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Volatility Update: Sizing Up Volatility Spikes (and SPYIX)?

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March 17, 2016
Volatility update: Clinging to the peaks, dropping into the valleys with volatility, options volume, and a new measure (SPYIX)

By most measures, volatility is a lot lower than it was a month ago. That’s not too surprising given the four-week, 8.5% advance in the S&P 500 during that time. Not only is volatility easing, but also, overall trading volumes across the options exchanges seem to be slowing from the frantic pace seen in early 2016. Meanwhile, one exchange seeks to offer investors a new market gauge ahead of the next volatility spike.

VIX Slips

The recent slide in the CBOE Volatility Index (VIX) is a rather obvious sign that risk perceptions are much different from a month ago. Before the S&P 500’s February 11 turnaround, the index had remained above 20 during nearly every trading session of 2016. On February 10, the index was north of 28 and at 2016 highs.

Figure 1 shows the steep drop in the index since then. Less than three weeks later, the market’s “fear gauge” was near 16 and at 2016 lows. It had dropped more than 40% before rebounding back toward 19 last week. 

CBOE VIX volatility


A one-month, 33% drop in VIX coincides with a turnaround in the S&P 500. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Falling Volume as Fear Recedes

Overall options volumes seem to be easing along with VIX through the first half of March. Since the launch of the ISE Mercury exchange last month, 14 separate exchanges now list puts and calls in the U.S. today. Yes, that’s no typo: 14. The Options Clearing Corporation (OCC) lists the total volume for trading across all the exchanges on its website daily.

For instance, total volume on March 9, 2016, was 12.9 million contracts. That’s the second lightest volume day for 2016 behind Monday, January 25. Through the first two weeks of March, average daily volume across the exchanges is 16.8 million contracts and in line with the numbers seen in February. That, in turn, is well off the frantic pace of nearly 20 million contracts during the month of January. 

Overall options volumes from OCC


Overall options volumes based on numbers from the Options Clearing Corporation (OCC) are down in March after a fast pace in February 2016. Source: For illustrative purposes only. Past performance does not guarantee future results.

Time for Spikes?

Speaking of options exchanges, Bats Global Markets announced last week that it plans to launch a new index to compete with the CBOE Volatility Index. While the Chicago Board Options Exchange computes VIX using a strip of short-term options on the S&P 500 Index (SPX), Kansas City–based Bats is computing its new SPYIX index using 30-day options on a popular exchange-traded fund (ETF) that holds the same stocks as the S&P 500. Called “Spikes,” the new volatility index has been launched to one or two data vendors, and the latest data can also be found on the Bats Global Markets website.

So far, SPYIX is the only real evidence of a volatility “spike” in the options market in March. After a rocky start to 2016, volatility and volume have receded as the underlying market tone has improved following a nearly 9% rally in the S&P 500.  

RED Option Strategy of the Week

Tom White, RED Option

Editor's Note: As of October 3, 2016, RED Option is now TradeWise.

Markets have risen over the last month or so after struggling at the beginning of the year. Recession fears have waned and economic data has improved, albeit slightly. Volatility has fallen sharply as equities recovered and option premium is leaking out of the market as uncertainty abates. That being said, I still believe the market has the potential to move in the near term. What strategy works well in a lower-volatility environment with the potential for more uncertainty?

The double calendar is a multi-legged option strategy that can potentially take advantage of this type of outlook. A double calendar is a range-based trade that has a wider breakeven range, and therefore a potentially larger probability of making a profit, than an individual calendar spread.

We previously wrote an article on individual calendar spreads, but we’ll give a quick overview here to get you up to speed. Calendar or time spreads have options in two different expiration cycles or series, with the options being either both calls or both puts. Calendar spreads involve buying an option in one expiration cycle and selling another option in a different expiration cycle but with the same strike as the first option. We trade long calendars, in which we purchase the further-term option and sell the near-term cycle so that the position remains risk-defined. The strategy seeks to take advantage of the underlying product trading at or near the strike price, with the highest potential for profit occurring in a rising volatility environment. 

The double calendar is a combination of two calendar spreads. We typically buy an out-of-the-money call calendar and put calendar around the current underlying share price. This results in a trade that is also range-based, like the neutral single calendar. But instead of having a profit peak at just one strike price, it has the potential for profit over a wider range of prices. Like the single calendar, the double calendar benefits from an increase in implied volatility (IV). In this way, it is different from the iron condor, another popular range-based positive-theta play. The iron condor is best used when IV is already high and expected to fall; the double calendar is better when IV is low and expected to rise. A double calendar has two peaks, two price points where the largest gains can be achieved. This max gain potential can change based on changes in implied volatility.

The price paid for the long double calendar is the entire risk involved in the spread. Selling double calendars allows us to initiate a trade for a credit, but the position is not risk-defined, and we typically stay away from that strategy. On the long double calendars, we only adjust or close the trade for credits, and the ideal scenario is for the underlying shares to move toward either strike. Although an increase in volatility would work best for the strategy as it moves close to either strike in the position, time decay (theta) also works in our favor. Our short near-term options lose value faster than the further-term long option in the trade. The roll values and calendar prices expand as long as the underlying shares remain within a couple of percents of either strike and volatility does not decrease significantly. Figure 3 shows a typical double calendar risk/reward graph with the optimal profitability near either strike.



Optimal profitability is near either strike. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

As shown, the ideal strikes on the double calendar are at the $80 and $85 strike. The overall risk is capped at the $0.80 initiation price (you’ll have to factor in transaction costs, too) and if volatility rises, the profit potential will also increase as long as the price of the underlying shares is within a reasonable distance from either strike. Another bonus for long calendar trades is that while the initial risk is defined, the profit potential can increase as volatility rises. This is one reason initiating long calendars in a low-volatility environment is beneficial.

To wrap up, if you expect a move and volatility is low, a double calendar may be the strategy to initiate as it gives you a wide range and a risk-defined downside. You can find out more about this strategy and other option trade recommendations at

Calendar, double-calendar and other multiple-leg option strategies like these can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.

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