CHICAGO BOARD OPTIONS EXCHANGE
Trading VIX Futures – Part II
Russell Rhoads, CFAInstructor – The Options Institute
CHICAGO BOARD OPTIONS EXCHANGE
CBOE Disclaimer
Options and futures involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker by calling 1-888-OPTIONS, or at www.theocc.com. In order to simplify the computations, commissions, fees, margin interest
and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all securities and futures transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. The information in this presentation, including any strategies discussed,
is strictly for illustrative and educational purposes only and is not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities or futures. Supporting documentation for any claims, comparisons, recommendations, statistics, or other technical
data, will be supplied upon request. Past performance is not a guarantee of future results. CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index®, VIX® and The Options Institute Logo are registered trademarks and SPX is a servicemark of CBOE. S&P®,
and S&P 500® are registered trademarks of the McGraw-Hill Companies, Inc. and are licensed for use by CBOE. Standard & Poor's does not promote, market, sell or endorse any
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Copyright © 2011 Chicago Board Options Exchange, Incorporated. All rights reserved.
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Outline
• VIX Index / Futures Review • The VIX Futures Pricing Curve
– Calendar Spread• VIX vs. SPX Review
– VIX as an Indicator– Trade S&P or VIX Futures?
• Summary / Q&A
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CHICAGO BOARD OPTIONS EXCHANGE
VIX Index
The VIX® –CBOE Volatility Index®.Measures S&P 500® implied volatility.Based on S&P 500 Option bid/ask quotes.Uses the nearby options with at least 8 days until expiration.Has been promoted as a ‘fear index’ by the business media.
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VIX Futures
VIX Futures • Value is $1000 x the level of the VIX Index.• Trade the next 7 months of expiration.• Expire on Wednesday 30 days before
corresponding S&P 500 option expiration.• Have very unique characteristics relative to
other financial futures.
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VIX Futures
Pricing –
VIX FutureDec VIX – VXZ0 @ 22.65 = $22,650Minimum price move = .05 or $50.+/- 1.00 price change = +/- $1000.
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VIX Futures
Expiration Months –
VIX FuturesNext 8 MonthsCurrently – Dec, Jan, Feb, Mar, Apr, May, Jun, Jul
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VIX Futures
Wednesday Settlement 30 Days Before the Next Option Settlement Date
VIX OptionExpiration
Next StandardOption Expiration
December 2010 Dec 22 Jan 21January 2011 Jan 19 Feb 18February 2011 Feb 16 Mar 18
March 2011 Mar 16 Apr 15April 2011 Apr 20 May 20May 2011 May 18 Jun 17Jun 2011 Jun 15 Jul 15
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VIX Futures
Settlement Pricing –
VIX futures are AM settled contracts.
AM settlement involves a special calculation of the VIX Index taking place the morning after the end of trading for a futures contract.
This is known as the Special Opening Quotation.
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VIX Futures
Special Opening Quotation (SOQ) –
This is a unique VIX index quote that involves only actual S&P 500 option trades.
The regular VIX Index calculation uses the mid-point between bids and offers.
The symbol for the SOQ is VRO.
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VIX Futures Curve
Introduction –• The VIX index and active futures may be
plotted as a curve• Due to the anticipatory nature of VIX
futures the shape may vary• There is a ‘typical’ shape to these VIX
prices
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VIX Futures Curve
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VIX Index Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10
VIX Index & Futures 11/16/2010
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VIX Futures Curve
Typical Curve –
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VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8
Sell Short Buy
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VIX Futures Curve
Four Months Later – Normal Curve
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VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8
CoverShort
SellLong
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VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8
VIX Futures Curve
Four Months Later – Volatility Spike
CoverShort
SellLong
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VIX Calendar Spread
VIX Price Behavior Study –• Based on futures moving along the curve• Used 46 pairs of contracts from Feb 07 –
Mar 07 to Nov 10 – Dec 10• Studied price behavior of pairs over three
month period• Used the Friday prior to expiration as the
‘roll date’
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VIX Calendar Spread
Example of roll date –
November 17 was Nov VIX Expiration
Friday November 12 was day Decemberbecame ‘front month’
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VIX Calendar Spread
November 12 –
Nov 10 VIX / Dec 10 VIX Results Analyzed
Feb 11 VIX / Mar 11 VIXMonitoring Starts
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VIX Calendar Spread
VIX Price Behavior Study –• Eliminated pairs where closer month was
at a discount to VIX Index• There were 33 of 46 pairs that remained
after the first screen• Analyzed price data over next three
months until Friday before expiration
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VIX Calendar Spread
Example of Data Analysis –January 15, 2010
Month 1 – Feb 10Month 2 – Mar 10Month 3 – Apr 10 Month 4 – May 10
PotentialPair
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VIX Calendar Spread
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VIX Index Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10
VIX Futures Curve 1/15/2010
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VIX Calendar Spread
Example of Data Analysis –January 15, 2010
VIX Index – 17.91VIX Apr 10 – 24.05VIX May 10 – 24.30
Passed Screen
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VIX Calendar Spread
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VIX Index Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10
VIX Futures Curve 4/16/2010
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VIX Calendar Spread
Example of Data Analysis –April 16, 2010
VIX Index – 18.36 (up 0.45)VIX Apr 10 – 18.20 (down 5.85)VIX May 10 – 19.95 (down 4.35)
May VIX lost less value than Apr VIX
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VIX Calendar Spread
Example of Data Analysis –March 18, 2008
Month 1 – Apr 08Month 2 – May 08Month 3 – Jun 08Month 4 – Jul 08
PotentialPair
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VIX Calendar Spread
VIX Futures Curve 3/18/2008
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VIX Index Apr 08 May 08 Jun 08 Jul 08 Aug 08
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VIX Calendar Spread
Example of Data Analysis –March 18, 2008
VIX Index – 31.16VIX Jun 08 – 27.24VIX Jul 08 – 26.96
Failed Screen
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VIX Calendar Spread
Example of Data Analysis –August 15, 2008
Month 1 – Sep 08Month 2 – Oct 08Month 3 – Nov 08Month 4 – Dec 08
PotentialPair
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VIX Calendar Spread
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VIX Index Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09
VIX Futures Curve 8/15/2008
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VIX Calendar Spread
Example of Data Analysis –August 15, 2008
VIX Index – 19.58VIX Nov 08 – 22.71VIX Dec 08 – 22.47
Passed Screen
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VIX Calendar Spread
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VIX Index Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09
VIX Futures Curve 11/14/2008
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VIX Calendar Spread
Example of Data Analysis –November 14, 2008
VIX Index – 66.31 (up 46.73)VIX Nov 08 – 62.90 (up 40.19)VIX Dec 08 – 53.51 (up 31.04)
Nov VIX gained more than the Dec VIX
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VIX Calendar Spreads
Summary –• 33 pairs passed initial screen• 25 of the 33 instances where the screen
was passed resulted in the 3rd month being at a discount to 4th month on ‘roll date’
• Warning - when curve inverts result can be front month at steep premium to back months
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VIX as SPX Signal
• VIX Futures are 100% anticipatory• There is an inverse relationship between
the S&P 500 Index and the VIX• Futures prices are based on the direction
the market expects the VIX Index to settle at expiration
• Since futures anticipate the VIX, they also indicate the market’s S&P 500 expectations
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VIX as SPX Signal
The most basic of rules –• Long the S&P 500 Index if Close > 200
Day Moving Average• 1/1/2007 – 10/29/2010 results in about a
2 point S&P 500 Index gain• 1/1/2007 – 10/29/2010 S&P 500 Index
down about 234 points
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VIX as SPX Signal
Adding in a VIX Screen –Long S&P 500 Index if…
– S&P 500 Close > 200 Day Moving Average– VIX Index Close < 200 Day Moving Average
1/1/2007 – 10/29/2010 ResultUp 185 S&P 500 Points
vs.2 Points with No VIX Screen
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VIX as SPX Signal
0
15
30
45
60
75
90
1/3/07 6/22/07 12/9/07 5/27/08 11/13/08 5/2/09 10/19/09 4/7/10 9/24/10
VIX Index vs. 4th Month VIX Future
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VIX as a SPX Signal
VIX Index vs. 4th Month VIX –• VIX Futures anticipate the direction of the
spot index over time• This results in the futures also anticipating
the overall market• When the VIX futures are at a discount to
the index, the anticipation is for lower volatility in the future
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VIX as a SPX Signal
VIX Index vs. 4th Month VIX –
Checked the result of being long the S&P 500 when the index is at a premium to the future expiring four months out
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VIX as a SPX Signal
Long S&P 500 if VIX > 4th Month VIX Future• Tested 1/1/2007 to 10/29/2010• Based on closing prices only• Result was a gain of 252 S&P 500 points • Again index was flat over same period
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VIX vs. SPX
• There is an inverse relationship between the VIX and the S&P 500
• Generally when the S&P 500 is under pressure the VIX moves higher
• This inverse relationship creates a wide variety of trading opportunities
What about trading VIX futures basedon an S&P 500 opinion?
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VIX vs. SPX
VIX trading based on an S&P 500 opinion –• Tough to quantify (no VIX ‘fair value’)• However, closer to expiration, front month
trades in line with index
What if you were bearish 11/15 & 11/16?
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VIX vs. SPX
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Nov 12 Nov 15 Nov 161150
1160
1170
1180
1190
1200
1210
1220
S&P 500 vs. VIX – 11/12 through 11/16
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VIX vs. SPX
Bearish on SPX -VIX Futures –
11/12 Buy Nov VIX @ 20.3511/16 Sell Nov VIX @ 22.25
SPX Futures –11/12 Sell Dec S&P @ 1194.7511/16 Buy Dec S&P @ 1175.00
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VIX vs. SPX
• VIX futures gravitate toward the index as settlement approaches
• A stock market outlook may also result in an opinion for the direction of volatility
• A VIX futures position in place of an S&P 500 futures position may be a viable method of trading around your opinion
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Summary / Q&A
• VIX futures may be traded as a calendar spread based on the outlook for the curve of VIX prices
• The VIX index and VIX futures may be used as an indicator for the overall market
• Also, VIX futures positions may be a viable alternative to trading market index futures
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Contact / Presentation
CBOE Volatility Index www.cboe.com/vix
CBOE Futures Exchange www.cfe.cboe.com
Russell Rhoads [email protected]
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