Bloomberg News

VIX 21% Tumble Means Shorts on Volatility Double Money: Options

October 17, 2013

Chicago Board Options Exchange

A trader works in the Volatility Index Options pit on the floor of the Chicago Board Options Exchange in Chicago. Photographer: Tim Boyle/Bloomberg

The biggest single-day decline in U.S. equity volatility since 2011 enriched options traders who spent the month doubling down on bets the bull market in stocks would survive the default deadline.

The most-owned contract on the Chicago Board Options Exchange Volatility Index, November 14 puts, soared 129 percent yesterday, while wagers the VIX will drop to 12 over the next month rose fivefold, data compiled by Bloomberg show. An exchange-traded note that allows investors to speculate on smaller price swings jumped 12 percent after investors created 7.7 million new shares in the security this month.

Stocks surged, pushing the Standard & Poor’s 500 Index within 4 points of a record, and the VIX lost 21 percent as lawmakers agreed on raising the debt limit, generating profits for traders who had doubled bets on lower volatility. Investors are turning to VIX options and funds to speculate on market fluctuations and offset losses when stocks drop, making an ETN based on the gauge the third-most traded U.S. security.

“For those with the instinct to buy at the darkest hour before the dawn, the payout profile in VIX index puts is more than two to one,” Neil Azous, founder of Rareview Macro LLC, a Stamford, Connecticut-based advisory and research firm, said in an interview yesterday.

Fiscal Standoff

Congress voted yesterday to end the 16-day government shutdown and raise the U.S. debt limit, ending the nation’s fiscal impasse. The vote concludes a four-week funding standoff that began with Republicans demanding defunding of Obama’s 2010 health-care law and objecting to raising the debt limit and funding the government without attaching policy conditions.

The S&P 500 rose 1.4 percent to 1,721.54. The index slumped to a one-month low on Oct. 8 as the debate in Congress reached a stalemate, before recovering in a 4 percent rally. The VIX, which moves in the opposite direction of the benchmark equity gauge 80 percent of the time, lost 3.95 points to 14.71, for the biggest percentage decline in more than two years.

Traders bought about 150,000 November 14 VIX puts over the past two weeks, said Mark Caffray, who brokers contracts on the index for clients at Chicago-based PTR Inc. The price of the option, the sixth-most traded on U.S. exchanges, has jumped to 55 cents from 20 cents on Oct. 8.

Deal Profits

“It was a way to say: ‘A deal is going to be done, and if so I’m going to profit from it,’” Stephen Solaka, who helps oversee about $100 million as managing partner of Belmont Capital Group in Los Angeles, said in a phone interview. “Smart money took advantage of some of the fear. It worked out fairly well.”

Contracts betting on a decline in the volatility gauge with a strike price of 12 climbed to 5 cents from 1 cent, the biggest percentage gain among VIX options. They expire on Nov. 20.

The VelocityShares Daily Inverse VIX (XIV:US) Short-Term ETN, which produces the inverse return of VIX futures, gained 12 percent to $27.39. The shares outstanding have jumped 70 percent to 18.8 million since the government shutdown began on Oct. 1, the highest level since July.

The ETN is the second-most U.S. traded security that profits from stock swings and has the 13th highest trading volume among more than 1,500 exchange-traded products, according to data from the past 30 days compiled by Bloomberg.

Bearish Options

Bearish VIX options with a strike level of 15 expiring in a month had the largest increase in open interest since the government shutdown began on Oct. 1. The contracts surged 88 percent to $1.05.

Stocks swings will widen as lawmakers prepare to clash early next year, according to Scott Wren of St. Louis, Missouri-based Wells Fargo Advisors LLC. The framework negotiated by the Senate would fund the American government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations.

“We are going to go through the same thing again who knows how many times over the next few months,” Wren, a senior equity strategist at subsidiary of Wells Fargo Co., which oversees about $1.3 trillion, said by phone. “There are questions over Chinese growth, the issues over in Europe, the debt and deficit issue in the States is going to come around again.”

Declining VIX

Traders have increased bets that the VIX will decline, sending the ratio of puts outstanding versus calls to a three-month high. The total number of puts to sell the index rose 114 percent to 2.88 million over the past month through yesterday’s expiration, the biggest jump since August 2011, according to open interest data compiled by Bloomberg. That compares with a 55 percent gain in the ownership of calls to 5.7 million.

During the week ending Oct. 14, the open interest for VIX puts rose by 625,000 contracts, compared with an increase of 495,000 in the number of calls outstanding.

The CBOE Skew Index, which tracks the price to protect against a drop in the S&P 500 (SPX), climbed 15 percent from its September low through Oct. 15, data compiled by Bloomberg show. It reached 131.01 this week, the highest since March 2012.

“All the recent put buying in the VIX, which is paying off big time, is evidence that customers had it right on a speculative play in the VIX versus the usual call buying as a hedge,” PTR’s Caffray said.

In Asia, Japan’s Nikkei Volatility Index dropped 11 percent to 21.61 today, the lowest level since January, as South Korea’s Kospi 200 Volatility Index retreated 4.1 percent to 14.01 and Hong Kong’s HSI Volatility Index declined 4.4 percent to 16.93. Europe’s VStoxx Index slid 3.1 percent to 18.01 at 10:11 a.m. in Frankfurt today.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at; Alex Barinka in New York at

To contact the editor responsible for this story: Lynn Thomasson at

China's Killer Profits

Companies Mentioned

  • XIV
    (VelocityShares Daily Inverse VIX Short Term ETN)
    • $31.99 USD
    • 2.67
    • 8.35%
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