Trading VIX Futures and Options Russell Rhoads, CFA Instructor The Options Institute 2010 Chicago Board Options Exchange, Incorporated. All rights reserved.
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VIX Futures / Options Outline VIX Index History Defined - Calculation VIX Futures Contract Specs Settlement Spreads VIX Options Contract Specs Settlement Underlying VIX ETN s VXX & VXZ Options on VXX & VXZ VIX and S&P 500 Relationship VIX Diversification Benefits Short Term Relationships Summary / Q&A
VIX Index A Brief History of the VIX 1993 VIX introduced in a paper. 2003 VIX calculation changed. 2004 futures contracts introduced. 2006 options on VIX begin trading. 2008 binary options on the VIX. 2009 mini-vix futures introduced. 2009 ETNs on VIX introduced.
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.
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.
VIX Futures Mini VIX Futures Value is $100 times the VIX Index. Trade the next 3 months of expiration. Expire on Wednesday 30 days before corresponding SPX option expiration. Have very unique characteristics relative to other financial futures.
VIX Futures Pricing VIX Future June VIX VXM0 @ 26.90 = $26,900. Minimum price move =.05 or $50. +/- 1.00 price change = +/- $1000. Mini-VIX June VIX VMM0 @ 26.90 = $2,690. Minimum price move =.05 or $5. +/- 1.00 price change = +/- $100.
VIX Futures Expiration Months VIX Futures Next 7 Months Currently Jul, Aug, Sep, Oct, Nov, Dec, Jan Mini-VIX Next 3 Months Currently Jul, Aug, Sep
VIX Futures Unique Features Pricing is anticipatory, no cost of carry. Future price reflects market opinion of the future direction of the spot VIX Index. At times the VIX future price is higher than the index and at times it is lower.
VIX Index vs. Front Month Future Daily Chart 6/1/2007 9/30/2007 32.00 29.00 26.00 Index Future 23.00 20.00 17.00 14.00 11.00 6/1/07 6/15/07 6/29/07 7/13/07 7/27/07 8/10/07 8/24/07 9/7/07 9/21/07 Data Source Bloomberg
VIX Index vs. Front Month Future Daily Chart 4/1/2009 7/30/2009 43.00 40.00 37.00 Index Future 34.00 31.00 28.00 25.00 22.00 4/1/09 4/15/09 4/29/09 5/13/09 5/27/09 6/10/09 6/24/09 7/8/09 7/22/09 Data Source Bloomberg
VIX Index vs. June Future Daily Chart 3/1/2010-5/26/2010 50 45 40 35 Index Future 30 25 20 15 3/1/10 3/15/10 3/29/10 4/12/10 4/26/10 5/10/10 5/24/10 Data Source Bloomberg
VIX Index vs. June VIX 5 Minute Chart 5/13/2010 27 Index Future 26 25 24 9:35 10:35 11:35 12:35 13:35 14:35 15:35 Data Source Bloomberg
VIX Index vs. June VIX 5 Minute Chart 5/17/2010 36 34 Index Future 32 30 28 26 9:35 10:35 11:35 12:35 13:35 14:35 15:35 Data Source Bloomberg
VIX Futures Expiration Futures expire 30 days before the next month s normal option expiration. Example July 2010 VIX Futures Expire Wednesday July 21. Option Expiration is August 20.
VIX Futures Settlement Pricing VIX futures are AM settlement with 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.
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.
Settlement History - 2010 Settle Index Close Difference Future Close Difference June 2010 26.11 25.87 0.24 25.85 0.25 May 2010 34.53 33.55 0.98 32.70 1.83 Apr 2010 15.80 15.73 0.07 16.00 (0.20) Mar 2010 16.68 17.69 (1.01) 17.45 (0.77) Feb 2010 22.50 22.25 0.25 22.60 (0.10) Jan 2010 18.87 17.58 1.29 17.85 1.02 Source www.cfe.cboe.com
Settlement History - 2009 Settle Index Close Difference Future Close Difference Dec 2009 20.84 21.50 (0.66) 21.35 (0.51) Nov 2009 22.54 22.41 0.13 22.55 (0.01) Oct 2009 20.82 20.90 (0.08) 21.10 (0.28) Sep 2009 23.64 23.42 0.22 23.50 0.14 Aug 2009 28.76 26.18 2.58 26.35 2.41 Jul 2009 23.48 23.87 (0.39) 24.05 (0.57) Jun 2009 31.03 32.68 (1.65) 31.85 (0.82) May 2009 27.04 28.80 (1.76) 28.50 (1.46) Apr 2009 38.20 37.67 0.53 37.85 0.35 Mar 2009 40.62 40.80 (0.18) 40.05 0.57 Feb 2009 48.40 48.66 (0.26) 48.00 0.40 Jan 2009 49.88 56.65 (6.77) 57.90 (8.02) Source www.cfe.cboe.com
Settlement History - 2008 Settle Index Close Difference Future Close Difference Dec 2008 51.29 52.37 (1.08) 52.44 (1.15) Nov 2008 67.22 67.64 (0.42) 67.04 0.18 Oct 2008 63.04 53.11 9.93 52.80 10.24 Sep 2008 31.54 30.30 1.24 29.68 1.86 Aug 2008 20.83 21.28 (0.45) 21.00 (0.17) Jul 2008 28.40 28.54 (0.14) 28.43 (0.03) Jun 2008 21.54 21.13 0.41 21.05 0.49 May 2008 17.16 17.58 (0.42) 17.37 (0.21) Apr 2008 21.78 22.78 (1.00) 22.87 (1.09) Mar 2008 25.67 25.79 (0.12) 25.95 (0.28) Feb 2008 25.51 25.02 0.49 26.07 (0.56) Jan 2008 24.18 23.34 0.84 24.04 0.14 Source www.cfe.cboe.com
Settlement History - 2007 Settle Index Close Difference Future Close Difference Dec 2007 22.08 22.64 (0.56) 22.55 (0.47) Nov 2007 26.70 24.88 1.82 25.08 1.62 Oct 2007 18.33 20.02 (1.69) 20.03 (1.70) Sep 2007 20.29 20.35 (0.06) 20.18 0.11 Aug 2007 25.05 25.25 (0.20) 25.24 (0.19) Jul 2007 16.87 15.63 1.24 15.57 1.30 Jun 2007 13.01 12.85 0.16 12.88 0.13 May 2007 13.63 14.01 (0.38) 13.96 (0.33) Apr 2007 12.03 12.14 (0.11) 11.87 0.16 Mar 2007 12.98 13.27 (0.29) 13.06 (0.08) Feb 2007 9.95 10.34 (0.39) 10.43 (0.48) Jan 2007 10.71 10.74 (0.03) 10.59 0.12 Source www.cfe.cboe.com
VIX Spreads 5/20/2010 5 Min 38 37 36 VXM0 VXQ0 VXN0 VXU0 1 35 34 4 2 33 32 8:30 9:30 10:30 11:30 12:30 13:30 14:30 3 Data Source Bloomberg
VIX Spreads 5/26/2010 5 Min 34 VXM0 VXN0 33 VXQ0 VXU0 2 32 4 31 3 30 1 8:30 9:30 10:30 11:30 12:30 13:30 14:30 Data Source Bloomberg
Spreads 5/27/2010 5 Min 33 32 4 VXM0 VXQ0 VXN0 VXU0 31 2 30 3 29 8:30 9:30 10:30 11:30 12:30 13:30 14:30 1 Data Source Bloomberg
Spreads Daily 5/3 5/27 36 34 VXM0 VXQ0 VXN0 VXU0 32 30 28 26 5/20 5/26 5/27 24 22 5/3/10 5/9/10 5/15/10 5/21/10 5/27/10 Data Source Bloomberg
VIX Options Introduced in 2006 Caught on very quickly as a method of trading volatility Currently second most actively traded index option series at the CBOE Have growing institutional following as hedging vehicle
VIX Options Characteristics European Style Wednesday Settlement Unusual Pricing Opening Price Quotation
VIX Options European Style European options are only allowed to be exercised on expiration. VIX options are cash settled at expiration.
VIX Options Wednesday Settlement Just like the VIX futures contracts, VIX options expire on the Wednesday 30 days before equity option expiration.
VIX Options Opening Price Quotation VIX Options are settled using the Special Opening Quotation on the morning following the last trading day for those options. This is identical to the settlement process for the VIX futures.
VIX Options Unusual Pricing It is not uncommon for VIX options to appear to be cheap or expensive when using the VIX Index as the underlying. When pricing options, the proper underlying instrument should be the corresponding VIX future price.
VIX Options Unusual Pricing VIX Index @ 32.00 VIX August 30.00 Call @ 1.25 VIX August Future @ 30.50
VIX Options Unusual Pricing VIX Index @ 27.50 VIX July 30.00 Put @ 1.50 VIX July Future @ 29.00
VIX Options - Open Interest 4,000,000 3,500,000 3,000,000 December 2009 July 2009 2,500,000 2,000,000 April 2007 1,500,000 1,000,000 500,000 0 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Source www.cboe.com
VIX ETNs VIX Exchange Traded Notes What is an ETN? Short Term Volatility - VXX Intermediate Term Volatility - VXZ Characteristics of these ETNs
VIX ETNs What is an ETN? ETN stands for Exchange Traded Note, it is an unsecured, unsubordinated debt security. They are created to replicate returns on an index minus fees. The trading in ETN s is very similar to that in ETF s (Exchange Traded Funds).
VIX ETNs ipath S&P 500 VIX Short-Term Futures ETN (VXX) Gives investors exposure to a daily rolling long position in the first and second month VIX futures contracts.
VIX ETNs ipath S&P 500 VIX Mid-Term Futures ETN (VXZ) Gives investors exposure to a daily rolling long position in the fourth through seventh month VIX futures contracts.
VIX ETNs Characteristics Introduced in Q1 2009 Exchange traded on the NYSE Have a negative correlation to S&P 500 index returns Backed by Barclays Bank
VIX ETNs VXX Average Daily Volume 45000000 40000000 35000000 30000000 25000000 20000000 15000000 10000000 5000000 0 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
VIX ETNs VXZ Average Daily Volume 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
VIX ETNs VXX / VXZ Options May 28 first day of trading at CBOE First Day Volume for VXX Options > 20,000 First Day Volume for VXZ Options > 1,500 Options on March Cycle Current months - July, August, September, & December Dollar Strikes
VIX Diversification University of Massachusetts Paper Studied the 2008 market and the diversification benefits of VIX futures or options. Compared a variety of portfolios and combined exposure to the VIX. Results showed return and diversification benefits of including the VIX in a portfolio.
VIX Diversification University of Massachusetts Paper Full study available on the CBOE website. www.cboe.com/institutional/reports.aspx
VIX Index Common Question Why does the VIX only seem to go up when the S&P 500 goes down? or Why doesn t the VIX spike when the S&P 500 runs up rapidly?
VIX Index Common Answers Put Call Parity People and Panic
VIX vs. SPX 10 Worst S&P 500 Days 1/1/2007 5/14/2010 SPX VIX Index VIX Future 10/15/2008-9.03% 25.61% 18.61% 12/1/2008-8.93% 23.93% 13.61% 9/29/2008-8.83% 34.48% 14.14% 10/9/2008-7.62% 11.11% 14.79% 11/20/2008-6.71% 8.89% 5.29% 11/19/2008-6.12% 9.79% 9.79% 10/22/2008-6.10% 31.14% 10.34% 10/7/2008-5.74% 3.13% 11.93% 1/20/2009-5.28% 22.86% 10.09% 11/5/2008-5.27% 14.31% 8.12% Data Source Bloomberg
VIX vs. SPX 1050 1000 950 900 850 800 750 11/20/2008 700 11/3/08 11/7/08 11/13/08 11/19/08 11/25/08 12/2/08 12/8/08 Data Source Bloomberg
VIX vs. SPX 5/6/2010 5 Min 1180 42.50 1160 38.50 1140 1120 S&P 500 VIX Index 34.50 30.50 1100 26.50 1080 8:30 9:30 10:30 11:30 12:30 13:30 14:30 22.50 Data Source Bloomberg
VIX vs. SPX 5/6/2010 5 Min 1180 42.50 1160 38.50 1140 1120 S&P 500 May VIX Future 34.50 30.50 1100 26.50 1080 8:30 9:30 10:30 11:30 12:30 13:30 14:30 22.50 Data Source Bloomberg
VIX vs. SPX 5/6/2010 5 Min 42.5 38.5 34.5 VIX Index May VIX Future 30.5 26.5 22.5 8:30 9:30 10:30 11:30 12:30 13:30 14:30 Data Source Bloomberg
Trading VIX Futures & Options Summary Wide variety of VIX related products available Inverse relationship with SPX creates interesting opportunities Number of VIX related derivatives will continue to increase
Trading the VIX Summary The CBOE Website has more information on these and other products. Questions / Comments? rhoads@cboe.com