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
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
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
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-13 48 15.65 16.20 25 18-Jan-13 20-Aug-12 396.41 106 77 41.29851 15-Feb-13 75 16.55 17.15 87 15-Feb-13 22-Oct-12 353.44 81 33 21.87491 15-Mar-13 105 17.20 17.80 100 15-Mar-13 19-Mar-12 484.88 251 184 21-Jun-13 86 19.55 19.95 95 130.6523 21-Jun-13 20-Jun-11 587.58 507 372 20-Sep-13 97 20.25 20.65 103 621.0312 20-Sep-13 24-Sep-12 20-Dec-13 561.69 103 21.20 21.60 251 125 53 31.4607 20-Dec-13 21-Dec-10 20-Jun-14 707.56 128 22.10 22.50 758 156 496 695.0652 20-Jun-14 18-Jun-12 19-Dec-14 135655.87 23.75 24.15 507124 121 78.11002 19-Dec-14 19-Dec-11 721.46 758 245 164.6751 CBOE FUTURES EXCHANGE 4
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-15-13 Side: Sell Trade ID: 106772:1268316180 Executed Total Vol: 100 Remaining Vol: 0 Price: 17.80 Position: N/A Date/Time: 2012/11/29 11:17:50.740 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=730.5701,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 5
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-15-13 Side: Sell Trade ID: 106772:1268316180 Executed Total Vol: 100 Remaining Vol: 0 Price: 17.80 Position: N/A Date/Time: 2012/11/29 11:17:50.740 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=730.5701,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 6
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-15-13 Side: Sell Trade ID: 106772:1268316180 Executed Total Vol: 100 Remaining Vol: 0 Price: 17.80 Position: N/A Date/Time: 2012/11/29 11:17:50.740 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=730.5701,VSIZE=10640,billingType=Taker CBOE FUTURES EXCHANGE 7
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 17.25 and is looking to terminate the swap on February 26, 2013. CBOE FUTURES EXCHANGE 8
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 17.25 but this time uses the CFE variance future Day Discount factor Par Variance ARMVM Futures price Futures P&L 0 0.9996 297.5625 0 1000 0 0 Total P&L 1 0.9996 291.2495 0 993.6893-6.31066 -$18,291.77 2 0.9996 308.7508-0.000028 1011.1841 11.1841 $32,417.72 52 0.9999 169.8330-0.024365 872.3035-127.7208-370,205.30 CBOE FUTURES EXCHANGE 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 17.25 but this time uses the CFE variance future Day Discount factor Par Variance ARMVM Futures price Futures P&L 0 0.9996 297.5625 0 1000 0 0 Total P&L 1 0.9996 291.2495 0 993.6893-6.31066 -$18,291.77 2 0.9996 308.7508-0.000028 1011.1841 11.1841 $32,417.72 52 0.9999 169.8330-0.024365 872.3035-127.7208-370,205.30 CBOE FUTURES EXCHANGE 10
Outright Customer Margins Expiration Symbol Margin per Variance unit Margin by Vega notional 18-Jan-13 VAF13 $175 17.45x 15-Feb-13 VAG13 $300 13.78x 15-Mar-13 VAH13 $100 10.21x 21-Jun-13 VAM13 $50 4.67x 20-Sep-13 VAU13 $125 3.76x 20-Dec-13 VAZ13 $50 3.33x 20-Jun-14 VAM14 $50 1.43x 19-Dec-14 VAZ14 $50 1.55x 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 ~ 10.21 times vega for 100K of 3-month variance CBOE FUTURES EXCHANGE 11
Spread Customer Margins Expiration 18-Jan-13 15-Feb-13 15-Mar-13 21-Jun-13 20-Sep-13 20-Dec-13 20-Jun-14 19-Dec-14 Symbol VAF13 VAG13 VAH13 VAM13 VAU13 VAZ13 VAM14 VAZ14 Scan Range $175 $300 $100 $50 $125 $50 $50 $50 Tier 1 2 3 4 5 6 7 8 18-Jan-13VAF13 $175 1 4-3 2-5 1-5 2-5 2-15 1-5 1-15 15-Feb-13VAG13 $300 2 $525 3-10 3-20 3-10 1-10 3-20 1-10 15-Mar-13VAH13 $100 3 $145 $475 1-2 1-1 1-3 1-2 1-3 21-Jun-13VAM13 $50 4 $85 $455 $20 2-1 2-3 1-1 2-3 20-Sep-13VAU13 $125 5 $225 $455 $30 $15 1-3 1-2 1-3 20-Dec-13VAZ13 $50 6 $240 $155 $35 $20 $10 3-2 1-1 20-Jun-14VAM14 $50 7 $140 $455 $45 $15 $15 $10 2-3 19-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
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. http://cfe.cboe.com/products/vacdata.aspx 18-Jan-13 15-Feb-13 15-Mar-13 21-Jun-13 20-Sep-13 20-Dec-13 20-Jun-14 19-Dec-14 Inception Date (SPX option listing) 20-Aug-12 22-Oct-12 19-Mar-12 20-Jun-11 24-Sep-12 21-Dec-10 18-Jun-12 19-Dec-11 Realized Variance to date 40.823856 21.400256 130.177678 620.556572 30.986046 694.590592 77.635365 164.200427 Number of expected Prices (Ne) 106 81 251 507 251 758 507 758 Number of returns elapsed 72 28 179 367 48 491 116 240 Previous settlement value 788.2177 714.0620 739.3040 833.4282 833.0102 689.5229 781.5450 713.7348 Discount Factor 0.999797702 0.999684369 0.999574166 0.999207147 0.9988745 0.998549324 0.997812656 0.996797229 Initial Strike (K0) 396.41 353.44 484.88 587.58 561.69 707.56 655.87 721.46 ARVM -0.048857-0.004568-0.06185-0.041569-0.049167-0.076532-0.068374-0.07661 Fed Funds Rate 0.0016 http://www.cfe.cboe.com/products/va_calculator.xls CBOE FUTURES EXCHANGE 13
S&P Volatility Term Structure December 10, 2012 http://www.cboe.com/data/volatilityindexes/volatilityindexes.aspx CBOE FUTURES EXCHANGE 14
http://www.cboe.com/data/volatilityindexes/volatilityindexes.aspx CBOE FUTURES EXCHANGE 15
How this relates to VIX derivatives Forward Variance / VIX futures / Convexity / VIX options CBOE FUTURES EXCHANGE 16
Disclaimer John Hiatt Director Research and Product Development hiattj@cboe.com 312.786.7779 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