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2023-10-20

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Is The VIX Broken?

We explore the recent performance of the VIX to ascertain if its behavior has altered fundamentally and if the VIX is still a reliable proxy for implied volatility.Some attribute the low VIX to the po

Is The VIX Broken?

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And that the speculative fever surrounding 0DTE options and option-writing strategies will likely turn ugly.</li></ul><p><figure><picture><img height=\"1152px\" loading=\"lazy\" sizes=\"(max-width: 768px) calc(100vw - 36px), (max-width: 1024px) calc(100vw - 132px), (max-width: 1200px) calc(66.6vw - 72px), 600px\" src=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w750\" srcset=\"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w1536 1536w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w1280 1280w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w1080 1080w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w750 750w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w640 640w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w480 480w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w320 320w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg?io=getty-c-w240 240w\" width=\"1536px\"/></picture><figcaption><p>Yurii Klymko/iStock via Getty Images</p></figcaption></figure></p> <p>Low volatility in the equity market is causing some analysts on Wall Street to wonder if the CBOE Volatility Index (<span>VIX</span>) might be broken. Despite heightened risks of a recession, rising interest rates threatening to<span> ignite corporate defaults, and even bank runs, the VIX has remained subdued this year.</span></p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" height=\"300\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2023/10/18/25338263-16976107298644502.png\" width=\"640\"/></span><figcaption><p>TradingView.com</p></figcaption></figure></p> <p>Some suspect that the VIX has lost its relevance due to the popularity of zero-days-to-expiration (0DTE) options, which allow traders to hedge intraday risks more effectively. Others argue that a subdued VIX is simply reflecting the benign sentiment underlying equity markets.</p> <p>In this article, we shall explore the recent performance of the VIX to ascertain if its behavior has altered fundamentally and if the VIX is still a reliable proxy for implied volatility.</p> <h2>Is The VIX Broken... Again?</h2> <p>Let us first address the question of<span> whether the VIX is broken. We argue that the VIX may seem broken only because expectations of the VIX have been distorted. Perhaps due to how the financial media has often labeled the VIX as Wall Street's \"fear gauge\", many investors seem to think that the VIX should spike simply because investors are fearful. However, the VIX has little to do with fear.</span></p> <p>Technically, the VIX Index is a benchmark designed to provide an up-to-the-minute market estimate of the implied volatility of the S&amp;P 500 Index (SPX). The VIX is calculated by using the midpoint of real-time SPX option bid/ask quotes. More specifically, the VIX Index is intended to provide an instantaneous measure of how much the market thinks the S&amp;P 500 Index will fluctuate in the 30 days from the time of each tick of the VIX Index.</p> <p>Objectively speaking, the VIX is an unbiased representation of implied volatility calculated based on the actual prices of options quoted on the SPX. Thus, we should expect the VIX to run like clockwork, and free from manipulation given its straightforward calculation and how the index itself cannot be directly traded. Saying that the VIX is broken would mean the same thing as saying that the options market for the SPX is broken too.</p> <p>Recall that we mentioned earlier that the VIX has very little to do with fear. Indeed, investors being fearful and willing to pay to hedge their positions is not the only factor moving the VIX. Many other factors including market liquidity, execution preference by institutional funds, speculative trading, and option-selling strategies to extract premiums, could all affect option pricing to different extents. These decisions are aggregated and captured as implied volatility through option prices and the VIX.</p> <p>It is also worthwhile to note that the phenomenon associated with a persistently subdued VIX is not as unusual as most people think. A quick search on Google for \"Is The VIX Broken?\" will yield old articles and commentary debating on the subject every few years. And soon enough, the VIX would spike in response to some major risk-off event. Indeed, Wall Street analysts have been repeating the same ritual of questioning if the VIX is broken whenever it fails to live up to fearful expectations.</p> <p>To put it bluntly, <em><strong>the frustration associated with how stubbornly low the VIX has been in spite of the economic uncertainties is really nothing more than a symptom of investor psychology.</strong></em> Just like how most investors are still struggling to come to terms with how the SPX had gained 12.4% year-to-date in spite of economic headwinds, they too are struggling to accept how the VIX could remain so low. But then again, given how well the SPX has held up and how resilient the economy has been, is there a real reason for the options market to price for a surge in volatility? <em><strong>And this is really one of the most difficult parts of trading that most traders never manage to overcome: the market is always right.</strong></em></p> <h2>The Case Of 0DTE Options</h2> <p>Explanations for why the VIX has been persistently low vary across financial media, but the most widely accepted argument puts the blame on the increasing popularity of 0DTE options.</p> <p>0DTE options, which are option contracts that will expire on the same day that they are traded, were fully introduced for all five trading days of the week by the Chicago Board Options Exchange (Cboe) in 2022. The product soon became a popular tool for day traders who prefer not to carry their exposure beyond a single trading session. Many analysts claim that hedge funds and other short-term traders have since switched to trading 0DTE options instead of options with longer expirations. Therefore the VIX, which is calculated based on prices of SPX options averaging 30 days to expiration, may no longer reflect the market's willingness to pay to hedge against the SPX.</p> <p>Although that argument may seem theoretically possible, we think the effect of 0DTE trading on the VIX might have been grossly exaggerated. To be clear, trading of 0DTE options has indeed ballooned. According to data presented by the Cboe below, we could see that volumes for 0DTE options as a share of total SPX options volume have surged from just 5% in 2016 to 43% currently.</p> <p><figure contenteditable=\"false\"><span><img contenteditable=\"false\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2023/10/18/25338263-16976850826694434.png\"/></span><figcaption><p>Cboe</p></figcaption></figure></p> <p>At first glance, this may seem like conclusive evidence that 0DTE options are responsible for breaking the VIX. But we suspect that 0DTE options may have attracted new speculators to the options market, which explains the increased volume for 0DTE specifically, instead of an entire swath of institutional traders suddenly deciding to switch careers to day-trade options.</p> <p>Below is a chart showing the growth in total volume for SPX options. As we can see, the volume for SPX options surged by around 57% in 2022, the same year that 0DTE options were introduced for all five days of the week by the Cboe. <em><strong>This would suggest to us that institutional option traders did not actually switch to trading 0DTE options, but instead, there was a huge influx of new traders into the SPX options market.</strong></em> This is in line with anecdotal evidence provided by Cboe that retail traders currently make up an estimated 30%-40% of 0DTE option volumes.</p> <p><figure contenteditable=\"false\"><picture><img contenteditable=\"false\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2023/10/19/25338263-16977003612761648.png\"/></picture><figcaption><p>Cboe, Stratos Capital Partners</p></figcaption></figure></p> <h2><strong>A Boom In Option-Writing Strategies?</strong></h2> <p>Another plausible explanation for the persistently low VIX points to the growing popularity of option-writing strategies. These strategies typically seek to generate income by selling call options on an existing stock position (covered call) or selling put options (cash-secured). These strategies give traders an opportunity to earn option premiums should those options regularly expire without getting exercised.</p> <p>The growing popularity of option writing has led to a bunch of exchange-traded funds (ETFs) specializing in these strategies being launched in recent years. The resulting effect on the options market is that whenever the cost of options rises and becomes attractive, these managers would come to the market to sell options. Such selling activity depresses option prices, which in turn results in a low VIX.</p> <p>According to data compiled by <a href=\"https://laohu8.com/S/EFFE\">Global X</a> ETFs, assets under management for options-selling ETFs have jumped by an estimated 70% this year and are approaching a record $60 billion. Data compiled by Bloomberg also showed that covered-call funds have seen at least 10 new launches this year.</p> <p><figure contenteditable=\"false\"><picture><img contenteditable=\"false\" loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2023/10/19/25338263-16977048300735147.png\"/></picture><figcaption><p>Bloomberg</p></figcaption></figure></p> <p>The apparent boom in option-writing strategies does seem like a credible factor driving down the prices of SPX options. However, we can't help but think that investors are chasing the wrong things again.</p> <p>The very premise of trying to earn income just by selling options makes little sense to us. Such strategies are in essence predicated on the assumption that there is some kind of regular mispricing in the options market that can be exploited by traders. Sure, such mispricings do occur. But we should expect such mispricings to be quickly exploited by professional traders and market makers. When a whole bunch of regular investors start selling options thinking that there is free money on the table, that is when things usually turn ugly.</p> <h2>In Conclusion</h2> <div></div> <p>We presented two of the best arguments explaining what may be causing the VIX to remain subdued. However, we conclude that the VIX is not broken. It seems to us that the only thing that needs to be fixed is traders' psychology and the speculative fever surrounding 0DTE options and option-writing strategies. And the adjustment will probably look really ugly, just like the \"Volmageddon\" of 2018.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Is The VIX Broken?</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nIs The VIX Broken?\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-10-19 23:14 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4641833-is-the-vix-broken><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>We explore the recent performance of the VIX to ascertain if its behavior has altered fundamentally and if the VIX is still a reliable proxy for implied volatility.Some attribute the low VIX to the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4641833-is-the-vix-broken\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1395152871/image_1395152871.jpg","relate_stocks":{"UVXY":"1.5倍做多波动率指数短期期货ETF-ProShares","VIXY":"波动率短期期货指数ETF","VXX":"短期VIX期货ETN","SVXY":"0.5倍做空波动率指数短期期货ETF","TVIX":"二倍做多VIX波动率指数短期期权ETN","BK4585":"ETF&股票定投概念"},"source_url":"https://seekingalpha.com/article/4641833-is-the-vix-broken","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2376231032","content_text":"We explore the recent performance of the VIX to ascertain if its behavior has altered fundamentally and if the VIX is still a reliable proxy for implied volatility.Some attribute the low VIX to the popularity of zero-days-to-expiration options, which allow for more effective risk hedging.Another plausible explanation for the persistently low VIX points to the growing popularity of option-writing strategies.We conclude that the VIX is not broken. And that the speculative fever surrounding 0DTE options and option-writing strategies will likely turn ugly.Yurii Klymko/iStock via Getty Images Low volatility in the equity market is causing some analysts on Wall Street to wonder if the CBOE Volatility Index (VIX) might be broken. Despite heightened risks of a recession, rising interest rates threatening to ignite corporate defaults, and even bank runs, the VIX has remained subdued this year. TradingView.com Some suspect that the VIX has lost its relevance due to the popularity of zero-days-to-expiration (0DTE) options, which allow traders to hedge intraday risks more effectively. Others argue that a subdued VIX is simply reflecting the benign sentiment underlying equity markets. In this article, we shall explore the recent performance of the VIX to ascertain if its behavior has altered fundamentally and if the VIX is still a reliable proxy for implied volatility. Is The VIX Broken... Again? Let us first address the question of whether the VIX is broken. We argue that the VIX may seem broken only because expectations of the VIX have been distorted. Perhaps due to how the financial media has often labeled the VIX as Wall Street's \"fear gauge\", many investors seem to think that the VIX should spike simply because investors are fearful. However, the VIX has little to do with fear. Technically, the VIX Index is a benchmark designed to provide an up-to-the-minute market estimate of the implied volatility of the S&P 500 Index (SPX). The VIX is calculated by using the midpoint of real-time SPX option bid/ask quotes. More specifically, the VIX Index is intended to provide an instantaneous measure of how much the market thinks the S&P 500 Index will fluctuate in the 30 days from the time of each tick of the VIX Index. Objectively speaking, the VIX is an unbiased representation of implied volatility calculated based on the actual prices of options quoted on the SPX. Thus, we should expect the VIX to run like clockwork, and free from manipulation given its straightforward calculation and how the index itself cannot be directly traded. Saying that the VIX is broken would mean the same thing as saying that the options market for the SPX is broken too. Recall that we mentioned earlier that the VIX has very little to do with fear. Indeed, investors being fearful and willing to pay to hedge their positions is not the only factor moving the VIX. Many other factors including market liquidity, execution preference by institutional funds, speculative trading, and option-selling strategies to extract premiums, could all affect option pricing to different extents. These decisions are aggregated and captured as implied volatility through option prices and the VIX. It is also worthwhile to note that the phenomenon associated with a persistently subdued VIX is not as unusual as most people think. A quick search on Google for \"Is The VIX Broken?\" will yield old articles and commentary debating on the subject every few years. And soon enough, the VIX would spike in response to some major risk-off event. Indeed, Wall Street analysts have been repeating the same ritual of questioning if the VIX is broken whenever it fails to live up to fearful expectations. To put it bluntly, the frustration associated with how stubbornly low the VIX has been in spite of the economic uncertainties is really nothing more than a symptom of investor psychology. Just like how most investors are still struggling to come to terms with how the SPX had gained 12.4% year-to-date in spite of economic headwinds, they too are struggling to accept how the VIX could remain so low. But then again, given how well the SPX has held up and how resilient the economy has been, is there a real reason for the options market to price for a surge in volatility? And this is really one of the most difficult parts of trading that most traders never manage to overcome: the market is always right. The Case Of 0DTE Options Explanations for why the VIX has been persistently low vary across financial media, but the most widely accepted argument puts the blame on the increasing popularity of 0DTE options. 0DTE options, which are option contracts that will expire on the same day that they are traded, were fully introduced for all five trading days of the week by the Chicago Board Options Exchange (Cboe) in 2022. The product soon became a popular tool for day traders who prefer not to carry their exposure beyond a single trading session. Many analysts claim that hedge funds and other short-term traders have since switched to trading 0DTE options instead of options with longer expirations. Therefore the VIX, which is calculated based on prices of SPX options averaging 30 days to expiration, may no longer reflect the market's willingness to pay to hedge against the SPX. Although that argument may seem theoretically possible, we think the effect of 0DTE trading on the VIX might have been grossly exaggerated. To be clear, trading of 0DTE options has indeed ballooned. According to data presented by the Cboe below, we could see that volumes for 0DTE options as a share of total SPX options volume have surged from just 5% in 2016 to 43% currently. Cboe At first glance, this may seem like conclusive evidence that 0DTE options are responsible for breaking the VIX. But we suspect that 0DTE options may have attracted new speculators to the options market, which explains the increased volume for 0DTE specifically, instead of an entire swath of institutional traders suddenly deciding to switch careers to day-trade options. Below is a chart showing the growth in total volume for SPX options. As we can see, the volume for SPX options surged by around 57% in 2022, the same year that 0DTE options were introduced for all five days of the week by the Cboe. This would suggest to us that institutional option traders did not actually switch to trading 0DTE options, but instead, there was a huge influx of new traders into the SPX options market. This is in line with anecdotal evidence provided by Cboe that retail traders currently make up an estimated 30%-40% of 0DTE option volumes. Cboe, Stratos Capital Partners A Boom In Option-Writing Strategies? Another plausible explanation for the persistently low VIX points to the growing popularity of option-writing strategies. These strategies typically seek to generate income by selling call options on an existing stock position (covered call) or selling put options (cash-secured). These strategies give traders an opportunity to earn option premiums should those options regularly expire without getting exercised. The growing popularity of option writing has led to a bunch of exchange-traded funds (ETFs) specializing in these strategies being launched in recent years. The resulting effect on the options market is that whenever the cost of options rises and becomes attractive, these managers would come to the market to sell options. Such selling activity depresses option prices, which in turn results in a low VIX. According to data compiled by Global X ETFs, assets under management for options-selling ETFs have jumped by an estimated 70% this year and are approaching a record $60 billion. Data compiled by Bloomberg also showed that covered-call funds have seen at least 10 new launches this year. Bloomberg The apparent boom in option-writing strategies does seem like a credible factor driving down the prices of SPX options. However, we can't help but think that investors are chasing the wrong things again. The very premise of trying to earn income just by selling options makes little sense to us. Such strategies are in essence predicated on the assumption that there is some kind of regular mispricing in the options market that can be exploited by traders. Sure, such mispricings do occur. But we should expect such mispricings to be quickly exploited by professional traders and market makers. When a whole bunch of regular investors start selling options thinking that there is free money on the table, that is when things usually turn ugly. In Conclusion  We presented two of the best arguments explaining what may be causing the VIX to remain subdued. However, we conclude that the VIX is not broken. It seems to us that the only thing that needs to be fixed is traders' psychology and the speculative fever surrounding 0DTE options and option-writing strategies. And the adjustment will probably look really ugly, just like the \"Volmageddon\" of 2018.","news_type":1},"isVote":1,"tweetType":1,"viewCount":595,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"upFlag":false,"length":27,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"hasMoreComment":false,"orderType":2}