XJO’s trend (4211) from options market observations

XJO closed at 4211 on 9 Mar 2012, rising 41 points for the day.

1) Volume

Weekly overall options volume (index + equities) was down slightly (5%)  last week including that of Friday’s despite the XJO rising 41 points for the day and equities weekly volume higher by 1%. 

Trading in XJO options though, increased by 14% for the week. It showed that the dropped off in options volume was due to lower positions being taken in individual stock options with increased trading in XJO options.

On analysing each of the call and put components separately on the XJO options, it was found that the put/call ratio for the week was at an average reading of 1.31, though it was a better one of 0.8 on Friday.

2) Volatility

An interesting indicator to keep track of is the CBOE Volatility Indiex (VX) Futures* to get a sense of expectations, it looks like there is a gradual increase expectated of the VIX. With current reading at 17.11, the VX futures are calling for it to be closing at 19.8 this week for its Mar expiry with an incline all the way to above 25 in June. The Implied Volatility in our market is not displaying dissimilar trend.

(*VX JAN12  “F” expiry was at 21.95; Feb12 “G” was 19.0512;  with reading on  9 Mar 2012 as follows for: Mar12 “H” futures is 19.8;  APR12 “J” is 23.2;  MAY12 “K” is 24.85;  Jun12 “M” 25.85 )

What about the XJO?

The XJO options’ current Implied Volatility is at a very level again of early 16. It has been here a few times in the last few months. If we were to look at the XJO calls and puts separately, we will find that the Implied Volatility for the calls for the next few months out lower than the puts. The puts’  Implied Volatility are at levels even higher than that of the historical levels.

What are these indicators implying?

Overall, with index call options on  low volatility and put/call ratio at average levels whilst puts’ volatility elevated, there is a risk of the current market remaining flattish or capped to the upside with risk on the donwside.


XVI (Aussie VIX) is under 20. What’s the implication?

Last Friday (13 Jan 2012), the XJO closed near 4200 with the XVI at 19.

What does a low XVI mean?

One and a half weeks ago on 4 Jan, when XJO was at a similar level(near 4200), the XVI was at a higher level of 23 . This  time, as we are hitting the 4200 level for the second time in less than 2 weeks, the XVI is only at 19. The lower XVI is indicating a more optimistic investor mood (less fear). The XVI generally have an inverse relationship with the performance of the XJO.

Is 19 low for XVI?

From previous times, each time the XVI falls below 20, it normally doesn’t stop there. It normally falls further before picking back up. The depth varies, but generally at least dropping to around 17, if not the lower of about 15 or 13. So, at 19, it may not have finished falling (which means more potential upside on XJO!)

The last time the XVI was at 19 was in early Dec. 2011 Again XVI didn’t pick back up from there (19) until it fell all the way down to 13. The XJO hit a high of early 4300 at that round. This time at 19, this indicator is telling me that it may continue to fall lower in the teens with more potential upside to go on the XJO (perhaps 4300 like in early Dec11).

What about volume?

The supportive news is that trading volume in Index (XJO) options has increased in the last week. Though the traded volume in both calls and puts were equal last week, but this is a strong move on the calls. This is because it is quite common for trading in puts to be higher than calls in most weeks due to portfolio protection strategies. Last week though, the increase in calls traded were twice as much as the puts (not common at all)

The last time we saw this sort of  strong volume in the calls  was a month ago. This may sound familiar but again it was early Dec 2011 when the XJO pushed all the way up to 4300.

The volume in the XJO calls is adding to the hypothesis that the XJO has a good chance of rising to the 4300 level in the short term.

What does huge options volume tell us?

Week ended 25 November 2011 with XJO sitting at 3984

As the XJO lost 4.6% last week and broke below the 4000 mark, it gave the options market a lot of impetus. Weekly options volume over-took equities volume, which was less of a common occurence. Last week, as equities volume rose by 8%, options volume had a 72% increase. Examining the pattern between options and equities volume 5 weeks ago, would tell us a story about last week’s volume.

Five weeks ago, at the end of October, as the market closed the week 5% higher at a last recent high of 4353 on the XJO, in that week, options volume (just like last week) over-took equities volume. In the last week of October as weekly equities volume rose 8% (just like last week), options volume was higher by 52% for the week. What’s significant since end of October is that the market has since lost more than 8%. That spike in options volume was the peak of the market then.

With this similar pattern we saw last week, that is, weekly options volume taking over equities volume by a large percentage, could this be a signal of another pivotal point for the market? This time, reversing up?

Another interesting observation is the XVI.

From end October to last Friday, the CBOE VIX index has climbed from a reading of 24.53 to 34.37 on Friday. That’s a 40% increase in VIX with a corresponding 10% drop in the S&P500.

The XJO, however, has lost 8.5% in the same period, but its XVI has only risen from 24.78 at the end of October to 26.94 since last Friday. That’s less than a 10% jump. Comparing the XVI with the VIX, the XVI is much less volatile and more benign.

Another point of observation is that, in the last 5 weeks, the last time the XJO plunged to 4171 on 3 Nov and bounced off from there, XVI was at the depth of 31. Last week, as the market punched through the 4171 level and went even lower to under 4000, XVI was still at around 27.

This is telling me that the fear factor in the market this time around is less severe than when it was threatening to break the higher level of 4171 3 weeks ago!

Could these all be signs of a market turning around (to go up)?

What are the VIX and XVI saying, after the fall?

Sky News Business Monday 8 Aug 2011 10.10am

Reporting on Australian Options Actions week ended 5 Aug 2011

1. VIX at 32%

The widely watched CBOE Volatility Index VIX, which is commonly known as the “investor fear gauge”closed at 32 on Friday 5 August in the US. That wasn’t the highest reading. It spiked to a recent all time high of 39.25 during the day. The biggest one day jump though was on Thursday in the US following the over 500 point plunge where volatility jumped by 29% in just one day.

Well, 39.25 intra-day high seemed high, but even that is not the all time record. The recent all time intra-day high was at 48 arrived at last year, during the 21 May 2010 market plunge due to the outbreak of the Greek  crisis (The all time record would be during the financial crisis in Mar 2009, where VIX reached as high as 53). The reading we are seeing at the moment is still not the highest. But to put it in perspective, the 32 reading at the close is compared to a benign average in the month of July of 19.22. That is a big spike in a month.

2. XVI closed at 31.86

Bringing us back closer to home,  the Australian VIX which is the XVI on Friday was at 31.86, that’s a spike of 26% from the day before, just 3% shy of the VIX’s 29% jump. Is this reading the highest for Australia? No. The last time the XJO fell to the all time low was during the same greek crisis when the XJO tanked to the lowest then of 4175 points. At that level, the XVI was at 33.22 and peaked two days later to 34.23 (after the market has recovered from the low).

With the current reading of the XJO after Friday sitting at 4105 (below the last low) and yet with a XVI of 31.86 (still not as high as the last higher low), like the US, we may not have seen the peak yet with volatility. However, we need to remember that VIX or XVI are volatility gauges.  It can either stay elevated for a period of time or it can spike before or after market has seen the bottom, it’s not necessarily a predictor of a turn in the market. What we know though is that volatility is not yet over. Whether it will be as high as the last reading or make a new high, we can only stay posted.

Japan and the XVI

Where is the market heading?


1 XVI is updated retrospectively by ASX, ie. XVI for today is not known till tomorrow morning

2 XVI is our very own VIX index, the fear gauge of the Australian market, calculated over the ASX/S&P200

3 VIX or XVI for us typically goes in reverse to the underlying market performance. If the peak in XVI can be identified, then we may be able to identify the turn (on the upward) in the market

What is XVI’s recent peak and where is XVI now?

XVI last peaked at 21.9 in mid November when the XJO plunged from failing to break 4815 to 4560/80. This lower level of 4560 is now broken.

The peak previous to that was 27.22, which twas around third week of August 2010 where the market fell to around 4320 (oh..oh). That’s highlighted in chart below.

As of today (Tuesday) which is reflecting our Monday market, was at 21.6.

If volatility is a guide, there may be more to come.










Options Question: Aussie XVI is at 12.16, what does it mean?

Options Question:

Hi Wai-Yee, I noticed the Aussie VIX dropped down to 12.16 today. How long could it stay at these levels ? From our previous talks I have been watching it each day and see its come down from 20 last month. What are your thoughts about the Aussie VIX and the ASX 200. Kind Regards Jon.

Wai-Yee replies:

Hi Jon,

You have brought up a very interesting topic. 

At a reading of 12.16 on 10 Dec, the XVI was at an all-time low! The obvious flow-on question then is, what does it mean for the XJO, which you have asked also.

 What is XVI?

 The XVI (or short for the S&P/ASX 200 Volatility Index), for those who have not been following, is the Australian VIX Index, launched by the ASX not too long ago. It is liken to the popular CBOE VIX index which is widely followed as the “fear gauge” of the stock market. VIX or XVI for us, measures the volatility of the Index. The market convention is that if volatility is high ie. VIX is high, then there is increased uncertainty in the market and markets tend to fall, hence fear is high and vice versa.

 Now, what we have is an all-time low XVI, which means there is a lack of the fear factor in the market currently. Does it mean that the market is bullish? This is what we will try to find out by looking at the XJO from different angles from the options perspective.

 We experienced the most recent high of 4815 on the XJO on 5 November. On that day, the XVI was at 18.29. On 10 Dec, despite the XJO having a reading of only 4750 (high of the day), the XVI was at the lowest point of 12.16. If I could show you the chart (coundn’t get it posted), you will see two spikes, the latest one with a lower peak, at the moment. This is indicating that the market is now more sanguine than a month before, eventhough we are not quite at the last high of above 4800 level. This is a bullish indicator.

Another indicator to look at is the Put/Call Ratio.  What is Put/Call Ratio?

 It’s a measurement of the number of puts versus the number of calls traded. It’s a division of Puts over Calls. A reading of greater than 1, signify more puts bought than calls on the underlying.

For those who don’t follow the Put/Call Ratio on XJO, it’s quite common for the XJO’s ratio to be greater than one, as institutions or investors buy the XJO Puts for portfolio protection.

The Put/Call Ratio for the XJO at the week ending 5 November (when the XJO hit a high of 4815) was at 1.83. Last week, when the XVI was at the lowest point of 12.16, the Put/Call ratio of the XJO has reduced to 1.17. Again, if I could show you the chart, you will see the gradual decline of the ratio in the last month, though the market is still not at the high it was a month ago. This is a very bullish indicator for the XJO. 

The reading of the current low 1.17  is indicating that institutions/investors/traders are taking positions in the market without hedging or not taking as much protection as normal. This is demonstrating that they have a bullish view of the market and do not think protection necessary at this juncture. Whether this turns out to be a prudent stand, we shall see, but this is the thinking of the market at the moment.

 The two indicators above are signalling to us that market participants do think the market is heading higher. If I were to cast a larger net and look at the market  as a whole as well (a part from options indicators), where the market has been and how it has been performing, I do agree with the general consensus, that we are heading higher for now; but, it would do so at a snail pace, in contrast to a rocket up performance. So, patience is required to make money in this market.

 Well, as stock markets are prone to doing what we don’t expect it to do, do check in again, for changing market conditions.

I hope this has been helpful, but remember, this is only my view, it is not necessarily RBS Morgans’ and that I can’t give advice in this forum and I can be wrong!

Have a Merry Christmas and enjoy the ride up!


Monday Australian Options 27 Sep 2010

Presented on SKY Business Channel (602) Monday 10.10am

Sky News Business

1. As TLS made a new all time low of $2.63 on Friday, what are your observations from the options market?

TLS’ share price is at an interesting juncture at the moment, whilst there are a few headwinds facing the stock at the moment – like the risk of not maintaining its dividend and the yet to be finalised NBN deal, at $2.63 a  share there are definitely two camps out there on the stock. There are those who think its cheap whilst others may think a new low is on its way. Let’s see what the options market have to say about the direction of the share price.

Upon preliminary examination of the put /call ratio on Friday it shows an optimistic story, it was at a ratio of 17 times, which means for every put that was traded, there were almost 5.5 more calls traded. If we were to go back three weeks, the story was more telling. Beginning from the week of 6 September, there were heavy volumes of calls traded on TLS leading to it hitting a high of $2.90 during the week, the put/call ratio then was 0.57; the bullish indicator co-incided with the stock rising. Then there was a switch the week after, two weeks ago with the put/call ratio switching to a bearish 1.31 as the stock fell. So, what about the week just past when TLS reached a new low of $2.63? The put/call ratio was a bullish 0.48, more bullish then three weeks ago when the stock was rising. Bottom line, the actions in the options market is suggesting that the stock is searching for its bottom price range and the strength of the bull camp may be outweighing the bear camp.

However, even if all these observations are inaccurate, the strategy of buying call options when a stock is searching for a bottom is a good strategy, as it caps losses to money spent on the call. The popular TLS call last week was the TLS Oct10 $2.65 call which closed at 8.5c.

2. The ASX launched the Australian VIX Index last week. How is it tracking so far?

The new Australian VIX  Index can be found by typing XVI.ASX at the market depth, just like typing in BHP to find its price. This volatility index is derived over the movement of the S&P/ASX 200 Index which is the XJO. It is the weighted average of the implied volatility of calls and puts of stocks that constitute the XJO index. In essence, it is a measure of investor “fear” factor or a sentiment gauge.  The ASX back dated this index and the highest reading of the Australian VIX or the XVI this year was at 34.23 which happened at the depth of the market slide this year when the index dipped to around 4200 late May. The lowest readings are perhaps more relevant to us at the moment. We had low readings twice this year and they were also times when the market was trading close to 5000. The first time was in early January this year when the market reached a high of 4955 on the 11 Jan. The XVI was at 18.87 and second time was on 15 April when the market hit 5000, the XVI was at 17.32. Both these times, the XVI reached mid 15s before climbing back up to those 17/18 levels before the market turned down.

Where are we at, at the moment? On the 23 Sep, the XVI was at 18.31, with a recent low of 17.31, not quite the 15 level. But I think it’s time we watch this VIX very closely for the possible turning point in the market.

With a positive lead from the US and the lack key economic data till end the of week, we may just see the XVI dip further.