil at bay but it always falls way too soon

People like us we play with a heavy balloon

Fiona Apple – Heavy Balloon

Fiona Apple released an album, Fetch the Bolt Cutters, last year that (to my ears) has it all. It’s musical umami. Fiona’s career has spanned decades and includes periods of great acclaim as well as relative obscurity. In that way her path mirrors the experiences of many investors and traders. There are ups and downs in life and in investing.

From an investing and trading perspective, 2020 had it all. Periods that were genuinely bitter, hints of sour and some salt. More recently, at least for bulls and anyone short the front end of the volatility curve, some sweet. Umami markets.

You could liken volatility trading to handling a “heavy balloon.” The relative “weight” of volatility increases as we climb the proverbial “wall of worry.” What a wall it’s been.

Then there are cycles like the one that originated a year ago. Between February 19 and March 23, the S&P 500® declined by 35%. The velocity of the selloff made it the steepest loss of that magnitude ever. On March 17 the VIX Index measured 82.69, an all-time closing high.

The volatility balloon becomes a weightless mass that first floats just out of reach. Conversely, we watch as equity markets experience turbulence, which last year, quickly gave way to a free fall. The volatility balloon careening higher as the S&P 500 and global markets swooned. One year ago. What a year it’s been.

 Cause you and I will be like a couple of cosmonauts

Except with way more gravity than when we started off

Fiona Apple - Cosmonauts

As regular readers know, I’m a fan of history that affords perspective when considering the relative importance of potential epochs. The VIX Index closed below 20 on February 12, 2021 for the first time since February 21, 2020. That was the second longest period (246 trading days) where the VIX Index measured greater than 20 ever.

The longest period where the VIX Index remained above 20 began in August of 2008 and ended on December 22, 2009. That tumultuous stretch spanned 331 trading days and redefined the role that volatility and tradeable volatility products can have on a portfolio. The Financial Crisis of 2008 reverberated for years. The October 9, 2007 closing SPX highs of 1565.15 wouldn’t be surpassed until March 28, 2013 (1569.19).

It really was “different this time.”


On January 29, 2009 Barclays launched their iPath S&P 500 VIX Short-Term Futures ETN (VXX) as a tool for investors to potentially hedge against market volatility or profit from managing short term volatility exposure. There are very important differences between volatility-linked exchange traded products, which are typically structured as a fund or note (unsecured debt security) and placed in an equity wrapper, and VIX futures.

The launch of VXX was an important event in the volatility space and ushered in the concept of “volatility as an asset class.” As the growth in VXX AUM continued, others were inspired to create similar products. Levered and inverse ETPs came to the market, and investors and traders used these products with varying degrees of success.

In hindsight, those that understood the inherent nuances (daily rolling, the impact of term structure, and potentially leverage) tended to prosper, while those that didn’t were likely disappointed performance-wise. I think about how my six-year-old opens packages. He really wants to know what’s behind the wrapper. Volatility traders would be advised to do likewise.

In 2013, Russell Rhoads, a former colleague at Cboe’s Options Institute wrote “Misperceptions About VXX.” Last month, S&P Dow Jones Indices published research on a variety of VIX based indices. It’s dense by comparison but numerous tradeable products have been designed to track their volatility-based indices. These pieces can help shed light on the volatility ETP markets and the indexes they’re designed to track. In particular, the S&P research illuminates “what’s behind the wrapper.”

VXX can be “like a heavy balloon” when the front end (Month 1 and Month 2) of the VIX futures curve is in contango. The VIX term structure was steep going into the February futures and options expiration (Feb 17). Following expiration, the spread between the current front month contract, March 26.40, and month two, April 29.05, is at 10%. The spread between the VIX Index and March futures is around 20% (reference Index @22/VXM1 @ 26.40).

Back to the VIX Index (and Futures)

Does the 20-level matter?

Does the relative steepness of the VIX curve portend poorly? In other words, does the middle and back end of the curve remaining stubbornly high matter?

VIX Futures Term Structure

Source: LiveVol Pro

When the S&P 500 made new all-time highs on February 19, 2020 (Feb VIX expiry) the curve looked very “normal” from a historical perspective: contango. The VIX Index measured around 14.40, and the March/April VIX futures spread was about 90 cents wide, or 5.85% relative to the March future. There was a demonstrable “election” bump in the October contract, but the entire curve traded below 20 with nearly every contract settling below 18.

Roughly a year later, the S&P 500 is 16% higher, just below all-time highs and the volatility outlook is dramatically different. In fact, the back end of the curve is higher than it was just before the November Congressional and Presidential election. What does that mean?

Longer-term hedges remain expensive when compared to other instances where the market was at or near highs. The flip side of that reality is that implied volatility risk premiums are much higher than they have been for years.

S&P 500 Index 60/90 Day Implied and Historic Volatilities

Source: LiveVol Pro

60- and 90-day SPX realized volatility measures are running ~12.80 and ~15.70 respectively. SPX (ATM) implied volatility for 60- and 90-day options are trading around ~18.50 and ~20 respectively. These premiums also exist on a 180-day basis.

New Normal?

Will our “new normal” ever look like our old normal? Should it?

The S&P 500 Index and the VIX Index from 1990 - 2019

Source: @bullmarketsco on Twitter

Equity market bulls may point to history with a glass more than half full perspective. The chart above was amended with red circles. Absent those, the simple takeaway might be that the terms following long periods with VIX greater than 20 gave way to up-markets once VIX measured below that level again.

 Fair enough but considering the huge time frame (1990 – present) it’s difficult to discern the length or magnitude of the subsequent “bull market.” What stood out for me was the frequency with which VIX moved back above the 20 level following prolonged periods of “unusually” high VIX Index readings.

 An alternate observation could be that periods of volatility tend to cluster. The end of one stretch of VIX plus 20 generally didn’t give rise to long periods of sub 20 measures. Periodicity, in chemistry, explains the “recurring trends that are seen in the element properties.” These observations helped Russian chemist Dmitri Mendeleev arrange and build out the periodic table based on where “holes” or undiscovered elements existed.* In volatility markets, the future is always to be discovered.

Money Flows

Money has been flowing back into long VIX ETPs, particularly UVXY, which has 1.5x exposure. According to ProShares marketing material, UVXY “provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.” Visit S&P Dow Jones for more information.

ProShares Ultra VIX Short Term Futures ETF (UVXY) Equity

Source: Bloomberg

Please read the prospectus carefully before investing.

This leveraged ProShares ETF seeks a return that is 1.5x the return of its underlying benchmark, or target, for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return, and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Source: ProShares UVXY Prospectus

Given the recent decline in the front end of the VIX curve, as well as the price of ETPs like VXX and UVXY, some market participants appear to be concerned about the prospect for a near-term pickup in S&P volatility levels.

Odds & Ends

The Nikkei 225 (Japan) has been on a tear as of late. The index moved to levels last seen in June of 1990. Between late 1982 and late 1989, the Nikkei gained ~450% as the Japanese economy embraced technology and other efficiencies. They maintained a relatively easy monetary policy that inflated real estate and other asset prices. It didn’t end well (The Lost Decade).

The Japanese index is now 263% off the June 2012 lows. The Nikkei has advanced 83% off the March 2020 lows. Over just the last four months, the index is up 33%.

The Nikkei 225 Index from 1970 to Now

Source: Bloomberg

Interest rates in the U.S. have been grinding higher since the 10-year yield traded ~50 basis points in early August of last year. The 10-year yield is back near 1.30%, which is where it was in late February of 2020. The Federal Reserve has seemingly pledged to prioritize employment and growth over inflation concerns. Much ink has been spilled over increasing borrowing costs.

Perhaps at some point it will matter. In 2020 the U.S. debt to GDP ratio reached 136% compared to 106% the previous year. The likelihood of a secondary stimulus bill will likely ratchet that ratio higher in 2021. However, if we zoom out and consider a 10-year borrow cost of 1.3%, in the grand scheme of things it seems less significant.

U.S. 10-Year Treasury Yield

Source: MacroTrends

On a much more domestic basis, the Russell 2000 Index has been the belle of the ball since Halloween. The small-cap index climbed 50% between the end of October 2020 and the February 9, 2021 close of 2,299. That run puts the Russell 2000 in uncharted territory relative to its 200-day moving average.

Over the past few sessions, the RUT has declined about 2% from those highs. The small caps have outperformed relative to large cap (RUT v. SPX) for five consecutive months (Sept 2020 through Jan 2021). It will be interesting to see if that relationship continues as February ends.

Mini Russell 2000 Index Options (MRUT) Launch

Cboe intends to launch Mini-Russell 2000® Index Options on March 1 pending regulatory review. This new product is designed to track the Russell 2000 Index at 1/10th the size of the standard contract. These options will have effectively the same notional value as the IWM ETF product. Being index options, they are European styled, cash-settled, and potentially benefit from 1256 contract status.

But you know that you never really go to the mat

You tie everything all pretty in the second act

Fiona Apple – For Her

Russell 2000 Index Distance from 200-Day Moving Average

Source: Cantor Fitzgerald Research

The capital markets symphony continues to play. Global markets grind higher as volatility measures and COVID infections continue to abate. The shape of the VIX futures curve looks “normal” in a very generic sense. Futures are trading at a premium to the VIX index, but the supply/demand dynamic for macro hedges and the memories of one year ago have elevated the entire complex.

VIX futures have no memory; they are always looking thirty days ahead. But investors have not forgotten the maelstrom of March 2020. It seems apparent that many are aware of the tendency for volatility events to cluster.

On we go.

On I go, not toward or away

Up until now, it was day, next day

Up until now, in a rush to prove

But now, I only move to move

Fiona Apple – On I Go

* (Periodicity)

Volatility News


Cboe Options Institute Derivatives Education Webinar Series:


Get the Inside Volatility Trading newsletter directly in your inbox by signing up here.


Futures trading is not suitable for all investors, and involves the risk of loss. The risk of loss in futures can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. For additional information regarding futures trading risks, see the Risk Disclosure Statement set forth in the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts

Cboe®, Cboe Global Markets®, CFE®, Cboe Volatility Index®, and VIX® are registered trademarks and Cboe Futures Exchange™ and Mini VIXTM are service marks of Cboe Exchange, Inc. or its affiliates. Standard & Poor’s®, S&P®, S&P 500®, and SPX® are registered trademarks of Standard & Poor’s Financial Services, LLC, and have been licensed for use by Cboe Exchange, Inc. All other trademarks and service marks are the property of their respective owners.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of "Characteristics and Risks of Standardized Options." Copies are available from your broker or from The Options Clearing Corporation at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 or at

© 2021 Cboe Exchange, Inc. All Rights Reserved.