Interactive Brokers Webcast Calendar and Diagonal Spreads with Volatility ETPs November 19, 2014 Presented by Russell Rhoads, CFA
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 1-888- OPTIONS, or from The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors, and involves risk of loss. 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 futures contract 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 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, Execute Success and VIX are registered trademarks and The Options Institute is a service mark of Chicago Board Options Exchange, Incorporated (CBOE). S&P and S&P 500 are registered trademarks of Standard & Poor's Financial Services, LLC and have been licensed for use by CBOE and CBOE Futures Exchange, LLC. CBOE s financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor s, and Standard & Poor s makes no representation regarding the advisability of investing in such products. All other trademarks and service marks are the property of their respective owners. Proshares and ishares financial products are not sponsored, endorsed, sold or promoted by CBOE and CBOE makes no representation regarding the advisability of investing in such products. An investor should consider the investment objectives, risks, charges, and expenses of these products carefully before investing. This and other information about these products, including prospectuses, can be found at www.isharesetn.com and www.proshares.com. CBOE is not affiliated with Interactive Brokers, ishares or Proshares. 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
Volatility ETPs Outline Introduction / Review of ETPs VIX Futures Price Behavior ETP Option Pricing Resources / Contact THE OPTIONS INSTITUTE at CBOE 3
Volatility ETPs Introduction Three VIX ETPs with Weekly Options ipath S&P 500 VIX Short-Term Futures TM ETN (VXX) ProShares Ultra VIX Short-Term Futures ETF (UVXY) ProShares Short VIX Short-Term Futures ETF (SVXY) THE OPTIONS INSTITUTE at CBOE 4
Volatility ETPs ipath S&P 500 VIX Short-Term Futures ETN (VXX) Introduced in late January 2009 The fund is designed to match a consistent thirty day weighting in the front two month VIX futures contracts Each day the VXX portfolio is rolled which may result in a positive or negative roll yield effect on the value of the fund The dollar weighting of VIX futures in VXX may be found at the ipath website THE OPTIONS INSTITUTE at CBOE 5
Volatility ETPs ipath S&P 500 VIX Short-Term Futures ETN (VXX) 2014 Price Action 60 50 40 VXX 30 20 VIX 10 0 1/2 2/5 3/11 4/11 5/15 6/18 7/22 8/22 9/25 10/28 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 6
Volatility ETPs ipath S&P 500 VIX Short-Term Futures ETN (VXX) Daily Holdings 11/11/2014 75.96% December VIX Futures 24.04% November VIX Futures Source: www.ipathetn.com THE OPTIONS INSTITUTE at CBOE 7
Volatility ETPs Ultra VIX Short-Term Futures ETF (UVXY) UVXY is designed to return two times the daily performance of the S&P 500 VIX Short-Term Futures Index The roll yield that puts pressure on VXX can be more significant in the performance of this fund in low volatility environments When there is extra volatility in the market the spikes in UVXY have been more accentuated than moves in VXX THE OPTIONS INSTITUTE at CBOE 8
Volatility ETPs Ultra VIX Short-Term Futures ETF (UVXY) 2014 Price Action 120 100 80 UVXY 60 40 VIX 20 0 1/2 2/5 3/11 4/11 5/15 6/18 7/22 8/22 9/25 10/28 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 9
Volatility ETPs Ultra VIX Short-Term Futures ETF (UVXY) Daily Holdings 11/11/2014 152% December VIX Futures 48% November VIX Futures Source: www.proshares.com THE OPTIONS INSTITUTE at CBOE 10
Volatility ETPs Short VIX Short-Term Futures ETF (SVXY) SVXY is designed to return the inverse daily performance of the S&P 500 VIX Short-Term Futures Index Historically SVXY performance has benefitted from the negative roll yield associated with the index In times of higher volatility the fund has come under tremendous pressure as well THE OPTIONS INSTITUTE at CBOE 11
Volatility ETPs Short VIX Short-Term Futures ETF (SVXY) 2014 Price Action 55 100 45 80 35 60 25 40 15 20 5 1/2 2/5 3/11 4/11 5/15 6/18 7/22 8/22 9/25 10/28 0 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 12
Volatility ETPs Short VIX Short-Term Futures ETF (SVXY) Daily Holdings 11/11/2014 Short 76% December VIX Futures Short 24% November VIX Futures Source: www.proshares.com THE OPTIONS INSTITUTE at CBOE 13
VIX Futures Pricing Contango / Backwardation Generic Example Positive Roll Yield Negative Roll Yield VIX Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 THE OPTIONS INSTITUTE at CBOE 14
VIX Futures Pricing Roll Yield Impact Annual Performance Analysis VIX 1Mo 2Mo Contango VIX 1Mo 2Mo Backwardation Year VXX* Performance UVXY* Performance SVXY* Performance 2007 42.93% 28.50% -51.07% 70.52% 29.48% 2008 109.71% 177.91% -69.31% 51.38% 48.62% 2009-64.90% -90.69% 115.65% 72.22% 26.98% 2010-71.99% -94.59% 144.49% 93.25% 6.35% 2011-3.72% -48.87% -45.47% 68.25% 30.95% 2012-77.92% -97.25% 162.35% 99.20% 0.80% 2013-65.72% -91.56% 107.98% 96.03% 3.57% 2014-26.15% -54.75% 11.95% 89.89% 6.91% Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 15
ETP Option Pricing VXX Term Structure 9 Day Options 90 80 70 60 50 40 30 VXX @ 28.25 20 26.00 26.50 27.00 27.50 28.00 28.50 29.00 29.50 30.00 30.50 31.00 31.50 32.00 32.50 33.00 33.50 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 16
ETP Option Pricing VXX Term Structure 30 Day Options 90 80 70 60 50 40 VXX @ 28.25 30 20 26.00 26.50 27.00 27.50 28.00 28.50 29.00 29.50 30.00 30.50 31.00 31.50 32.00 32.50 33.00 33.50 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 17
ETP Option Pricing VXX Diagonal Trade VXX at 28.25 Want to be prepared for a spike in volatility over the next nine days Hope to limit the losses if VIX stays low Buy 1 30 Day 26 Call @ 2.90 Sell 1 9 Day 30 Call @ 0.50 Net Cost = 2.40 THE OPTIONS INSTITUTE at CBOE 18
ETP Option Pricing VXX Diagonal Trade 9 Day Expiration Payoff Diagram 3.00 2.00 VXX @ 28.25 1.00 0.00 26 28 30 32-1.00 Break Even 27.90-2.00-3.00 THE OPTIONS INSTITUTE at CBOE 19
ETP Option Pricing UVXY Term Structure 9 Day Options 140 130 120 UVXY @ 21.75 110 100 90 80 19.00 20.00 21.00 22.00 23.00 24.00 25.00 26.00 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 20
ETP Option Pricing UVXY Term Structure 30 Day Options 140 130 120 UVXY @ 21.75 110 100 90 80 19.00 20.00 21.00 22.00 23.00 24.00 25.00 26.00 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 21
ETP Option Pricing UVXY Calendar Spread UVXY at 21.66 expect VIX to be fairly quiet for the next week and a half Neutral VIX means UVXY would be expected to drift lower Sell 1 UVXY 9 Day 20 Call @ 2.15 Buy 1 UVXY 65 Day 20 Call @ 4.70 Net Cost = 2.55 THE OPTIONS INSTITUTE at CBOE 22
ETP Option Pricing UVXY Calendar Spread 9 Day Expiration Payoff Diagram 1.50 1.00 0.50 Break Even 18.50 Break Even 22.25 0.00 16 18 20 22 24 26-0.50-1.00 UVXY @ 21.66-1.50-2.00 THE OPTIONS INSTITUTE at CBOE 23
ETP Option Pricing SVXY Term Structure 9 Day Options 65 60 SVXY @ 73.50 55 50 45 40 35 68.50 69.50 70.50 71.50 72.50 73.50 74.50 75.50 76.50 77.50 78.50 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 24
ETP Option Pricing SVXY Term Structure 30 Day Options 65 60 SVXY @ 73.50 55 50 45 40 35 68.50 69.50 70.50 71.50 72.50 73.50 74.50 75.50 76.50 77.50 78.50 Source: Bloomberg THE OPTIONS INSTITUTE at CBOE 25
ETP Option Pricing SVXY Trading Recent SVXY Price Action 100 90 80 70 60 50 40 30 8/1 8/14 8/27 9/10 9/23 10/6 10/17 10/30 THE OPTIONS INSTITUTE at CBOE 26
ETP Option Pricing SVXY Trading October 15 SVXY down over 30% from recent highs trading around 55.00 Consider buying a longer dated call option When volatility calms down opportunistically sell shorter dated calls against the long position October 15 Buy 1 SVXY Mar 50 Call at 13.00 THE OPTIONS INSTITUTE at CBOE 27
Volatility ETPs Summary Each of the three volatility oriented ETPs with short dated options available for trading have their own unique price behavior and option price behavior Due to historical periods of extreme moves, the options may appear to be expensive Calendar and diagonal spreads are methods for trading a particular outlook for market volatility THE OPTIONS INSTITUTE at CBOE 28
Volatility ETPs Resources / Contact Resources www.cboe.com/weeklys www.ipathetn.com www.proshares.com www.cboe.com/volatility Contact rhoads@cboe.com Twitter - @russellrhoads THE OPTIONS INSTITUTE at CBOE 29