The Volatility Landscape—October 2014

Updated: Oct 18th, 2014 | Vance Harwood

VIX + VIX Future Term Structure May 2011- March 2012


  • CBOE
    • On October 6th, the CBOE introduced an updated methodology for computing the VIX index.  Previously the index was computed using SPX options with 3rd Friday of the month expirations, but now SPX weekly options are used when they bracket the 30 day expectation maturity of the VIX.  For example the VIX for 9-October-2014 computes an implied volatility value for 8-November—since options don’t exist that expire on that date an interpolation is used between the 7-Nov-2014 and the 14-Nov-2014 SPX weekly options.  Calculations via the old methodology are reported under the VIXMO ticker.    While technically I think this is a sound move, the currently much lower volumes on SPX weekly options that far out may cause the new VIX to significantly diverge from the old VIX  (so far I’ve seen variations as high as +5%).   The CBOE’s new methodology does not impact the expiration process for VIX futures and options; they will continue to use the 3rd Friday options for that calculation.
    • The CBOE’s expansion to near 24 hour trading for VIX futures has gone well and they are planning to expand the trading hours of VIX and SPX options starting October 21st to the same Sunday Afternoon 6pm ET to Friday Afternoon at 4:15 ET span.  For more information see this note from the CBOE.
    • VXST futures have been trading since February 13th, 2014.  So far their reception has been lukewarm with volumes running around 50 per day, but their prices do seem to track the VIX index pretty well, significantly better than VIX futures.   For more see VXST FuturesNot a Bad Proxy for the VIX.
  • PHDG gains momentum
    • This PowerShares fund uses the same VEQTOR methodology as VQT, but it’s an ETF rather than an ETN.  Its assets under management have climbed to $431 million, gaining momentum in its quest to top Barclay’s $640 million VQT (source
    • PHDG distributes a dividend (currently around 1.6% per year).  Of the 22 USA volatility based funds only PHDG and VelocityShares’ SPXH and TRSK distribute dividends.
    • Recently options became available (30-July-2014) on PHDG.  I’ve wanted options on the VEQTOR based funds (VQT and PHDG) for a long time because they raise the possibility of a Covered Call Strategy That’s Long Volatility.   Unfortunately the market maker isn’t showing much enthusiasm, with huge spreads and no bid prices on ATM options.




White Papers

  • Volatility: A New Return Driver?
    • A good non-mathematical overview of volatility, volatility products including futures and a couple example trading strategies using volatility Exchange Traded Products
  • The VIX-VIX Futures Puzzle?”
    • A technical paper testing the forecast accuracy of VIX futures that includes a comprehensive technical overview of the VIX, VIX Futures, and volatility term structures.  It skips the calculus but provides a clear description and comprehensive formulas.
  • Variance and Convexity: A Practitioner’s Approach
    •  My favorite paper from the CBOE’s 2013 Risk Management Conference.  Sparse and very technical it addresses some of the differences between variance and volatility with regards to VIX futures.  Most of the other papers from the conference are posted here with links associated to the agenda items.
  • VIX White Paper
    • Complete details on the VIX calculation, recently updated (8-Oct-2014) to reflect the new methodology that utilizes SPX weekly options



Wish List

Saturday, October 18th, 2014 | Vance Harwood