For starter's yesterday's blog caused quite a stir. I was quoted on the DJ Newswire and at VIXandMore.
Option Trader's as many of you know, my option mentoring students have been asking Option Pit for some time to develop a quick and easy way to figure out how expensive broad market skew is. This is where I initially developed the CBOP Curve Volatility Index. The idea was to combine the CBOE Volatility Index or VIX and the new SKEW index to create a readable volatility level for the 'tail' of the curve. I stated then that the CBOP had issues, the most notable of which is that the VIX already factors some skew in it. With that in mind, here are the changes I made:
1. I switched from using the VIX to the VXO, the OEX based volatility index that tries its best to capture "ATM" IV of the S&P 100 index.
2. I adjusted the VXO upward based on the different risk betas of the OEX and the SPX. Traditionally, the OEX has a beta of between .92 and 1.02 of the SPX. While I could likely put in some function that automatically adjusts for the changes in beta, for ease of use I used the median beta over the last several years which is about .96. Thus, I simply divided the VXO by .96 to increase the IV to a level it would measure ATM 30 day IV in the SPX.
The index still needs some work, I am sure there is an easier way to weight VXO, and I have not found a simple way to adjust for weekend time decay, I think do think that the new version gives traders a better glimpse of the price of put volatility than the original CBOP. Below is a graph of the new CBOP since 2011 began. Notice that this index is still falling, and did not see the big huge DIP old CBOP (CBOPO??) saw last week.
Going forward expect to get a CBOP number at the end of every blog post. I am still open to suggestions, if you have ideas on easy ways to tweak this index please shoot me an email: mark@optionpit.com. Early next week I will begin talking a little bit about possible uses of this index.
The CBOP Curve Vol Index Closed at 21.31, its lowest level since March
Special thanks to Jared Woodard, Bill Luby (my co-authors at Expiring Monthly), Andrew Giovinazzi and Henry Schwartz (my co-authors at theStreet.com) and Jeff Augen for their input.
If you have interest in learning more, check out the recordings of our L2 Prep Course, you can purchase the recordings here. Make sure you check it out, we have a very special offer listed on the page.
I'll have an updated version of the CBOP Curve Index on Thursday, today it closed at 21.87. Near its lows over the last 60 days. The CBOP will be something I will discuss in our next FREE webinar. We will also announce the winner of our ReTweeting contest!!! You can register for the webinar here. The Title is Volatility Skew and Directional Trades (by the way, just cause the contest is over does not mean you should stop retweeting the posts you like).
By the way, for those of you thinking about taking one of my competitor's volatility courses our 'Trader's Guide to Volatility' is the most comprehensive course available and can be purchased for about 1/3 of the price. Buy it here: Volatility Course
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Data from the CBOE and Yahoo
