Article / 15 May 2017 at 12:44 GMT

Volatility Update: VIX options are still expensive –#SaxoStrats

Product Manager, Options Trader, Educator
  • VIX volatility index hit 52-week low last week as equities rallied further
  • VIX options were very actively traded on Friday
  • Put/call ratio of 0.37 means call options are relatively expensive
  • VIX May futures are trading at 3.89% premium to VIX spot, June at 14% premium
  • Being short volatility has paid off for traders over the past year
  • Look for ways to offset or reduce the premium with combination strategies

CBOE pits
 CBOE pits. VIX options were very actively traded on Friday. Photo: Shutterstock

By Georgio Stoev

There's a lot of noise around the VIX these days and its current levels. Last week it dropped to a new 52-week low at the $9.52 handle as share prices rallied further. For the week the CBOE Volatility Index fell by 1.61%.

The old adage "When the VIX is high, it's time to buy - when the VIX is low, look out below" is similar to a Warren Buffett investment philosophy and argues that when everyone fears buying equities, you shouldn't fear. Conversely, when the market is made complacent and no one fears, you should probably fear the most.

Speaking of Buffett, the "Oracle of Omaha" himself seems to be having a tough time finding a place to put his billions of dollars sitting in cash.

VIX index (monthly)
VIX Monthly
Source: Dynamic Trend

On Friday, VIX options were very actively traded. According to the Chicago Board Options Exchange website, some 858,407 contracts were traded versus a daily average volume (ADV) of 709,395. Out of the 858,407 traded, 625,942 were on the call side, leaving 232,465 puts. This gives us a put/call ratio of 0.37 and an argument that VIX options, particularly call options because of the skew, are relatively expensive. 

VIX May futures (2 DTE) at the moment are trading at $11.20, or a 3.89% premium to the VIX spot ($10.79), while the June futures (VXM7) are at a 14% premium. On Wednesday, the May futures settle.

Deutsche Bank's Thorsten Slok last week pointed out the obvious (yet disregarded by many volatility investors) fact that shorting the VIX index over the past year would have resulted in a net gain of 160%. One the other hand, going long VIX would have resulted in a loss of 75%. 

You cannot throw in the towel on the volatility index if you are using the index to hedge your portfolio. Instead, look for ways to offset or reduce the high premium with combination strategies, i.e. vertical call spreads, back ratio spreads, flys and so forth. 

Volatility low in other markets

Low volatility is observed in other markets, including the foreign-exchange, rates and event crude oil markets. Using the QuikStrike's QuikVol, we are seeing that at-the-money volatility for EURUSD (EUN7) is continuing to decline, especially after the outcome of the French presidential election. This may suggest that the market is not expecting large moves from the pair in the near future. 

ATM volatility for EURUSD (EUN7) 
Source: QuikStrike

In crude oil (CL), volatility dropped some 6% after the underlying futures (CLM7) found some support near $46/barrel and then rallied to $48. Volatility is very low in gold (GCM7) as the precious metal hovers near $1,231/oz. 

To sum up, being short volatility has paid off for traders over the past year, particularly in the equity markets. For those looking to make long bets on volatility it's better to do so in some sort of a combination strategy to offset the somewhat elevated premiums.

— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank

fxtime fxtime
Personally I work on the golden rule of VIX call very corrosive to your account as premium and time decay are horrendous. Safer IMHO just to await for a vol spike and trade extreme end of the VIX spike to the downside.
Georgio Stoev Georgio Stoev
Good rule to live by...It depends what risks one wants to hedge at times, e.g. systemic non-systemic. It could make sense to buy VIX futures when VIX options are trading at significant premium.


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