Trading Strategies for Extended Global Trading Hours for VIX and SPX Options

matt moran

November 29, 2021

On November 21, 2021, the Cboe Options Exchange extended its existing Global Trading Hours (GTH) session and introduced a 24/5 business model for S&P 500 Index (SPX and SPXW) and Cboe Volatility Index® (VIX® Index) options. Market participants will now be able to trade or hedge volatility in the US market and global equities conveniently across all time zones, nearly 24 hours a day, five days a week.

The expanded trading hours will allow market participants to react quickly to changing market events, access US index options globally, and develop new trading strategies to diversify and hedge their portfolio. To highlight the benefits of 24×5, below we explore extended GTH use cases and trading strategies for VIX and SPX options.

1. Notional value for strong products

SPX options and VIX options and futures have the potential to be powerful tools for market participants to manage or adjust their exposure.

Over a period of 20 trading days in early 2020, the S&P 500 index fell 25.3%, while March 18 VIX futures were up 358% and March 20 VIX calls were up 6393%. These gains have been exceptionally high and there may be losses associated with purchases of futures and options.

Changes in Reported Closing Values ​​Over 20 Days in 2020 (February 19 to March 17, 2020)

Source: Cboe World Markets

Institutional investors often prefer larger notional sizes for the trading instruments to be used. Over the past several months, the notional value covered by an SPX options contract has typically been over $400,000, and in 2021 the average daily notional value of SPX options trading volume has been around $540 billion. of dollars.

Notional value of average daily volume of options on the S&P 500 index at Cboe (in billions)

Rough estimates of notional volume in billions. Some analysts use a delta weighting multiplier to develop more conservative estimates. Figures include both AM set SPX options and PM set SPXW options. Source: Cboe World Markets

2. Volatility bias and vertical spread strategy

The charts below show the estimated 30-day volatility bias for SPX options and for VIX options on March 16, 2020, when the VIX index reached its all-time daily close high of 82.69, and on March 22 October 2021, when the VIX Index closed at 3:43 p.m. On October 22, 2021, out-of-the-money puts for SPX options and out-of-the-money calls for VIX options were the highest implied volatilities for each contact.

STRATEGY IDEA | Market participants who are intrigued by the negative asymmetry often exhibited by stock index options may find utility in the vertical option spread strategy, which involves selling one put option and simultaneously buying another put option. at a different strike price, but with the same expiration.

Volatility bias for options on the S&P 500 index in March 2020 and October 2021

Source: Cboe World Markets

Volatility bias for VIX options

Source: Cboe World Markets

3. Term Structure and Calendar Spread

The VIX index was in decline on March 16, 2020 when the VIX index reached an all-time daily closing high of 82.69, and was in contango on October 22, 2021. The VIX index tends to retrace to the average and has been in contango most trading days since the launch of VIX futures in 2004.

VIX index and VIX futures contract structure in March 2020 and October 2021

With expirations from October 27, 2021 to December 15, 2023. The S&P 500 Index closed at 4544.9 on October 22, 2021.

Source: Cboe World Markets

The term structure of SPX options shows higher implied volatilities for short-term out-of-the-money SPX put options, which are often purchased for stock portfolio protection. Given the higher implied volatilities, some sophisticated investors may sell cash-backed short-term SPX puts.

Term Structure for Certain Put Options on the S&P 500 Index on October 22, 2021

With expirations from October 27, 2021 to June 22, 2022. The VIX index closed at 15.43 on October 22, 2021.

Source: Cboe World Markets

The VIX option calls with the highest implied volatility were the short-term out-of-the-money VIX 20 option calls, which are bought by participants who want trading instruments with upside potential during sharp corrections stock markets.

Term structure for certain VIX option calls on October 22, 2021

Source: Cboe World Markets

STRATEGY IDEA | Options investors who expect a change in a steep futures structure in the near future can take advantage of the calendar spread strategy, which involves buying and selling a call option (or purchase and sale of a put option) with the same exercise price but with different expiration dates.

4. Portfolio Protection with SPX Puts and VIX Calls

Cboe offers dozens of benchmarks designed to track the performance of hypothetical strategies using options. Interest in strategies that can help manage far-left risk and mitigate portfolio drawdowns has increased since the onset of the COVID-19 pandemic. As shown in the chart below, two Cboe benchmarks that buy index options outperformed some of the major traditional benchmarks from year-end 2019 through October 21, 2021. The Cboe VIX Tail Hedge Index ( VXTHSM) bought VIX call options and rose 137%, while the Cboe S&P 500 5% Put Protection Index (PPUTSM) increased by 48%.

Indices since the end of 2019 | December 31, 2019 – October 21, 2021

Source: Cboe World Markets

5. Generating Improved Option Premiums and Risk-Adjusted Returns with SPX Options

For decades, investors have sold stock index options in an effort to receive option premiums and generate enhanced risk-adjusted premiums. The average monthly gross premium as a percentage of the underlying for the Cboe S&P 500 PutWrite Index (PUTSM), which writes cash-guaranteed at-the-money SPX put options, was 1.9% and 0.8% for the Cboe S&P 500 2% OTM BuyWrite Index (BXYSM), which sells SPX options calls out of the money. At-the-money option put strategies often garner more premium and have less upside equity participation compared to out-of-the-money option put strategies.

Gross monthly premiums for writing options

May 2006 – October 2021. Amounts shown are gross premiums received and net strategy returns may be lower or negative. * Gross amount of premiums received as a percentage of the underlying.

Source: Cboe Options Exchange

Sortino’s ratio chart shows that since mid-1986, three Cboe benchmarks that sell SPX options – PUT, BXMDSMand CMBOSM – all had higher risk-adjusted returns, as measured by the Sortino ratio, than some key traditional benchmarks.

Sortino Ratios (June 30, 1986 – September 30, 2021)

Pre-tax total return indices. Source: Zephyr and Cboe Global Markets

There are a number of strategies and use cases to explore when trading SPX and VIX options during extended global trading hours. With more time to trade, market participants will be able to react quickly to changing market events, access US index options globally, and develop new trading strategies to diversify and hedge their portfolios. .

Additional Resources

There are significant risks associated with trading in any of the Cboe Company products discussed here. Before engaging in transactions in these products, it is important that market participants carefully review the information and disclaimers contained on

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