S&P 500 Variance Futures: Exchange-Traded/OTC Conventions

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1 S&P 500 Variance Futures: Exchange-Traded/OTC Conventions 2013 CBOE Risk Management Conference March 4, 2013 Presented by: John Hiatt Director, Research and Product Development

2 Agenda Overview of CFE S&P 500 Variance futures Margins Market Data / Conversion Calculator S&P 500 Volatility Term Structure S&P 500 options / Variance Futures / VIX futures / VIX options CBOE FUTURES EXCHANGE 2

3 Overview CFE S&P 500 Variance Futures Exchange-traded futures contract whose final settlement value depends upon a measure of the variance of the S&P 500 Index over the life of the contract. Quote and trade in the same convention as variance swaps currently offered in the OTC market. Final settlement value adjusted to reflect daily accrual of interest payments on variation margin. How did we get here? CBOE FUTURES EXCHANGE 3

4 Overview S&P 500 Index options (SPX) listing cycle Through two years Spot-starting annualized implied volatility Nickel ticks Vega notional Quoted Using OTC Conventions Quotes/Orders must be in increments of 1,000 vega notional VA Futures expirations on 10-Dec-12 Inception Expiry Bid Size Initial Bid Offer Number Offer Size of Number of Realized Expiry Date Strike expected Prices returns elapsed Variance 18-Jan Jan Aug Feb Feb Oct Mar Mar Mar Jun Jun Jun Sep Sep Sep Dec Dec Dec Jun Jun Jun Dec Dec Dec CBOE FUTURES EXCHANGE 4

5 Overview Post Trade Price is converted from implied volatility to a futures price. Fill Information Class: VA (Future) Underlying Symbol: VA Session Name: CFE_MAIN Product: VA Mar Side: Sell Trade ID: : Executed Total Vol: 100 Remaining Vol: 0 Price: Position: N/A Date/Time: 2012/11/29 11:17: Firm: CBOE.053 Originator: Executing Broker: XXS CMTA: CBOE.501 Account: MM SubAccount: MM Acronym: CBOE.MM User Id: MM User Assigned ID: MM Extensions: VPRICE= ,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 5

6 Overview Post Trade Price is converted from implied volatility to a futures price. Quantity is converted from vega notional to variance units. Fill Information Class: VA (Future) Underlying Symbol: VA Session Name: CFE_MAIN Product: VA Mar Side: Sell Trade ID: : Executed Total Vol: 100 Remaining Vol: 0 Price: Position: N/A Date/Time: 2012/11/29 11:17: Firm: CBOE.053 Originator: Executing Broker: XXS CMTA: CBOE.501 Account: MM SubAccount: MM Acronym: CBOE.MM User Id: MM User Assigned ID: MM Extensions: VPRICE= ,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 6

7 Overview Post Trade Price is converted from implied volatility to a futures price. Quantity is converted from vega notional to variance units. All four pieces of information are included on fill reports. Clearing and Trade Match will only receive futures price and variance units. Data vendors will receive prices/quantity in volatility and vega notional. Fill Information Class: VA (Future) Underlying Symbol: VA Session Name: CFE_MAIN Product: VA Mar Side: Sell Trade ID: : Executed Total Vol: 100 Remaining Vol: 0 Price: Position: N/A Date/Time: 2012/11/29 11:17: Firm: CBOE.053 Originator: Executing Broker: XXS CMTA: CBOE.501 Account: MM SubAccount: MM Acronym: CBOE.MM User Id: MM User Assigned ID: MM Extensions: VPRICE= ,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 7

8 Overview P&L of an OTC Variance swap Assume an investor enters into a long S&P 500 March 2013 variance swap position on December 10, 2012, at an implied volatility of and is looking to terminate the swap on February 26, CBOE FUTURES EXCHANGE 8

9 Overview P&L of a CFE S&P 500 Variance future Investor enters into the same 100,000 vega notional exposure at an implied volatility of but this time uses the CFE variance future Day Discount factor Par Variance ARMVM Futures price Futures P&L Total P&L $18, $32, , CBOE FUTURES EXCHANGE 9

10 Overview P&L of a CFE S&P 500 Variance future Investor enters into the same 100,000 vega notional exposure at an implied volatility of but this time uses the CFE variance future Day Discount factor Par Variance ARMVM Futures price Futures P&L Total P&L $18, $32, , CBOE FUTURES EXCHANGE 10

11 Outright Customer Margins Expiration Symbol Margin per Variance unit Margin by Vega notional 18-Jan-13 VAF13 $ x 15-Feb-13 VAG13 $ x 15-Mar-13 VAH13 $ x 21-Jun-13 VAM13 $ x 20-Sep-13 VAU13 $ x 20-Dec-13 VAZ13 $ x 20-Jun-14 VAM14 $ x 19-Dec-14 VAZ14 $ x 100,000 Vega (Mar13) 10,206 variance units 100,000 vega converts to 10,206 Variance units of March 2013 futures Margined at $100 per variance unit for a total margin of $1,020,616 ~ times vega for 100K of 3-month variance CBOE FUTURES EXCHANGE 11

12 Spread Customer Margins Expiration 18-Jan Feb Mar Jun Sep Dec Jun Dec-14 Symbol VAF13 VAG13 VAH13 VAM13 VAU13 VAZ13 VAM14 VAZ14 Scan Range $175 $300 $100 $50 $125 $50 $50 $50 Tier Jan-13VAF13 $ Feb-13VAG13 $300 2 $ Mar-13VAH13 $100 3 $145 $ Jun-13VAM13 $50 4 $85 $455 $ Sep-13VAU13 $125 5 $225 $455 $30 $ Dec-13VAZ13 $50 6 $240 $155 $35 $20 $ Jun-14VAM14 $50 7 $140 $455 $45 $15 $15 $ Dec-14VAZ14 $50 8 $295 $150 $50 $30 $20 $5 $5 Example: 100K vega 3-month forward starting variance with June 2013 expiration 100,000 Vega (Mar13) 10,206 variance units 200,000 Vega (Jun13) 18,668 variance units 100,000 vega converts to 10,206 Variance units of March 2013 futures 200,000 vega converts to 18,668 Variance units of June 2013 futures Spread ratio for March/June is 1-2 (i.e. 9,334 March futures to 18,668 June futures) These contracts are margined at the spread rate of $20 per variance unit. The remaining contracts are margined at the outright rate Total margin = $273,880 = ($20*9,334+$100*872) CBOE FUTURES EXCHANGE 12

13 Conversion Inputs/Calculator The conversion formula inputs are loaded on the CFE website daily. Also, CFE provides a variance calculator to convert from vol/vega to futures price/var units or vice versa Jan Feb Mar Jun Sep Dec Jun Dec-14 Inception Date (SPX option listing) 20-Aug Oct Mar Jun Sep Dec Jun Dec-11 Realized Variance to date Number of expected Prices (Ne) Number of returns elapsed Previous settlement value Discount Factor Initial Strike (K0) ARVM Fed Funds Rate CBOE FUTURES EXCHANGE 13

14 S&P Volatility Term Structure December 10, CBOE FUTURES EXCHANGE 14

15 CBOE FUTURES EXCHANGE 15

16 How this relates to VIX derivatives Forward Variance / VIX futures / Convexity / VIX options CBOE FUTURES EXCHANGE 16

17 Disclaimer John Hiatt Director Research and Product Development Futures trading is not suitable for all investors, and involves risk of loss. CFE is a registered trademark and CBOE Futures Exchange and SPX are service marks of Chicago Board Options Exchange, Incorporated. S&P and S&P 500 are trademarks of Standard & Poor s Financial Services, LLC and have been licensed for use by CBOE Futures Exchange, LLC (CFE). S&P does not sponsor, endorse, sell, or promote any S&P index-based investment product. Copyright 2012 CFE. All rights reserved. CBOE FUTURES EXCHANGE 17