Interactive Brokers Webcast. VIX Trading Strategies Russell Rhoads, CFA Senior Instructor The Options Institute CBOE

Transcription

1 Interactive Brokers Webcast VIX Trading Strategies Russell Rhoads, CFA Senior Instructor The Options Institute CBOE

2 Disclosure Statement 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 The information in this presentation is provided solely for general education and information purposes. No statement within this 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 and 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, CFE and VIX are registered trademarks and CBOE Futures Exchange, CBOE Short-Term Volatility Index, Execute Success, SPX, The Options Institute and VXST 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. 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 2013 CBOE. All rights reserved CBOE OPTIONS INSTITUTE 2

3 VIX Introduction Outline CBOE Volatility Index S&P 500 VIX Relationship VIX Futures VIX Options VIX ETPs Something New Summary / Q&A CBOE OPTIONS INSTITUTE 3

4 CBOE Volatility Index VIX Calculation The CBOE Volatility Index is based on SPX option prices The next two standard (third Friday) option series that have at least 8 days to expiration contribute to the formula The formula inputs all out of the money put and call options that are actively quoted Using a complex formula a hypothetical S&P 500 Index option that expires in 30 days is created The implied volatility of this hypothetical option is what is quoted as VIX Historically VIX has had an interesting relationship with the S&P 500 CBOE OPTIONS INSTITUTE 4

5 S&P 500 VIX Relationship Price Comparison VIX vs. S&P 500 Daily (Jan 2013 Oct 2013) S&P VIX Jan-13 Mar-13 May-13 Jul-13 Sep Source: Bloomberg CBOE OPTIONS INSTITUTE 5

6 S&P 500 VIX Relationship Price Comparison VIX vs. S&P 500 Weekly (Jan 2000 Oct 2013) S&P VIX Source: Bloomberg 0 CBOE OPTIONS INSTITUTE 6

7 S&P 500 VIX Relationship Inverse Relationship Jan 2000 Oct 2013 S&P 500 Higher VIX Lower % Opposite S&P 500 Lower VIX Higher % Opposite Correlation % % % % % % % % % % % % % % % % % % % % % % % % % % % % Sum % % CBOE OPTIONS INSTITUTE 7

8 S&P 500 VIX Relationship Inverse Relationship 10 Worst S&P 500 Days Jan 2000 Oct 2013 Date SPX % VIX % 10/15/ % 25.61% 12/1/ % 23.93% 9/29/ % 34.48% 10/9/ % 11.11% 11/20/ % 8.89% 8/8/ % 50.00% 11/19/ % 9.79% 10/22/ % 31.14% 4/14/ % 13.91% 10/7/ % 3.13% CBOE OPTIONS INSTITUTE 8

9 S&P 500 VIX Relationship Price Behavior VIX Distribution of Returns Jan 2007 Oct Daily Changes Over 10% Since CBOE OPTIONS INSTITUTE 9

10 Behavior of Implied Volatility Mean Reversion Implied volatility is a range-bound measure At times there may be some extreme moves But generally Implied Volatility oscillates around a mean In time A move up in VIX is usually followed by a drop A long period of complacency in VIX is usually followed by a spike CBOE OPTIONS INSTITUTE 10

11 Behavior of Implied Volatility Mean Reversion VIX vs. 10 Day Average Jan 2013 Oct Day Moving Average VIX VIX Day Average 10 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 11

12 VIX Futures Description The CBOE Futures Exchange lists VIX Futures out several consecutive months The value of a VIX Futures contract is $1000 times the price VIX Futures and VIX Options share the same settlement dates They also share a forward pricing characteristic that may result in confusion for traders that are new to VIX Option trading CBOE OPTIONS INSTITUTE 12

13 VIX Futures Pricing VIX Pricing 8/30/2013 VIX Index Jan Sep Feb Oct Mar Nov Apr Dec May Source: Bloomberg CBOE OPTIONS INSTITUTE 13

14 VIX Futures Pricing Futures Pricing Curve 8/30/ VIX Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Source: Bloomberg CBOE OPTIONS INSTITUTE 14

15 VIX Futures Pricing VIX Pricing 4/15/2013 VIX Index Aug Apr Sep May Oct Jun Nov Jul Dec Source: Bloomberg CBOE OPTIONS INSTITUTE 15

16 VIX Futures Pricing Futures Pricing Curve 4/15/ VIX Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 16

17 VIX Futures Futures Price Behavior August 2013 VIX vs. Index Aug 2013 VIX VIX 10 11/26/12 1/31/13 4/8/13 6/11/13 8/14/13 Source: Bloomberg CBOE OPTIONS INSTITUTE 17

18 VIX Futures Summary There is no fair value or arbitrage relationship between VIX and VIX futures prices VIX futures pricing reflects a combination of a risk premium for short sellers and the outlook that results in a VIX oscillating around an average price The front month future has historically had a close pricing relationship with price changes in the underlying VIX CBOE OPTIONS INSTITUTE 18

19 VIX Options Description VIX options are cash settled index options similar to SPX option contracts These options share a settlement value with VIX Futures that share an expiration date They also share the same forward volatility measure for valuation purposes Due to this valuation metric, VIX options may appear to be mispriced. CBOE OPTIONS INSTITUTE 19

20 VIX Options Pricing Pricing 1/4/ VIX Apr = Apr VIX The best underlying pricing for VIX options is the corresponding VIX future CBOE OPTIONS INSTITUTE 20

21 VIX Options Long Theta Trade (Own Options Make Money with Time) January 4, 2013 VIX at Outlook is for equity market to continue to trend upward and volatility to stay relatively low Forecast expects VIX to be unchanged into April Decide to take a look at a bearish VIX position and maybe buy a VIX April Put Buy 1 VIX Apr CBOE OPTIONS INSTITUTE 21

22 VIX Options Long VIX Put Long Theta Trade Payoff Diagram CBOE OPTIONS INSTITUTE 22

23 VIX Options Long Theta Trade Actual Outcome Wrong on VIX Still made April VIX Settlement CBOE OPTIONS INSTITUTE 23

24 VIX Options Summary Before trading VIX index options, be sure to understand the pricing and valuation of those options The difference between the underlying futures and VIX index may dictate a trade or strategy The leverage from the futures market can also be beneficial for VIX option trades CBOE OPTIONS INSTITUTE 24

25 VIX Strategy ETPs Introduction There is a wide variety of VIX-related strategies that are offered as either an Exchange Traded Note or Exchange Traded Fund The first exchange traded product that follows a VIX strategy was the ipath S&P 500 VIX Short Term Futures ETN (VXX) Since then there have been several other VIX-related ETNs introduced in the US VIX Exchange Traded Products are not direct investments in the VIX Index CBOE OPTIONS INSTITUTE 25

26 VIX Strategy ETPs Long Short Dated VXX, VIXY, VIIX Leverage Short Dated TVIX, UVXY Far Dated VIXM, VIIZ, VXZ Leveraged Far Dated TVIZ CBOE OPTIONS INSTITUTE 26

27 VIX Strategy ETPs Short Near Dated XXV, SVXY, XIV Long Dated ZIV CBOE OPTIONS INSTITUTE 27

28 VIX Strategy ETPs VXX vs. VIX VXX vs. VIX Jan 2013 Oct VXX VIX Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 28

29 VIX Strategy ETPs Price Behavior VXX Distribution of Returns Feb 2009 Oct Daily Changes Over 10% Since Feb CBOE OPTIONS INSTITUTE 29

30 VIX Strategy ETPs VXX Trade Tuesday October 8, 2013 VXX closed at It was up about 20% over five trading days based on the most recent crisis in Washington, DC A trader felt this 20% rise in VXX was unwarranted and that the ETP should follow a pattern of reverting back to lower levels Based on this outlook they consider a bear call spread with short dated options CBOE OPTIONS INSTITUTE 30

31 VIX Strategy ETPs VXX Trade October 11 th Call Quotes Option Bid Ask VXX Oct 11th 16 Call VXX Oct 11th 17 Call VXX Oct 11th 18 Call VXX Oct 11th 19 Call VXX Oct 11th 20 Call Sell 1 VXX Oct 11 th Buy 1 VXX Oct 11 th CBOE OPTIONS INSTITUTE 31

32 VIX Strategy ETPs VXX Trade VXX Oct 11 th 17 / 19 Bear Call Spread Payoff Table VXX Short VXX Oct 11th 17 Call (1.00) (2.00) (3.00) Long VXX Oct 11th 19 Call Credit P/L (0.60) (1.60) (1.60) CBOE OPTIONS INSTITUTE 32

33 VIX Strategy ETPs VXX Trade VXX Oct 11 th 17 / 19 Bear Call Spread Payoff Diagram CBOE OPTIONS INSTITUTE 33

34 VIX Strategy ETPs Summary Be aware that VIX Exchange Traded Products base their performance on a strategy and not the index Often these ETPs will change in value even if VIX is flat At times, the ETP may even move in the opposite direction than a trader would expect This is due to the ETPs being based on futures strategies and not directly holding the VIX index CBOE OPTIONS INSTITUTE 34

35 Something New VXST The CBOE Short-term Volatility Index SM (VXST SM ) was introduced on October 1 st at the CBOE Risk Management Conference It is a measure of nine-day implied volatility as indicated by SPX option pricing Historically VXST has a wider range and has been more volatile than VIX CBOE has daily closing numbers for VXST going back to January CBOE OPTIONS INSTITUTE 35

36 Something New VXST vs. VIX VXST vs. VIX Jan 2011 Oct VXST VIX Jan-11 Sep-11 May-12 Jan-13 Sep-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 36

37 Something New VXST vs. VIX VXST VIX Jan 2011 Oct Jan-11 Sep-11 May-12 Jan-13 Sep-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 37

38 Volatility as an Asset Class Summary VIX has historically had an inverse relationship with the S&P 500 VIX options and futures both give traders an easy and efficient method of gaining exposure to market volatility The exchange traded products based on VIX focus on a strategy and not replicating the spot VIX index VXST has been out about a month and is generating a lot of attention from VIX traders CBOE OPTIONS INSTITUTE 38

39 Questions / Contact Me Russell Rhoads Links CBOE OPTIONS INSTITUTE 39