trading volatility with vix futures and options
TRANSCRIPT
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Peter LuskInstructor
The Options Institute at CBOE
Trading Volatility
with VIX Futures and Options
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 2
Disclosures
In order to simplify the computations, commissions have not been included in the
examples used in these materials. Commission costs will impact the outcome of all stock
and options transactions and must be considered prior to entering into any transactions.
Multiple leg strategies involve multiple commission charges.
Any strategies discussed, including examples using actual securities and price data, are
strictly for illustrative and educational purposes only and are not to be construed as an
endorsement, recommendation, or solicitation to buy or sell securities.
Options involve risks and are not suitable for all investors. Prior to buying or selling an
option, an investor must receive a copy of Characteristics and Risks of Standardized
Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The
Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois
60606. Investors considering options should consult their tax advisor as to how taxes
may affect the outcome of contemplated options transactions.
CBOE, Chicago Board Options Exchange, OEX and XEO are registered trademarks
and The Options Institute and SPX are servicemarks of CBOE. All other trademarks and
servicemarks are the property of their respective owners.
Copyright © 2009 Chicago Board Options Exchange, Incorporated. All rights reserved.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 3
Session Outline
The VIX Index – What is it?
VIX Futures & Mini-VIX Futures
What You Need to Know
A Market-Timing Tool?
VIX Options
Unique Pricing Aspects
Trading Case Study
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 4
The CBOE Volatility Index
VIX - The CBOE Volatility Index
A measure of 30-day implied volatility
Created in 1993 by CBOE & Duke University
Goal: to trade and hedge against changing
implied volatility
Originally based on OEX options (S&P 100)
2003 – New formula with SPX options (S&P 500)
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 5
0
200
400
600
800
1000
1200
1400
1600
06/03/08 07/03/08 08/05/08 09/05/08 10/07/08 11/06/08 12/09/08 01/12/09 02/12/09 03/17/09 04/17/09
-10.00
10.00
30.00
50.00
70.00
90.00
110.00
130.00
150.00
170.00
190.00
SPX
VIX
VIX & SPX 5/1/08 to 4/30/09
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 6
VIX and the S&P 500
Also known as the “Fear Index,” VIX gives
an indication of options market anxiety.
VIX tends to rise as the S&P 500 falls
A “low” VIX indicates complacency.
A “high” VIX indicates anxiety.
VIX readings are very difficult to interpret as
an indicator of market direction.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 7
VIX Futures
Launched March, 2004
Mini-VIX futures added March, 2009
Unique pricing and price behavior
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 8
VIX Futures – Contract Specs
Ticker Symbol VX
Underlying VIX Index
Last Trading DayTuesday, 31 days before next
SPX expiration
ExpirationWednesday morning 30 days
before next SPX expiration
Settlement$1,000 VIX calculation based
on opening SPX option prices
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 9
Mini-VIX Futures – Contract Specs
Ticker Symbol VM
Underlying VIX Index
Last Trading DayTuesday, 31 days before next
SPX expiration
ExpirationWednesday morning 30 days
before next SPX expiration
Settlement$100 VIX calculation based
on opening SPX option prices
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 10
VIX / Mini-VIX Futures – More Facts
Cash Settlement
Quotes in Nickels
VIX Futures – 7 contract months
Mini-VIX Futures – 3 contract months
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 11
Margin Requirements
VIX Futures Mini-VIX Futures
Long / Short $8,000 $800
Spreads $500 $50
Note: margin requirements may change.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 12
15
17
19
21
23
25
27
29
31
33
35
9/2
4/2
007
10/8
/2007
10/2
2/2
007
11/5
/2007
11/1
9/2
007
12/3
/2007
12/1
7/2
007
12/3
1/2
007
1/1
4/2
008
1/2
8/2
008
2/1
1/2
008
2/2
5/2
008
3/1
0/2
008
3/2
4/2
008
4/7
/2008
4/2
1/2
008
5/5
/2008
5/1
9/2
008
6/2
/2008
6/1
6/2
008
6/3
0/2
008
7/1
4/2
008
7/2
8/2
008
8/1
1/2
008
VIX Index
Aug Futures
VIX compared to Aug 08 VIX Futures
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 13
VIX compared to Feb ‘09 VIX Futures
15
25
35
45
55
65
75
85
8/4
/08
8/1
8/0
8
9/1
/08
9/1
5/0
8
9/2
9/0
8
10/1
3/0
8
10/2
7/0
8
11/1
0/0
8
11/2
4/0
8
12/8
/08
12/2
2/0
8
1/5
/09
1/1
9/0
9
2/2
/09
2/1
6/0
9
VIX Index
Feb Futures
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 14
VIX Futures vs. VIX Index
No traditional futures-to-cash relationship!
No cost-of-carry relationship.
The current VIX futures price is the
market’s estimate of what the VIX Index
will be at settlement.
VIX Futures prices based on expectations.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 15
(non-) Correlation
VIX futures trade independently of the VIX
Index prior to expiration.
VIX futures can trade above or below the
VIX Index.
Convergence at expiration.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 16
Date Mar Fut VIX Index
03/05/09 47.35 50.17
03/12/09 41.10 41.18
03/20/09 47.05 45.89
Last trading day, 3/24; Final settlement, 3/25
VIX Futures vs. Index Sample Dates
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 17
VIX Futures Spreads
The price of a VIX futures is based on
expectations.
Therefore, the spread between one futures
contract and the next contract can change.
Trading VIX futures spreads may be an
opportunity (with the attendant risks).
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 18
VIX Futures Spreads
Apr - Mar
Date Mar Fut Apr Fut Spread
2/17/09 48.00 44.05 3.95
2/20/09 46.70 44.75 2.95
2/24/09 44.50 43.90 1.60
2/25/09 43.45 43.25 0.20
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 19
VIX & VIX Futures – 3/18/09
VIX Index 40.79 -2.94
April VIX Futures 43.05 +1.45
May VIX Futures 40.10 +0.95
June VIX Futures 38.80 +0.60
What does that tell us?
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 20
A Market-Timing Indicator?
Lawrence McMillan cited in Barron’s, 4/6/09:
“The relationships are fluid….., but the upshot is
that when longer-term VIX futures are priced at a
substantial and/or persistent premium to shorter-
term VIX futures and VIX itself, it portends a
volatile and usually weaker phase ahead for
stocks.”
Page 15, “Today’s Indexes Look Familiar” by Michael Santoli
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 21
VIX Futures Spreads
SPX & VIX Spreads Aug - Dec 07
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
08/21/07 09/21/07 10/23/07 11/23/07 12/26/07
1100
1150
1200
1250
1300
1350
1400
1450
1500
1550
1600
3rd - Front
3rd - VIX
SPX
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 22
VIX Futures Spreads
SPX & VIX Spreads Dec 07 - April 08
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
12/18/07 01/22/08 02/22/08 03/26/08 04/25/08
800
900
1000
1100
1200
1300
1400
1500
1600
3rd - Front
3rd - VIX
SPX
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 23
VIX Futures Spreads
SPX & VIX Spreads April - Aug 08
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
04/22/08 05/22/08 06/24/08 07/25/08 08/26/08
800
900
1000
1100
1200
1300
1400
1500
3rd - Front
3rd - VIX
SPX
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 24
VIX Futures Spreads
SPX & VIX Spreads Aug - Dec 08
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
08/21/08 09/23/08 10/23/08 11/24/08 12/26/08
200
400
600
800
1000
1200
1400
3rd - Front
3rd - VIX
SPX
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 25
VIX Futures Spreads
SPX & VIX Spreads Dec 08 - April 15, 2009
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
12/02/08 01/05/09 02/05/09 03/10/09 4/9/2009
400
500
600
700
800
900
1000
3rd - Front
3rd - VIX
SPX
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 26
VIX Futures Spreads
SPX & VIX Spreads APR 09 - JUL 09
-4
0
4
8
12
4/1/2009 4/20/2009 5/9/2009 5/28/2009 6/16/2009 7/5/2009 7/24/2009
300
400
500
600
700
800
900
1000
1100
4th - Front
4th - VIX
SP 500
Spreads SPX
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 27
VIX & VIX Futures – 4/30/09
VIX Index 36.50 +0.42
May VIX Futures 37.00 +0.55
JuneVIX Futures 36.90 +0.95
July VIX Futures 36.83 +0.13
Has the market changed from 3/18 to 4/30?
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 28
VIX & VIX Futures – 8/12/09
VIX Index 25.98 +0.12
Sep VIX Futures 28.60 +0.55
Oct VIX Futures 29.55 +0.40
Nov VIX Futures 29.20 +0.35
Is the market different on 8/12?
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 29
VIX & Mini-VIX Futures – Summary
Prices of VIX futures are based on expectations.
VIX futures prices can trade above or below the
VIX Index.
Ticker Margin
VIX futures VX $8,000
Mini-VIX futures VM $800
VIX futures spreads $200
The relationship of back-month futures to the
VIX index might give a clue to market direction.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 30
VIX Options
Launched February 24, 2006
Symbol – VIX
Cash-settled, European, $100 multiplier
1-point strikes below 20; 2½ above
6 expirations available (3 near term plus
3 in February quarterly cycle)
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 31
VIX Settlement (at Expiration)
VIX expiration is the Wednesday 30 days
prior to the next month’s option expiration.
Last trading day is the Tuesday before the
Wednesday VIX option/futures expiration.
Settlement based on VIX calculation using
next-month options (e.g., June VIX
settlement uses July SPX options)
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 32
VIX Options – Pricing 1
Date: 3/10/08
Current VIX Index 25.46
May 30 Call 2.70
May 30 Put 3.40
Is there anything unusual about these prices?
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 33
VIX Options – Pricing 2
Date: 8/12/09
Current VIX Index 25.55
Sep 30 Call 1.90
Sep 30 Put 3.70
Is there anything unusual about these prices?
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 34
Inputs to Option Prices
Underlying Price
Strike Price
Time to Expiration
Interest Rates
Volatility
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 35
VIX Case Study
Date 2/27/08 (90 days to May exp.)
VIX Index 22.69
VIX MAY Futures 22.58
VIX MAY 22.50 Call 3.40
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 36
VIX Case Study – the Forecast - 1
Date 2/27 3/10
VIX Index 22.69 29.38
May Futures 22.58 ???
May 22.50 Call 3.40 ???
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 37
VIX Case Study – the Forecast - 2
Date 2/27 3/10
VIX Index 22.69 29.38
May Futures 22.58 25.46
May 22.50 Call 3.40 5.40
NOTE: The 22.50 Call appears to be trading
below parity to the VIX index!
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 38
Case Study – Observations
With approximately 90 days to expiration,
the VIX futures changed less than the
VIX Index.
Traders of VIX options must pay attention
to the price of the VIX futures contract.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 39
Summary
VIX is an index of implied volatility of SPX
options.
VIX has been negatively correlated to the
market.
Futures and options contracts have unique
specifications.
The “underlying” for VIX options is the same
expiration VIX futures contract.
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CHICAGO BOARD OPTIONS EXCHANGETrading Volatility – 40
Trading Volatility
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