How to Tame Risk with VIX® Futures and Options in 2020

Financial professionals interested in learning more about this topic are invited to join Cboe for a webinar on September 16. Learn more about how to register below.

By Matt Moran, Director, Institutional Product Advancement at Cboe

Record volatility in early 2020 along with potential heightened uncertainty around the U.S. presidential election, the ongoing COVID-19 pandemic and other concerns have increased interest in harnessing tradable volatility products to manage risk. Let’s see what the VIX futures term structure and other benchmark indices tracking VIX options and futures are predicting for 2020.

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How Have VIX Index-Related Strategies Performed?

As of September 8, the chart above shows that since the beginning of 2020:

· The Cboe VIX Tail Hedge Index (VXTHSM), a benchmark index that tracks the performance of a strategy that buys and holds the S&P 500 stocks and also buys VIX call options, rose 97%. The VXTH Index benefitted from the fact that it bought VIX call options, which rose in value. The reported daily closing values for the VIX March 20 call options (that expired on March 18) rose from $0.75 on February 19 to $48.70 on March 17.

· The Cboe S&P 500 5% Put Protection Index (PPUTSM), a benchmark index that tracks the performance of a strategy that buys and holds the S&P 500 Index stocks and also buys SPX put options), rose 19%.

· The S&P 500® Index rose 4%.

· The MSCI EAFE® Index (US$), an equity index that captures large and mid-cap representation across several developed markets countries (excluding the U.S. and Canada), fell 6%.

· Finally, the S&P GSCI, a composite index of commodities that measures the performance of the commodity market, fell 35%.

Want to learn more about managing risk with benchmark indices? Speakers from Cboe’s September 16 webinar will analyze the performance of more than 14 years of benchmark indices that use VIX futures or options. Register below.

The Market’s Expectations for Future Volatility

What can be discerned from the market’s pricing of future volatility expectations? Uncertainty has increased greatly in 2020, particularly due to the upcoming U.S. presidential election on November 3, trade tensions, the global COVID-19 pandemic and the resulting disruption of the travel and retail sectors.

Throughout much of 2020, the VIX futures term structure has shown an “election bump,” as demonstrated in the chart below. Prices are higher for the October VIX futures, which may be used to hedge volatility around the November 3 U.S. election. It is also worth noting that there have been several shifts in the VIX futures term structure, likely due to rising concern about higher volatility in early 2021. Market participants may be pricing in possible delays in the resolution of the pandemic and the U.S. election.

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If you’re interested in learning more about the opportunities VIX products may provide in risk management, financial professionals are invited to join a live 60-minute webinar as industry experts discuss Taming Risk with VIX® Futures and Options.

The webinar speakers will present highlights from their authored CFA Institute Research Foundation research paper, The VIX Index and Volatility-Based Global Indexes and Trading Instruments — A Guide to Investment and Trading Features (2020) [M. Moran], and answer questions about what the VIX Index measures, what tradable volatility-based products are available and more.

Additionally, the speakers will shed light on how VIX futures and options and other financial instruments may be used during times of significant moves in volatility, while addressing other questions about the VIX Index and related strategies. The webinar’s speakers will also analyze the performance over more than 14 years of benchmark indices that use VIX futures or options.

Date: Wednesday, September 16, 2020

Time: Noon to 1 PM ET (U.S. East Coast)

Webinar Moderator and Speakers:

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The webinar will be accepted for one hour of Continuing Education (CE) Credit.

Learn more and register here.

Cboe®, Cboe Global Markets®, Cboe Volatility Index®, and VIX® are registered trademarks and Mini VIXSM is a service marks of Cboe Exchange, Inc. or its affiliates. S&P 500® and SPX® are registered trademarks of Standard & Poor’s Financial Services, LLC and has been licensed for use by Cboe Exchange, Inc. Any products that have the S&P Index or Indexes as their underlying interest are not sponsored, endorsed, sold or promoted by Standard & Poor’s or Cboe and neither Standard & Poor’s nor Cboe make any representations or recommendations concerning the advisability of investing in products that have S&P indexes as their underlying interests. All other trademarks and service marks are the property of their respective owners.

Futures trading is not suitable for all investors, and involves the risk of loss. The risk of loss in futures can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. For additional information regarding futures trading risks, see the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606.

The methodology of the Cboe VIX Tail Hedge Index and Cboe S&P 500 5% Put Protection Index is owned by Cboe Exchange, Inc.

Past Performance is not indicative of future results.

The Cboe VIX Tail Hedge Index and Cboe S&P 500 5% Put Protection Index (the “Indexes”) are designed to represent proposed hypothetical options strategies. The actual performance of investment vehicles such as mutual funds or managed accounts can have significant differences from the performance of the Indexes. Investors attempting to replicate the Indexes should discuss with their advisors possible timing and liquidity issues. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for strategies such as the Indexes could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors should consult their tax advisor as to how taxes affect the outcome of contemplated options transactions. Past performance does not guarantee future results. It is not possible to invest directly in an index. Cboe Exchange, Inc. calculates and disseminates the Indexes.

© 2020 Cboe Exchange, Inc. All Rights Reserved.

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