CBOE Volatility Index (VIX) Options Skew Soars Amid Worry, Frustration

VIX options traders are showing signs of nervousness -- again

by Adam Warner

Published on Aug 12, 2015 at 9:20 AM
Updated on Jun 24, 2020 at 10:16 AM

Stop me if you think you've heard this one before, but… CBOE Volatility Index (VIX) options traders are showing signs of market nervousness. This, from Bloomberg:

"Speculators' appetite for protection from stock-market tempests has reached the highest in nine years. 

Options predicting a rise in the Chicago Board Options Exchange Volatility Index are the most expensive since 2006 relative to those betting on a drop. With gains narrowing, investors are hedging through calls on the VIX, which usually rises as the Standard & Poor's 500 Index falls.

… Last week, options betting on a 10 percent rise in the VIX cost 19.1 points more than puts with strike prices 10 percent below the VIX's level, three-month data compiled by Bloomberg show. That's the widest spread since July 2006." 

In other words, the skew in VIX has soared. Now as we know, there's always a huge volume and pricing bias in favor of VIX out-of-the-money (OTM) calls here. Everyone wants to either hedge against the next market explosion or speculate on it. Not to mention there's thought the biggest players here are playing vs. CDO-CDS type instruments. So there's a built-in bid at all times. The difference now is that that bid has hit levels not seen since 2006.

I'm sympathetic in the sense that the market is just awful. I mean, I realize it's not 2008-type awful, or even remotely close. But for a market that's still actually up on the year, it's just frustrating beyond belief. 

No rally follows through. We discount news one day only to obsess over it the next day.  Breadth is bad, which would certainly suggest that individual investments lag the overall market. The index range never ends, but it sure feels like when it finally does, it will end with a downside violation. 

So yeah, I get the desire to play for a volatility spike. The problem is, market frustration hasn't translated into anything but volatility market frustration.

Market has been "volatile" for months. Here are the $VIX settlements since February: 16.64, 15.67, 13.81, 12.80, 14.67, 12.82

It's impossible to know what anyone actually does with all these VIX calls.  But they ultimately fail almost every time. 

It's nice ammo to have in the arsenal if you're of a mind to fade market drops. Beyond that, though, they really haven't worked. And yet the VIX call bid never goes away. It only gets more popular and more expensive. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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