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Market Volatility and VIX-Based Exchange-Traded Notes

Our covered call writing and put-selling portfolios have been significantly impacted the past few weeks from extreme market volatility. In addition to rising wages, inflation concerns and projected interest rate hikes, volatility based exchange-traded notes are also playing a role in the market decline. 


What is the VIX?

The VIX is also known as the CBOE Volatility Index. It demonstrates the market’s expectation of 30-day volatility based on option-pricing. It measures market risk and is frequently called the investor fear gauge.


What are exchange-traded notes (ETNs)?

ETNs are unsecured debt securities based on the performance of a market benchmark, like the VIX, less applicable fees. They are traded on major US exchanges during traditional trading hours. ETNs have a maturity and are backed only by the credit of the issuer, a key factor to consider. When they mature, the financial institution takes out fees and gives the investor cash based on the performance of the underlying index.


Risks of ETNs

  • Investors must be directionally correct on index and cover expenses as well
  • The issuer may not be able to pay the cash on time
  • The issuer may default on the loan
  • Limited secondary market may result in large losses or gains
  • FINRA has warned against volatility-linked ETNs and even required Wells Fargo to pay investors $3.4 million for improper sales of these products


Current market and ETNs

In 2017, the VIX was historically low, remaining under 15 while the S&P 500 returned more than 20%. Many hedge funds were playing the current market conditions by purchasing stocks and ETNs that targeted a declining market volatility. This strategy works when the market continues to accelerate and volatility remains low. But we all know what transpired the past few weeks. Wage growth, inflation concerns and projections of interest rate hikes rattled the market causing significant price declines and dramatic increases in volatility. The screenshot below shows a tripling of the VIX in the past month:

exchange-traded notes and market volatility

Volatility Spikes as Market Declines


Many inverse-VIX ETNs lost more than 90% of their value as a result of the trade no longer working. The chart below, shows the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) dropping from 144 to 5 in a few days:

volatility-based ETNs

XIV Drops more than 90% in a Few Days


These events with volatility-based inverse ETNs have resulted in a secondary exacerbation of market volatility as institutional investors unwind these ETN positions and sell stock shares to reduce their leverage. Investors are concerned about VIX-related trading volume and revenues declining and impacting the CBOE itself because 25% of CBOE global market revenue is generated from VIX-related products. This concern is reflected in the chart below:

CBOE volatility products

CBOE Price Decline



Volatility-based ETNs are extremely risky and not appropriate for most retail investors. However, it is beneficial to understand how these products may be a secondary factor in impacting our option-selling positions in extreme market conditions.


Volatility and our covered call positions (re-published from last week’s blog commentary)

Many of our members who have never experienced the type of market volatility we have experienced recently have been inquiring about how to incorporate volatility into our investment decisions. I have moved from more aggressive positions (out-of-the-money strikes) to more defensive positions (in-the-money strikes). Both can generate cash into our brokerage accounts. I will also be discussing volatility in this weekend’s blog article.

All other factors being the same, I favor OTM strikes when the VIX is below 20 and either declining or consolidation (moving sideways). I favor ITM strikes when the VIX moves above 20 and confirms the inverse relationship between the VIX and the S&P 500.

It is so important to trade in a non-emotional manner as aberrations like we recently have been experiencing will rear their ugly heads from time-to-time and we need to eliminate fear and greed from our trading influences.

It is true that a market acceleration can make ITM strikes appear to be a bad decision but in an environment of high volatility, defensive trading makes more sense especially for retail investors looking to generate cash-flow in a low-risk manner.


The chart I created below highlights how I address volatility and my option-selling positions as they relate to volatility:

VIX and the S&P 500

Volatility and our Covered Call Positions


Upcoming speaking event

POINT, or Phoenix Options Investors Networking Traders,

March 2 @ 6:30 pm9:00 pm 

Friday March 2, 2018 6:30 PM to 9:00 PM   Rio Salado Community College 2323 West 14th Street · Tempe, AZ

Find out more »

American Association of Individual Investors: Phoenix Chapter

March 3 @ 9:00 am12:00 pm 

Saturday, March 3, 2017 9:00 AM    Registration/Social Time 9:00 AM    Refreshments Time 9:30 AM    Program Time Location: Jewish Community Center 12701 N. Scottsdale Road Scottsdale, Arizona 85245 DIRECTIONS: The Center is 3.66 miles south of 101 on Scottsdale Road. The Center is on the left as you drive south from 101 OR Take 101 to E. Cactus. Drive 2 miles west on E. Cactus to N. Scottsdale Rd. Turn right on N. Scottsdale Rd. The Center is 1/8 mile on…


Portfolio Overwriting webinar for The Options Industry Council (OIC)

Date: 3/22 @ 2 PM ET

FREE Registration Link:


Market tone

 This week’s economic news of importance:

  • Federal budget Jan $59 billion
  • Consumer price index Jan 0.5 (above expectations)
  • Retail sales Jan (-)0.3% (below expectations)
  • Weekly jobless claims Feb 10th 230,000 (as expected)
  • Industrial production Jan (-)0.1% (below expectations)
  • Housing starts Jan 1.326 million (above expectations)
  • Building permits Jan 1.396 million
  • Consumer sentiment Feb 99.9 (above expectations)


Mon Feb 19th

  • None: President’s day

Tue Feb 20th

  • None

Wed Feb 21st

  • Markit manufacturing PMI Feb
  • Markit services PMI
  • Existitng home sales

Thu Feb 22nd

  • Weekly jobless claims through 2/17
  • Leading economic indicators Jan

Fri Feb 23rd

  • None

For the week, the S&P 500 rose by 4.30% for a year-to-date return of  2.19%%


IBD: Market in confirmed uptrend

GMI: 2/6- Sell signal since market close of  February 7, 2018

BCI: Due to the market volatility, I will be selling only in-the-money calls until market volatility subsides. I remain bullish on the economy and the market moving forward.


The 6-month charts point to a neutral outlook. In the past six months, the S&P 500 was up 11% while the VIX (19.46) moved up by 64%.

Wishing you much success,

Alan and the BCI team


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

26 Responses to “Market Volatility and VIX-Based Exchange-Traded Notes”

  1. Jay February 17, 2018 12:53 pm #

    In one of his opening comment segments at the start of a show last week Jim Cramer explained the implosion of the short volatility ETN’s and the resultant margin squeeze and felt it was a bigger catalyst for the correction than anything fundamentally wrong.

    I had been a consistent CSP seller on the ETF SVXY and was caught holding 100 shares that were assigned some time ago. At least as an ETF it did not close and go to zero like Credit Suisse’s ETN XIV did.

    I understand the structure and risk in ETF’s like SVXY and VXX which also have options available. But if you do not my suggestion is stick with good stocks.These things are a derivative of a derivative and are not intuitive. – Jay

  2. roni February 17, 2018 3:57 pm #

    Expiry weekend report

    Total account value : (3.9%) NEGATIVE.

    This month options cycle was terrifying.
    During the correction in the 3rd week my total account value was down 13%. I did not panic, but I was feeling very worried.

    Fortunately the market recovered a lot, and by learning from Spin about Repair Strategy, and executing it, I was able to do some damage control, and hope to get back to where I was.

    Early in this options cycle I was fully invested in 10 positions :

    Only 2 (PANW, and RHT) were assigned at positive gain of 2%

    1 (CGNX) was liquidated on 02/15 to avoid ER risk. (14.8%) loss.

    1 (OLED) still holding 200 shares after Repair Strategy calls expired yesterday, now 1.5% above my BEP.

    3 (LOW, TOL, and CRM) will expire on 02/23 after Repair Strategy executed in order to reduce potential loss.

    3 (ADBE, DLTR, and WGO) still holding, calls bought back following the 20/10 rule.

    I wish to thank Spin for his great help.


    • Terry February 19, 2018 2:41 pm #

      Roni and Spin;

      I found the links that Spin posted on stock repair strategy. I am going through them now. Thanks so much for sharing these.


    • spindr0 February 20, 2018 1:47 pm #

      Roni –

      You executed your OLED Repair superbly. You came within 43 cents of the ideal result and that margin of error was Mr. Market’s fault. OK, so you were ‘almost’ perfect ;->)

      The higher implied volatility due to the recent market correction facilitated getting more bang for the buck and being able to succeed with such a short term Repair. Congrats. I hope tha you have similar success with LOW, TOL, and CRM.


      If you have any questions about the stock Repair Strategy, feel free to hit me up with them.


  3. roni February 17, 2018 4:32 pm #

    Forgot to say, I’m currently 35% in cash for the next cycle.


  4. Barry B February 17, 2018 10:12 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 02/16/18.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are still in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The Blue Collar Investor Team

    [email protected]

  5. Byung February 18, 2018 12:09 am #


    I just finished studying chapter 6 and have a lot of questions.

    On ROO for ITM call option… If I bought ABC stock for $56, and sold $50 call option… when the option expires, if the stock price is between $50 to $55.99, the option buyer can buy the stock away from us. Is this correct?

    On ROO for ITM call option… Why do we calculate it based on Price Per Share – Intrinsic Value? Shouldn’t it just be Purchase Price of Stock? Because that is how much we actually took out of our pocket to buy the stock.

    In the basic Ellman Calculator, it projects annual return on your investment. Why does it project this if each trade is held for only a month?

    Is “What Now” tab used for OTM only?

    When you say “Option Price”, do you mean “Option Premium”?

    When you say “Call Option”, do you mean “Strike Price”?

    I have a few more questions, but I think it is one of those things that will become more clear as I continue to study / move into other chapters.

    Thanks Alan.

    • Alan Ellman February 18, 2018 2:32 pm #


      My responses:

      1. Yes, any strike that is in-the-money can be exercised and our shares sold at the strike assuming we don’t buy back the option prior to expiration. This applies to all prices above $50.00.

      2. We deduct the intrinsic value from our cost basis because we don’t count it as initial time value profit and yet we do receive it.

      3. The ROO stats from the Basic Ellman Calculator gives initial time value returns without annualizing. The Schedule D of the Elite Calculator does annualized returns. The reason I show annualized returns in my material is so comparisons can be made to other investments.

      4. The “What Now” tab applies to rolling options which means mostly ITM strikes.

      5. Option price = option premium

      6. Call option = call strike + expiration date


  6. Ponnavolu February 18, 2018 4:03 am #

    Barry and Alan,

    I attended your recent master class at the money show in Orlando.

    I have two questions.

    1.Where and how do get the distributed volume on any stock. Is there a chart or any formula?

    2. In your strategy do you have any sacred stocks? I mean the ones that you just buy and hold and not trade and not sell any covered calls?

    Thank you


    • Alan Ellman February 18, 2018 2:40 pm #


      1. Your brokerage site will provide this information or there are many free sites:
      Enter ticker & search
      Scroll down on left side for average trading volume

      2. I do have a small % portfolio which represents 10% of the stock portion of my total portfolio (the other 90% is for covered call writing) which consists of longer term securities with no option components. My greatest success lies with option-selling.


  7. Marta February 18, 2018 11:50 am #

    Hi Alan,
    When do you expect your new book on poor man’s covered call and other portfolio overwriting strategies book to become available for purchase? I am looking very much forward to it! Thanks, Marta

    • Alan Ellman February 18, 2018 2:57 pm #


      The release of the new book should be within the next 2 months. It is taking a bit longer than anticipated because we are also developing 3 new calculators for each of the strategies in the book. Two are complete and ready for action but the formatting of the PMCC Calculator is taking some time due to the large number of formulas inherent in the calculator. Our hope is that the final product will justify the wait.


  8. Frank February 18, 2018 2:06 pm #

    Hello and thank you for reading my message/question.

    I have read almost all of Alan’s books yet I have one question I haven’t been able to find the answer to.

    If you bought a stock sometime in the past, say at $40 per share and it dropped overnight to $30, would you consider selling a covered call with a strike of $35? You might get assigned but the premium would help offset the original loss.

    Thank you,

    • Alan Ellman February 18, 2018 2:47 pm #


      Using covered call writing as a tool to mitigate losses on a long stock position is a reasonable position management technique. We must first evaluate the reason for the gap-down and conclude that further decline is unlikely. Here is a link to an article I published several years ago on this topic:


      • Frank February 18, 2018 8:44 pm #

        Thank you Alan. That was very helpful.

    • Jay February 18, 2018 3:15 pm #

      Hi Frank,

      Anyone who trades stocks and has not had one drop significantly over night has either been extremely fortunate or has not been doing it long enough :)!

      In your example if I did not already have the stock covered and it dropped I would first try to figure out what caused it: earnings report? News event? General market pull back? Legal action? Scandal in the company? There was likely something. Then I would either sell it if the fundamental picture seems changed or hold it for a bounce back. I would not be inclined to write a covered call. Just wait it out if I still liked the stock..

      My preferred approach is to sell covered calls on positions I already have a paper gain in on up days and then only incrementally. If I have 200 shares I’ll sell one contract and let the rest run.

      But there are many ways to skin this cat! That is just mine and others do it differently with equal or greater success! – Jay

  9. Mark February 19, 2018 11:39 am #


    Lets say you write a coverd call and the stock explodes past the strike price.

    Can I purchase a leaps contract the day before expiration and have those called away in place of my stock?



    • Alan Ellman February 19, 2018 1:45 pm #


      Our contract obligation is to deliver shares of stock, not options. If we own LEAPS or call options of any duration, those options must be exercised and shares bought at the strike to then deliver to the call buyer. Most brokers will still require the original shares to be delivered but there may be some that have a way to replace older shares with newer ones if the shares are available during the settlement period.


    • spindr0 February 20, 2018 2:03 pm #

      Option assignments require the delivery of shares so you cannot buy a LEAP and use it as a surrogate for share delivery. Even if you could, doing so makes no sense.

      Many brokers allow you to designate which shares of your holdings you buy (or sell) but the IRS requires that you be able to prove that designation, either via a broker’s electronic or paper trail. I doubt if that can be done with an OCC assignment but your broker would be the one to verify that.

      As for the LEAP idea, they tend to have wide spreads and some amount of time premium. Why expend that extra money (B/A and TP) to buy the LEAP (resulting in a higher cost basis) and exercise it in order to deliver the newly acquired shares (assuming your broker allows designation)? If anything, you would buy the nearest expiry with the lowest time premium to acquire shares at the lowest price possible.

      If you don’t want to sell your current shares, perhaps due to tax issues, buy enough new shares at current price to satisfy the pending assignment (assuming that your broker allows designation os shares for assignment). Always try to keep it as simple as possible.


  10. John February 20, 2018 7:09 am #


    I’ve been watching your videos online last few weeks. Just made an epic failure move selling 13 options on WMT:( I ordered your book about exit strategies and read it on Sunday. I never even looked to see if there was earnings in the option period. I was so excited but then sad when I saw this mornings pre-opening action on WMT. I referenced your book and sold my soldiers right away after buying back my options for pennies. Big loss but huge lesson:)

    Anyway, I’m retired Navy and I think I’m a fan of your style. Look forward to doing and learning more. I plan to write 200K (stock value) worth of Options this week. My first real attempt to do a monthly STO Monthly strategy.

    Thank you.


    • Alan Ellman February 20, 2018 12:15 pm #


      This is exactly how I learned the earnings report lesson but it took several blows over the head before I put this rule in place. For you, it will be a 1-time lesson and will ultimately result in higher returns in the years and decades moving forward.

      Thank you for your years of service.


  11. Tim February 21, 2018 11:57 am #


    I hope all is well. It was nice meeting you in Orlando at the Money Show. I have a question on how to track the cost of a stock that I had a covered call position on but the call expired out of the money. The following is an example:

    I bought LGIH at $71.75 and sold an in the money $70 call for $3.90. At expiration the stock was below $70 so the call expired and I decided to keep the stock. This month I sold another out of the money $70 call for $2.80. What should I track as the cost of the stock for this month- the original cost of $71.75 or the current price of $68.25? This is not for tax purposes. This is only for tracking my monthly ROO and other monthly calculations.

    Your insight would be greatly appreciated.

    Thank you,

    • Alan Ellman February 21, 2018 2:04 pm #


      Nice seeing you in Orlando, thanks for stopping by.

      At the time you sold the 2nd option, you were deciding between selling an option on that same security or selling the stock for $68.25 and using the cash to buy a different stock. Therefore, we use $68.25 as our cost basis so that we are comparing apples-to-apples.

      When calculating overall returns, you can use the Schedule D in the Elite Calculator (free to premium members in the resource/download section) or simply take your portfolio gains (losses) and divide by initial portfolio value.


  12. Alan Ellman February 21, 2018 5:20 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  13. Ben February 23, 2018 2:22 am #

    I just subscribed the other day and love all of your material and the two books of yours I’ve read. I’ve been trading covered calls for about 6 months and am familiar with your system and the exit strategies which are my favorite.

    The topic is what do with larger accounts.

    Do you have any recommendations or information on how to manage larger accounts using your techniques and strategies? I know the usual answer it that “it depends on many factors”. So we could talk generally or from your own experience, or other blue collar investor’s experience that you may have heard about.

    More specifically – If I trade with $100,000… would I take 5 or 10 positions per month? If I trade with $1,00,000 would it be handled any differently? I’m curious about how many positions to take each month and if it matters about the share price of the underlying stock. For example, with larger accounts would I buy stocks above $80 or doesn’t it make much difference. Assume risk, taxes and time are not an issue.

    I trade in one of my IRA’s and have been practicing your strategies with 50k with 3-5 positions per month on some dividend stocks that I own. I’m planning on moving that up now that I have access to your report.


    • Alan Ellman February 23, 2018 7:09 am #


      You’re managing this issue perfectly…start small and work your way up until you find your comfort level. For me, it’s 15 – 25 positions and 50 – 100 contracts per month (plus a few positions in my mother’s account).

      In my book, “Stock Investing for Students” on page 137, I offer a series of guidelines. A screenshot of that page is shown below.



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