Tag Archives | SPX

CBOE: Welcome to the 21st Century

As a long-time CBOE market maker, I’ve been very disappointed in how my ‘home’ exchange has handled SPX options. Obviously they didn’t care because this is a trading vehicle with world-wide support and fantastic trading volume.

Nevertheless, change is in the air and I love it. In fact, I plan to switch from trading the more volatile RUT options to trading SPX options, once the changes described below are made.

Goodbye to AM Settled SPX Options

I recently discussed the fact that the CBOE quietly transformed their Weeklys SPX options from morning settlement to afternoon settlement.

I also expressed displeasure with the perceived unfairness of morning settlement, where the settlement price is often very different from ‘reality.’

It appears that the CBOE is coming to its senses:

CBOE Holdings, Inc. (NASDAQ: CBOE) announced plans today to list on C2, the company’s new alternative exchange, an electronically-traded version of its flagship S&P 500 Index option (SPX), which it is calling “SPXpm.” The Company submitted a rule filing to the Securities and Exchange Commission (SEC) today and plans to list SPXpm upon SEC approval.

Under the proposed rule change filed with the SEC, SPXpm will be identical in structure to CBOE’s traditional SPX index option product, except it will have “p.m.” settlement.

A press release is available with more information.

I’m pleased to see the original Options Exchange realize that the 21st century arrived more than a decade ago. Electronic trading is mandatory. Eliminating morning settlement makes this product viable to me. I avoided SPX options because of the lack of electronic markets and the unfairness (that’s a kind word for ‘stupidity’) of the method chosen as the settlement price for expiring options.

CBOE: Good luck and I wish you well with your new, improved product – when it gets approval for trading.

Another CBOE product is worthy of special notice

The CBOE has begun listing SKEW indexes. Here’s the quote from the http://www.cboe.com/micro/skew/introduction.aspx:


View The Press Release – CBOE to Begin Publishing Values for CBOE S&P 500 Skew Index

Introduction to CBOE SKEW Index (“SKEW”)

The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk – the risk of outlier returns two or more standard deviations below the mean – is significantly greater than under a lognormal distribution.

The CBOE SKEW Index (“SKEW”) is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant.

One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the “skew”.

I’m glad to see this index is being published.


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Implied Volatility and Beta


Isn't using IV (implied volatility) for statistics the same as using Beta as a measure of risk for stocks? I.e., if the stock dropped sharply and it's beta increases, but not the risk, it's actually a better price now. Same here – if the market declines today, does it really mean that tomorrow will be an even riskier day, as told by IV? If not it eliminates the need to trade fewer contracts on high IV times.



Beta and volatility are not comparable. Yes, in a broad sense you can say they measure a stock's volatility and tendency to undergo large moves. But the differences are very significant.

Beta MEASURES the PAST volatility of a single stock when compared with the volatility of a group of stocks.  IV is an ESTIMATE of FUTURE volatility for an individual stock (or group of stocks).

Beta is RELATIVE and depends on the volatility of it's comparative index (SPX or DAX) when we talk about volatility in the options world, it is an independent measure.  In other words, beta not only depends on the volatility of the individual stock, but it also depends on the volatility of the group.


Not the Risk

You said that the stock price declines, beta rises, and 'not the risk.'  Why do you believe that risk is less just because the stock is trading at a lower price? Okay, the total that can be lost is less because the sock price is nearer to zero.  So in that sense, risk is less.

However, risk is most often measured in terms of probability of losing money on the trade and not only in terms of dollars lost. Many traders believe a declining stock is more likely to decline further than reverse direction. That's the basis of technical analysis. Once support is broken, the bottom cannot be known. Trend followers jump on the bandwagon when stocks make big moves – in either direction.  I do NOT agree that the lower stock price suggests that owning the stock is less risky.

Remember Enron?  As the price declined, people bought the now 'less risky' stock – only to discover that risk had increased, not decreased.

There is a psychological rationale for buying stocks that fall.  Investors think about the fact that they were planning to buy at a price above the current level, so it must be a good, less risky purchase now.  Unless the stock has not broken support, there is no evidence that this is true.  There is always that feel good felling when you catch the bottom, but in my opinion, it's is too risky to make that attempt.


Getting back to beta

IV is an ESTIMATE of future volatility for an individual stocks or group of stocks.  Whereas implied volatility is very likely to increase as the market falls, there is no reason for beta to change unless it independently becomes more volatile than it used to be. Beta could decline if the individual stock moved less that its customary percentage of the index against which it is being measured.

When IV rises on a market decline, it is a fact that market participants believe that the market will be riskier tomorrow.  The evidence is clear and overwhelming. Traders pay higher prices for options – and those option prices are what determines the implied volatility.  Why do they pay those higher prices?  Because they are afraid that tomorrow will bring more downside.  They may be wrong, but that is the expectation. And IV is a measure of expectations.

Traders buy options when they want to insure a position.  They buy options when afraid.  They buy options when speculating.  Whatever the individual reason, the 'marketplace' buys options in anticipation of something bad happening.  That makes IV higher.

Remember when markets fall, they sometimes fall hard.  That's why people expect tomorrow to be riskier after a big decline. I see nothing wrong with that idea. Sure it's okay to fade the down move and sell a bunch of puts into a big decline.  You are getting a pumped price, but you are selling to the buyers who are far more afraid than you.  I have no reason to believe they are any smarter, but it does take courage to fade the crowd when selling into a falling market.  That's why there is a higher reward for option sellers who are willing to take the risk.

One reason for trading fewer contracts (as a premium seller) in a falling market is fear. The prices are attractive, we may be hoping that the decline will end, but there is that nagging fear of the huge bear taking hold of the marketplace.  I suspect it's not that higher IV per se that makes trades sell fewer options under such circumstances.


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Front Month Iron Condors: Challenging to Trade?

Interesting trading points raised by Brian:


I have been trading front month ICs (opening 4-6 weeks out), but at times am finding it too challenging to manage. So in Sept I experimented by opening a Dec position (3 months out). One thing I noticed is that the theta decay was almost non-existent the first 30 or so days. I could have opened the position 30 days later for almost the same credit. Not sure if this is a usual occurrence or not.

Also am curious as to why you say that SPX is difficult to trade. I would think that RUT would be more volatile and hence more difficult. (it seems to rise & fall more, %-wise, than SPX)



Hello Brian,

1) 3-month options have time decay.  And I know that you know that to be true.  It is not anywhere near zero, nor should it appear to be near zero.

Here's one way to see that for yourself. When you look at a 3-month trade (even if it is not a trade you make in real life), also look at the 2-month trade with the same strikes. Then you can compare just how much more time premium is built into options with a 4- or 5-week longer lifetime. That should provide a reasonable estimate for how much time decay to anticipate over the next month or so.

Be careful to keep an eye on the implied volatility (IV) for the underlying: VIX (for SPX options) or RVX (for RUT options). Longer-term options are more vega dependent, and if IV rises, you may see what appears to be zero time decay. It's not. It's just what can happen when vega affects the option price by more than theta.

IV (hearts)  trumps theta (spades)

We have all seen examples in =  which a sudden market decline, accompanied by a surge in IV .  The result is a huge increase in the value of put options and even an increase in the price of call options as the market falls.  That's vega trumping theta, delta, and gamma simultaneously.

2) It's the negative gamma that makes spreads challenging to manage efficiently. Longer-term options have less gamma.  This may seem simplistic, but the truth is that when trading those 3-month options, you earn your profits more slowly (less theta).  In return, larger market moves result in less change in the price of individual options and option spreads – and less money is lost. 

If you want maximum risk and maximum reward, then you found it with front-month options.  If you prefer less risk and less reward, you can move out in time and initiate trades using 3-month options.  Then if you also plan to exit early – two to four weeks before the options expire – you avoid the period of maximum time decay and maximum effect of negative gamma. 

I know it's difficult to leave money on the table, but you are not really doing that.  From my perspective, early exit means taking a decent profit  – or perhaps a loss if you made an unfortunate adjustment or two earlier) – but the main benefit is eliminating all risk and being able to sell new, longer-term options with less risk. 

This philosophy is not for everyone, as short-term options constantly get the most play. If not convinced that this is true, the high volume of Weeklys ought to make it obvious that short-term options (when do the Dailys start trading?) are the favorite tools of most traders (and all gamblers).

3) I used 'difficult' to trade SPX in the context that it is more difficult to buy/sell the options at favorable prices.  The markets are wider, there are no exchanges making competitive quotes, and the last time I tried to trade these (a few years ago), they did not even have electronic trading.

I was not referring to managing the position. Yes, RUT is a more volatile index, presenting more management challenges.  However, option premium is higher, and that means the trader is compensated for taking additional risk.


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It’s been almost one year since I last published an options quiz.  Time for another. 

Your participation is appreciated becasue it helps me gauge which material is most appropriate for readers of Options for Rookies








3) You decide to trade some Weeklys and open an iron condor position by selling an out of the money SPX put spread (1100/1110) and an out of the money SPX call spread (1220/1230).  All options expire in one week.  SPX is trading at 1160. [Corrected to 1160]

By Tuesday of expiration week, ONE of the following events occurred:

To reply, choose ‘other’ and enter (for example) a,b,c,d


4) Let’s assume you have been bullish and earned a significant profit on your investment portfolio since May 2010. You are concerned with protecting your profits. 

Please consider cost, how much protection is gained, and the possibility of earning a lot more money if the market undergoes another major rally



5)  Poll: This question is directed to you as a trader/investor.  I am not looking for a theoretical reply, but am asking which of the following worked for you. 



Thanks for participating


“Your book is well written, comprehensible, coherent and detailed.  I was especially pleased with the absence of useless chatter.”  VT 



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Hedging a Portfolio of Index Iron Condors


As a way of reducing risk from a downward move, could you recommend the
most appropriate hedge for a portfolio of index iron condors? I have
considered OTM puts, debit spreads, VIX calls & other calls on other
VIX products, even Gold & bond ETFs.




I apologize for the delayed response.

There is no 'most' appropriate method or adjusting iron condors.  For some traders the primary objective is to get rid of that risk.  For them, exiting the trade is often the simplest solution.

For others, finding a good method for keeping the trade alive – and worth owning – is the objective.  To do that, trades must be made that are appropriate for the given situation.

But – here is one piece of advice: To find the best hedge for an IBM position, try to trade IBM options.  For SPX spreads, try to hedge with SPX options.

Let's take a look at your suggestions:

1) OTM options come in two categories: 

a) Those that are farther OTM than the option you are already short.  Those puts help in a black swan dive.  Not otherwise.

Why don't they help 'otherwise?'  When you own any extra OTM options and look at a risk graph, you will see that the tails of the curve point to rapidly increasing profits.

That seems to provide all the risk protection needed. The problem with that scenario is the ticking clock.  Those puts and/or calls do provide great protection.  However, you are buying these options to protect an existing position, not to deliver a huge profit on a huge market move.  Sure, that would be a nice bonus, and if you want to own black swan protection, that's okay.

But here you seek a good hedge for your iron condor portfolio.  With the iron condor, you plan to hold the trade for a while.  When you plan to hold until expiration or plan to exit sooner doesn't matter here.  The point is that as time goes by, the effectiveness of those OTM puts  that you bought or protection decreases.  They still serve as black swan protection, but do almost nothing to cut losses as your short option becomes ATM or moves ITM.

Quick example:  you are short the 900 calls.  If you buy some 920 calls, the upside looks great.  But consider that it's expiration week and the index is 895 to 905.  Your original position is causing pain (if you still own it).  And you may still own it, being mesmerized by the risk graph that shows how well you do on a move to 930.  But a move to the 910 area is a lot more likely than a  move to 930.  And time is short.  Thus, if the market trickles higher, not only does your iron condor threaten to lose the maximum, but the options you own for protection are quickly fading to zero.  The worst possible result:  Insurance is a total loss and so is the original trade.

For this reason, I do not recommend buying options that are farther OTM than your shorts – when your objective is protection. 

b) Those that are less far OTM than your current short options.  These are wonderful options to own, and afford fantastic protection.  But – they are probably more expensive than you are willing to pay.

In the example, if you owned 880 or 890
calls (bought before the market moved near 900), you would own REAL
protection.  It may be insufficient to prevent a loss, but those options
will have real value if and when the iron condor gets into trouble.

The price of these options can be reduced by applying the kite spread.  Before using kites, be absolutely positive that you understand risk as expiration nears.  Study those risk graphs.  This trade can be tricky to handle.

2) Debit spreads – which are less far OTM than your short put – help.  But they offer limited protection.  Many times the cost is too high for limited protection, but it does help.

In the example, you could buy 880/890 call spreads as partial protection.  The obvious limitation of this method is that this spread can only move to 10 points, and that may be far too little protection.  But it is one way to hedge – if it appeals to you. 

Warning:  If you pay a big price for these, then the profit potential is too small to do you any good.  If I buy these, I consider $4 for a 10-point spread to be as far as I am willing to go.

3) When looking for a debit spread to purchase, do not eliminate the spread you are currently short.  Even though that would close the trade, if that is the best spread to buy, then buy that one and lock in the loss.  Don't buy the wrong spread just to keep a poor position alive.

4) Stay away from VIX options unless you are 100% certain you know what they are and how they work.  For example, VIX is not the underlying for these options.  VIX futures are the underlying and I believe you will be best served to stay clear of VIX options.

5) VXX options may be better, but I am have not used them and do not want to offer advice that may not be accurate.  Ask Adam Warner or Bill Luby for advice.

6) Gold and bonds are out of my league.  That type of hedge does not work for me, and truthfully I know ZERO about those products. If that is your plan, you must get advice elsewhere.


Switch to TradeKing and get up to $150 in transfer fees reimbursed.

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Trading SPX Shares

Options for Rookies Home Page


Question on the SPX. Can one buy the SPX outright in place of buying SPY
ETF? Not the options but the SPX itself. If I wanted to allocate
$20,000 into the S&P 500 in a taxable account I could just buy 20
SPX contracts (assuming the SPX was at 1,000). If so, would this qualify
for that 60/40 tax treatment if sold at a gain even if the options aren't



Hi Ann,

You cannot buy 'SPX' in the sense that you can buy shares.

The best you can do is buy an index fund that comes very close to mimicking the performance of SPX.  One such a fund is the Vanguard S&P 500.  You simply buy $20,000 worth of shares.  However, this is a (low fee) mutual fund, and not what you truly want to own.  It's nearly what you want, but so is SPY.

Yes, if you buy SPX calls, you get 60/40 tax treatment. 

But please (PLEASE) remember that when you buy calls you are not 'investing' in the index in the typical meaning of the word.  $20,000 worth of calls may expire worthless while SPX remains unchanged.  You apparently want to own shares – and that is VERY different from owning call options.  

If you can meet the margin requirement, and if your broker allows the trade, you can buy calls and sell puts.  The puts and calls must have the same strike price and expiration date.  That is exactly equivalent to owning shares, except they you do not collect any dividends.

The fact that you may be ale do this does not suggest it is a good idea.  You can easily lose the entire investment.

Let's look at ATM (at the money) options.  If you buy 2 SPX Oct 1070 calls and sell 2 SPC Oct 1070 puts, your would own a position that behaves the same as owning 200 shares, or $21,400 worth of a portfolio that is based on the S&P 500 Index.  This trade would cost a small cash debit (but a much larger margin requirement). 

At expiration, these cash-settled options would be worth the closing value of the index, and you would have a profit or loss based on owning 200 'shares' of SPX with a purchase price of $1,070 per share.

If SPX > 1,070, then you get the intrinsic value for your calls – in cash.  With SPX = 1100, the calls are in the money by 30 points each, and your account gets $6,000 in cash.  That's the profit you would have earned if you could buy 200 shares at $1,070 and sell them at $1,100.

If SPX < 1,070, your calls have no value, and you would have to pay cash because you are short the puts.  A closing price of 1020 means you would owe $10,000, and the value of your investment would be the remaining $10,000. 

When you own shares and it declines by 50 points, you lose 50 X $100 per point, per 100 shares. That's $5,000 per 100 shares, or $10,000.

Note:  If SPX declines by 100 points, you lose your entire investment.  Not only that, but as the value declined, you would get margin calls and possibly be forced to liquidate at an inconvenient time.

You did not state why you want to buy SPX 'shares' – but if it is to save commissions on buying SPY shares, that's not a good enough reason.


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