CBOE Equity Market Volatility Indexes

Transcription

1 Interactive Brokers Webcast CBOE Equity Market Volatility Indexes March 26, 2014 Presented by Russell Rhoads, CFA

2 Disclosure 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 OPTIONS, or from The Options Clearing Corporation at Futures trading is not suitable for all investors and involves risk of lo ss. The information in this presentation is provided solely for general education and information purposes. No statement within t his presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities or futures price data, are strictly for illustrative and educational purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Multiple leg strategies involve multiple commission charges. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation is available from CBOE upon request. CBOE, Chicago Board Options Exchange, CBOE Volatility Index, CFE and VIX are registered trademarks and CBOE Futures Exchange, CBOE Short-Term Volatility Index, CBOE 3-Month Volatility Index, CBOE Mid-Term Volatility Index, Execute Success, RVX, SPX, The Options Institute VXST, VXN, VXV and VXMT are service marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P 500 is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by CBOE and CBOE Futures Exchange, LLC (CFE). CBOE's and CFE s financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in such products. Russell 2000 is a registered trademark of Russell Investments, used under license. The NASDAQ-100 Index, NASDAQ-100, and NASDAQ are trademark or service marks of The NASDAQ Stock Market, Inc. (with which its affiliates are the "Corporations"). These marks are licensed for use by CBOE in connection with the trading of products based on the NASDAQ-100 Index. The products have not been passed on by the Corporations as to their legality or suitability. The products are not issued, endorsed, sold or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). CBOE is not affiliated with Interactive Brokers. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-cboe product or service described in this presentation. Copyright 2014 CBOE. All rights reserved. THE OPTIONS INSTITUTE at CBOE 2

3 CBOE Equity Market Volatility Indexes Outline S&P 500 Related Indexes CBOE Russell 2000 Volatility Index CBOE Nasdaq-100 Volatility Index Summary / Q&A THE OPTIONS INSTITUTE at CBOE 3

4 Volatility Indexes on the S&P 500 Introduction The CBOE Volatility Index (VIX ) was the first implied volatility related index The VIX methodology is applied to a wide variety of markets to calculate a standard measure of implied volatility CBOE now publishes quotes on four volatility indexes that use S&P 500 Index options as the underlying market THE OPTIONS INSTITUTE at CBOE 4

5 Volatility Indexes on the S&P 500 Volatility Indexes based on S&P 500 Option Pricing Index Ticker Days CBOE Short-Term Volatility Index VXST SM 9 Days CBOE Volatility Index VIX 30 Days CBOE 3-Month Volatility Index VXV SM 93 Days CBOE Mid-Term Volatility Index VXMT SM 184 Days THE OPTIONS INSTITUTE at CBOE 5

6 Volatility Indexes on the S&P Price Action VXST VIX VXV VXMT 25 VXST VIX VXV VXMT Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: CBOE.com THE OPTIONS INSTITUTE at CBOE 6

7 Volatility Indexes on the S&P Price Action VXST vs. S&P S&P VXST Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec Sources: CBOE.com and Bloomberg THE OPTIONS INSTITUTE at CBOE 7

8 Volatility Indexes on the S&P Price Action VIX vs. S&P S&P VIX Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov Sources: Bloomberg and CBOE.com THE OPTIONS INSTITUTE at CBOE 8

9 Volatility Indexes on the S&P Price Behavior VXST vs. VIX 25 VXST 20 VIX Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: CBOE.com THE OPTIONS INSTITUTE at CBOE 9

10 Volatility Indexes on the S&P VXST VIX SPX Relationship Market Correlations VIX SPX VXST Day Average Realized Volatility VXST VIX VXV VXMT 175% 109% 67% 48% THE OPTIONS INSTITUTE at CBOE 10

11 Volatility Indexes on the S&P VXST VIX Relationship by Year VXST VIX H/L Percent Range VXST / S&P 500 Correlation Average High Low H/L Range % % % H/L Percent Range VIX / S&P 500 Correlation Average High Low H/L Range % % % THE OPTIONS INSTITUTE at CBOE 11

12 Volatility Indexes on the S&P 500 Volatility Curves Selected Term Structure Curves in /20/2013 Average 8/2/ VXST VIX VXV VXMT Source: CBOE.com THE OPTIONS INSTITUTE at CBOE 12

13 Volatility Indexes on the S&P 500 VXST Futures Trading Weekly futures based on the CBOE Short-Term Volatility Index began trading on February 13, 2014 There are futures contracts expiring on a weekly basis available for trading at the CBOE Futures Exchange This gives traders an opportunity to take advantage of an outlook for near term volatility pricing THE OPTIONS INSTITUTE at CBOE 13

14 CBOE Russell 2000 Volatility Index Russell 2000 Index (RUT) The Russell 2000 Index is considered a leading benchmark for the performance of small cap stocks Many market participants think of the Russell 2000 as being a better indicator of the domestic economy than other broad based equity market indexes As a group Russell 2000 stocks generated over 80% of their revenues from inside the United States in 2012 THE OPTIONS INSTITUTE at CBOE 14

15 CBOE Russell 2000 Volatility Index Introduction The CBOE Russell 2000 Volatility Index (RVX) utilizes the CBOE Volatility Index (VIX) methodology The calculation uses RUT index options as the inputs with the result being a 30 day measure of implied volatility Small cap and large cap stock prices are influenced by different economic factors At times RVX and VIX do not necessarily correlate with each other THE OPTIONS INSTITUTE at CBOE 15

16 CBOE Russell 2000 Volatility Index 2013 Price Action RVX vs. Russell Russell RVX Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov Sources: Bloomberg and CBOE.com THE OPTIONS INSTITUTE at CBOE 16

17 Russell 2000 Volatility Index RVX Futures Futures on RVX began trading at the CBOE Futures Exchange on November 18, 2013 The pricing characteristics of RVX futures contracts are very similar to VIX futures THE OPTIONS INSTITUTE at CBOE 17

18 Russell 2000 Volatility Index RVX Futures Contract Specifications Underlying Ticker Futures Symbol Contract Multiplier Minimum Price Intervals Dollar Value Per Tick Contract Months Trading Hours Settlement Date RVX VU $1, $50 Up to 9 Serial Months 8:30 am to 3:15 pm Chicago Time 30 Days Prior to Following Month's 3rd Friday THE OPTIONS INSTITUTE at CBOE 18

19 Russell 2000 Volatility Index RVX Futures Pricing CBOE Russell 2000 Index / Futures Prices 12/6/2013 Index / Future Close RVX VUZ VUF VUG VUH Spread vs. RVX Days to Expiration Contango normal shape Backwardation usually occurs in times of high volatility THE OPTIONS INSTITUTE at CBOE 19

20 Russell 2000 Volatility Index RVX Options Options on the Russell 2000 Volatility Index began trading at CBOE late last year So far these options appear to share the same pricing characteristics as the other volatility related option markets The best underlying market to gauge the value of an RVX option may be the corresponding futures contract THE OPTIONS INSTITUTE at CBOE 20

21 Russell 2000 Volatility Index RVX Options Contract Specifications Underlying Ticker Multiplier Strike Prices Minimum Tick < $3 Minimum Tick > $3 Contract Months Trading Hours Settlement Date RVX $100 Minimum Strike Price Increment of $ Three near term plus three additional on Feb cycle 8:30 am to 3:15 pm Chicago Time 30 Days Prior to Following Month's 3rd Friday THE OPTIONS INSTITUTE at CBOE 21

22 Russell 2000 Volatility Index RVX Option Pricing December 6, 2013 Pricing RVX Feb = The Best Underlying Pricing Vehicle for RVX Options may be the Corresponding Future THE OPTIONS INSTITUTE at CBOE 22

23 Russell 2000 Volatility Index RVX Option Trade Trade on December 4, 2013 Bought 50 RVX Jan Sold 50 RVX Jan Net Cost = 0.35* *Excluding Commissions THE OPTIONS INSTITUTE at CBOE 23

24 Russell 2000 Volatility Index Option Trade Payoff Diagram Break Even THE OPTIONS INSTITUTE at CBOE 24

25 Russell 2000 Volatility Index RVX Option Trade Payoff At Expiration RVX Settlement Over Both Options Expire 0.35 Per Contract Loss RVX Settlement Between and Partial Gain or Loss RVX Settlement Under Both Options In the Money 0.65 Per Contract Gain THE OPTIONS INSTITUTE at CBOE 25

26 Russell 2000 Volatility Index Summary The Russell 2000 is considered the standard for measuring the performance of small-cap stocks As a measure of expected volatility of the Russell 2000 RVX is a standard for determining expected 30 day volatility for small cap stocks RVX futures and options now offer traders and investors an efficient way to gain exposure to this volatility measure THE OPTIONS INSTITUTE at CBOE 26

27 CBOE Nasdaq-100 Volatility Index Overview The CBOE Nasdaq-100 Volatility Index (VXN) is calculated using options on the Nasdaq-100 (NDX) Index VXN is typically at a premium to VIX, but has fallen to a discount There has been a bit of a seasonal pattern for VXN based on the earnings calendar THE OPTIONS INSTITUTE at CBOE 27

28 CBOE NASDAQ-100 Volatility Index 2013 in Context VXN vs. NASDAQ NASDAQ VXN Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov Sources: Bloomberg and CBOE.com THE OPTIONS INSTITUTE at CBOE 28

29 CBOE NASDAQ-100 Volatility Index VXN Futures Pricing September 6, VXN Sep-13 Oct-13 Nov-13 Dec-13 THE OPTIONS INSTITUTE at CBOE 29

30 CBOE Nasdaq-100 Volatility Index VXN Futures Pricing November 1, VXN Nov-13 Dec-13 Jan-14 Feb-14 THE OPTIONS INSTITUTE at CBOE 30

31 CBOE Nasdaq-100 Volatility Index Summary VXN pricing behaves in a similar manner to VIX pricing The shape of the curve varies with the outlook for volatility based on NDX option pricing Curve trading is popular with VIX futures and is a logical approach to trading VXN futures as well THE OPTIONS INSTITUTE at CBOE 31

32 CBOE Equity Market Volatility Indexes Summary CBOE quotes dozens of volatility indexes and offers trading vehicles on eight of those indexes Four of those tradable volatility indexes are based on the US markets The underlying markets tend to be highly correlated, but do have periods of divergent performance This sort of divergent performance shows up in the respective volatility indexes as well THE OPTIONS INSTITUTE at CBOE 32

33 CBOE Equity Market Volatility Indexes More Information / Contact cfe.cboe.com THE OPTIONS INSTITUTE at CBOE 33