CBOE volatility - where the bodies are buried

Open interest across Vix futures options stands at around 9.4million contracts, heavily skewed towards call options used to benefit from a rise in volatility. There are around 7.2 million calls held among investors easily outnumbering by more than 3.3-times the number of put contracts held.

The following chart illustrates the mix across those using the contracts to speculate on rising volatility through call options (upper panel) and those predicting even lower volatility through put options in the lower panel.

Open interest across time

Each contract month is assigned a different color. The vertical white dashed bar represents the current value of the CBOE Vix index at 12.26. To the right of this line, call options are out-of-the-money, while put options are in-the-money. To the left of the line the opposite holds true; calls have intrinsic value while puts have only extrinsic or time value.

The chart excludes the vast number of options maturing next week at the May 21 expiration to better illustrate the distribution over medium and longer time horizons. The horizontal white dashed line drawn above the call contracts contrasts the number of positions looking to protect against rising volatility against the highest reading of put contracts at the 14.0 strike.

Most investors use Vix futures options to protect a long portfolio from the kind of market swoon that typically accompanies a spike in volatility. It is at exactly those times that investors start paying higher premiums for defensive options whose value should increase when prices fall. This also explains why interest in puts on the Vix are relatively few compared to calls. There are far fewer portfolios that require insulation from rising equity prices or sliding volatility. Yet those who have speculated on declining volatility readings have been the winners. Back to the earlier point, put options sitting to the right of the vertical line are in-the-money and would expire with value should the Vix index remain at its current reading. 

The same can’t be said for call buyers where the vast majority of currently held options would expire worthless under current prices. However, protection against adverse movements over time is exactly what these investors are looking for. Note too, the peak in open interest at the 20.0 strike call option, above which the underlying Vix has struggled to trade in very recent memory. For this reason, investors may be using this strike as a popular weapon to write as they partially offset the cost of lower strike call options aimed at better insuring their portfolios.  

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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