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Weekly Options Take Charge

Friday, March 10th, 2017 | Vance Harwood

The volume of CBOE’s Weeklyssm options has grown rapidly since they expanded their listings into equities and Exchange Traded Products in June 2010.  Now weekly options comprise almost 30% of the CBOE’s average daily option volume.  The list of available weekly options is available on the CBOE website.

Among other things option traders take advantage of the Weeklys to position themselves for earnings releases,  harvest rapid premium decay near expiration, and place low cost directional plays.

Three recent press releases suggest that the Options Clearing Corporation (OCC) and the CBOE are moving to the next phase—making up to 5 weeks of options available on popular securities and moving existing options to look more like the Weeklys.  The specific moves are:

  1. Five weeks of Weekly options for many securities (press release)
    •  Initially Weekly options were only made available 9 days before their expiration.  If you needed a later expiration date your only choices were monthly options with their 3rd Saturday of the month expiration, or in some cases quarterlies.    In 2013 the CBOE started making SPX options available with weekly expirations 5 weeks in advance.   Evidently encouraged, they rolled out additional weekly expirations for additional  indexes and stocks (e.g., SPY & AAPL).    Overall I think the advantages of a more regular set of dates will outweigh the  problems with spreading option volume across more option classes.
  2. Friday afternoon expiration for most monthly options
    • The OCC announced a plan to change the expiration date for monthly options—to align with the Weeklys.  Instead of expiring on Saturday, they would expire at the end of trading Friday.   The Saturday expiration always seemed awkward to me, causing confusion on theta calculations and exposing investors to weekend news events.  I suspect it’s a throwback to days when paper actually had to be shuffled to close things out.  This change, planned for February 2015, would render the 3rd Friday of the month options indestinguishable from Weeklys.
  3. Rationalizing ticker symbols with SPX options (press release)
    • There are  three different tickers for SPX options,  SPX, SPXW, and SPXPM. Unlike other options there are weekly options (PM settled) on the same week that the monthly (AM settled) expire.

In general the move to weekly options has been gradual and non-invasive.   One of the side benefits of the rise of the SPX weeklys is that now there are always options series that closely bracket the 30 day volatility window of the VIX calculation.  Using the monthly SPX options there were sometimes longish extrapolations required with suspect accuracy. In October 2014 the CBOE switched the VIX calculation methodology to take advantage of the SPX weeklys availability.   Ultimately this new VIX calculation was needed to support VIX Weekly futures and VIX Weekly options.

How Much Should We Expect the VIX to Move?

Friday, March 10th, 2017 | Vance Harwood

Every couple of months it seems like there’s an uptick in articles about the CBOE’s VIX Index being broken or manipulated.   Generally I expect the percentage moves in the VIX to be around a factor of 4 in the opposite direction of SPX (S&P 500).  But there are significant eccentricities in the VIX that I factor in, for example Fridays tend to be down days, Mondays tend to be up.

The chart below shows the percentage moves at close for VIX (blue bars) and SPX (red line) for the first 12 trading days of November 2012, along with my -4X rule of thumb (green bars).  The black ovals show 5 days where the VIX went opposite the expected direction. In addition, on two days, the 1st and the 16th the VIX moved far more than a -4X factor.

One of these days, the 12th, has at least a partial explanation.  That was the day that the VIX calculation shifted from using November / December SPX options to December / January options.   If you’re interested see Bill Luby’s post for more information on this phenomenon.

I did an analysis of SPX and VIX since 1990 to see the actual historical ratios between their percentage moves.   I excluded daily SPX percentage moves of less than +-0.1% because they often give very high, nonsensical ratio values.

The average ratio value was -4.77, but as you can see there is a wide spread.   About 20% of the time the ratio is positive (data to the right of the red line).

Each of the blue bars in the histogram shows how many days had a VIX% / SPX% ratio in each 0.25 wide bin.  For example, there were 120 days where the ratio was between -3.25 and -3.5.   I also plotted a normal distribution—which shows this distribution is more concentrated and has wider tails than a Gaussian distribution.

While not broken, and probably not manipulated, the VIX as a fear gauge leaves a lot to be desired.   Given its past performance it’s not reasonable to expect it to negatively correlate with the S&P 500 every day.  However, I think it does give us a very good feel for the mood of the SPX options market.  A single SPX option has the leverage of a $200K+ investment in the S&P 500, so it tends to be the domain of professional / institutional investors.  They aren’t always right, but they aren’t dummies, and they’re voting with their wallets.   Last week they were trading as if they thought the market decline was over, and at least for today, it looks like they were right.

A Covered Call That’s Long Volatility

Friday, March 10th, 2017 | Vance Harwood

Covered calls are an example of  positions that are short volatility.  I hadn’t thought of it that way until Sheldon Natenburg, the author of Option Volatility & Pricing  pointed that out in a fascinating interview in Expiring Monthly  (   A covered call position is profitable if the underlying equity stays the same or goes up, but in a big market downswing, when volatility spikes up,  the modest potential profits from a covered call are more than wiped out by the losses in the underlying.

Unfortunately it is usually expensive to hedge a short volatility position.  The two most common strategies have problems:  VXX typically has roll yield losses, and VIX/VXX options have significant time decay.  Recently I started looking at Barclays’ VQT ETN, a fund that is intended to be long volatility.  The chart below compares $1000 invested in SPY and VQT starting in September 3rd, 2010—VQT inception date.

$1k investment in SPY and VQT

In bull market phases VQT underperformed the S&P 500  by about 50%,  but during the -19.5%  drawdown in August 2011 VQT only dropped 3% before going on a short term volatility fueled binge that lifted it 20%.    The next chart shows the day-to-day percentage moves of VQT vs SPY since June 2011.

Daily percentage moves SPY vs VQT

When times are volatile, VQT shifts its investments to include more short term volatility—which lowers its correlation to the S&P 500 to about 50% or 60%.  In very quiet times, like the end of December/January VQT shifts to a almost pure S&P play—giving it the nearly 100% correlation you see at the right side of the chart.   The next chart is from the VQT prospectus, showing the backtested, theoretical performance of VQT since 2005

VQT vs S&P500 backtest to 2005

VQT looks almost tailor-made for covered call writing.  Its low drawdown behavior limits capital risk while its volatility is similar to the S&P 500.  Unfortunately, there are no liquid options available on VQT, so we’ll have to get creative in developing a covered call style position.  Since much of VQT’s composition is direct exposure to the S&P 500 I will use SPY options as logical building blocks.  A covered call is a short call position hedged with a long equity position.    Since brokers won’t accept a long VQT position as a hedge for a short SPY call and I don’t want to have naked calls, I’ll protect my short call position with long out-of-the-money calls—creating a call spread.     I’m not too concerned about losses on these credit spreads, because VQT is a natural hedge for the position, so I’m comfortable with a $2 spread in the option strike prices.

Profitability analysis:

Market Action VQT action SPY call credit spread action Overall Profit
S&P 500 strongly up Up, but not as much as S&P Worst case loss.  Loss is premium received at creation minus $2/ option pair Neutral to small loss
S&P 500 up Up, but not as much as S&P  Neutral to profitable, with profit equal to premium received at creation minus any in-the-money intrinsic value. Modest profit
S&P 500 down Down, but not as much as S&P  Profitable, keep full premium received at creation Neutral to small loss
S&P 500 strongly down Strongly up as volatility portion kicks in  Profitable, keep full premium received at creation Very Profitable


The spreadsheet that provides the VQT backtest data from March 2004, including all formulas is available here.


The VIXs of Christmas Past

Monday, July 24th, 2017 | Vance Harwood

One of the persistent characteristics of the CBOE‘s VIX® index is the Christmas Effect—the tendency for VIX to drop down to relatively low levels during the Christmas holidays.  The CBOE’s VIX volatility December futures predict this drop for months in advance, and it has come to pass again this year.   I am aware of at least three possible explanations for this:

  1. Option market makers and others short options reduce their prices before the holidays so that they don’t get stuck with time decay (theta) during the multiple days off
  2. Traders in general go on vacation the end of December, volume drops, and the market becomes lethargic, reducing volatility
  3. People expect volatility to decrease, trade accordingly, and it becomes a self-fulfilling prophecy

I am skeptical about calendar based trading strategies (e.g., “crash prone” October was +8.5%, -1.8%, +4%  2011 through 2013) but the Christmas effect has been persistent— perhaps because it’s not easy to profit from it.   The VIX index itself is not investable, and the December VIX futures already discount the effect.

I was curious  how the VIX behaved over the last few years in December and January, so I generated the chart below using VIX historical data from the CBOE.


To make the chart more readable I carried over closing values over weekends/holidays and used a 3-day moving average.  I excluded 2008, even though it shows the Christmas effect because the market that year was clearly in an unusual state.

There does seem to be a fairly consistent low around the 23rd of December and the VIX has consistently increased right after that—at least for a few days.   By mid-January things seem to have settled back into their random ways.

I also wondered how VIX futures behaved around the holidays.     I used my VIX futures master spreadsheet  to generate the chart below showing the behavior of the front month VIX futures, the next ones to expire.

With the VIX futures the December dip comes a few days earlier.

In my experience, the future is often uncooperative in repeating the past, but this VIX Yet to Come, looks like a reasonable bet for a post-Christmas boost.

Top 11 questions about dividends

Monday, February 27th, 2017 | Vance Harwood

Based on searches that lead people to Six Figure Investing, these are the top 11 questions people ask about dividends:

  1. When is XYZ’s ex-dividend date?   This information can be hard  to find.  Some companies provide the entire year’s dates on their webside (e.g., iShares),  others like Vanguard only reveal the information a few days before the ex-dividend occurs.  I have summarized / estimated ex-dividend dates for many of the popular ETFs here.


  2. When is XYZ’s distribution or pay date?  Same as question #1, this information can be hard to find.  I summarize pay dates along with ex-dividend dates for many ETFs here.


  3. When do I have to buy a security in order to receive the dividend?   The day before it goes ex-dividend or earlier.


  4. When can I sell a security and still receive the dividend?  On the ex-dividend date or later.  You can safely ignore the record date.  See here for a detailed explanation of how this works.


  5. What happens to a security’s price when it goes ex-dividend?  It will typically drop by the amount of the dividend—assuming the market is opening flat.   If the market is strongly up or down at opening the price will be influenced by this.


  6. What if I’m short the security on its ex-dividend date?  You owe the dividend.  It will be subtracted from your brokerage account on the distribution date.  You borrowed the stock, you are responsible for paying the owner of the security the dividend.  If you short the stock on the ex-dividend date or later (e.g., record date) you don’t owe the dividend.


  7. Do I get a dividend if I’m long call or put options on a security?   No, with an option you don’t actually own the security, you only have the right to buy or sell it, so you don’t get a dividend.  However, the prices of options are influenced by dividends, for example the bid price on deep in the money calls will decrease to compensate for an upcoming dividend.  If the dividend is a special dividend, not regularly scheduled, then your options will likely be adjusted, either with a revised strike price or a cash payout (neither to your benefit).  For more on option adjustments see this post.  For news on specific adjustments visit the Options Clearing Corporation Website.


  8. What happens if I’m short put or call options on a security when it goes ex-dividend?  If you don’t own any of the underlying security, then nothing direct happens.  Again the option prices are influenced by the security’s dividend, but there is no direct dividend received, or owed. If the premium on your short call is less than the dividend amount your calls may be exercised. If the dividend is a special dividend, not regularly scheduled, then your options will likely be adjusted, either with a revised strike price or a cash payout (neither to your benefit).  For more on option adjustments see this post.  For news on specific adjustments visit the Options Clearing Corporation Website.


  9. What if I have a covered call position with a security when it goes ex-dividend?  It depends on how much premium is present on the option price when the security goes ex-dividend.

    • If your calls are deep in the money, with premiums significantly less than the dividend amount, then your options will probably be assigned—and you will wake up on ex-dividend day with your position converted to cash—minus your security and your short options.  No dividend for you.
    • If your options are out of the money by more than the dividend amount nothing will happen to your calls and you will collect the dividend.
    • If your calls are between these two limits then it depends on the prices at the end of the day before the ex-dividend date.  My experience is that if the premium of your calls is 50% or less than the dividend amount, your calls will probably will assigned.


  10. Are there any dividend capture schemes that  isolate you from market risk?   The short answer for retail customers is no.  Wall Street excels at  preventing anyone from getting a free lunch.   You can use a covered call position to move away from the zero-sum situation on ex-dividend day of having a dividend, plus a security that has just dropped by the value of the dividend, but you are still exposed to significant market risk.  See this post for more on dividend capture schemes.


  11. What happens with a special dividend ?   The stock price will behave the same, dropping by approximately the dividend amount on the ex-dividend date.  Adjustments to the option’s strike prices will be made to existing positions if the special dividend amount  is more than $0.125 per share.  This adjustment process prevents options traders from experiencing big losses or windfalls when a special dividend is announced.  The Options Clearing Corporation newstream gives specifics on upcoming options adjustments. For more about special dividends see “Profiting From Special Dividends