Introduction to VIX Futures Russell Rhoads, CFA Instructor The Options Institute
CBOE Disclaimer Options and futures involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker by calling 1-888-OPTIONS, or at www.theocc.com. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all securities and futures transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. The information in this presentation, including any strategies discussed, is strictly for illustrative and educational purposes only and is not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities or futures. Supporting documentation for any claims, comparisons, recommendations, statistics, or other technical data, will be supplied upon request. Past performance is not a guarantee of future results. CBOE, Chicago Board Options Exchange, CBOE Volatility Index, VIX and The Options Institute Logo are registered trademarks and SPX is a servicemark of CBOE. S&P, and S&P 500 are registered trademarks of the McGraw-Hill Companies, Inc. and are licensed for use by CBOE. Standard & Poor's does not promote, market, sell or endorse any product based upon its indices. CBOE is not affiliated with Interactive Brokers. Copyright 2011 Chicago Board Options Exchange, Incorporated. All rights reserved. 2
Outline CBOE Volatility Index VIX Futures Basics The VIX Futures Pricing Curve VIX Futures as a SPX Signal VIX / SPX Relationship Summary / Q&A 3
VIX Index The VIX CBOE Volatility Index. Measures S&P 500 implied volatility. Based on S&P 500 Option bid/ask quotes. Uses the nearby options with at least 8 days until expiration. Has been promoted as a fear index by the business media. 4
VIX Index A Brief History of the VIX 1993 VIX introduced in a paper. 2003 VIX calculation changed. 2004 futures contracts introduced. 2006 options on VIX begin trading. 2008 binary options on the VIX. 2009 mini-vix futures introduced. 2010 Weekly Options on VIX Futures. 5
VIX Futures VIX Futures Value is $1000 x the level of the VIX Index. Trade the next 8 months of expiration. Expire on Wednesday 30 days before corresponding S&P 500 option expiration. Have very unique characteristics relative to other financial futures. 6
VIX Futures Pricing VIX Future Feb 2011 VIX VXG1 @ 21.65 = $21,650 Minimum price move =.05 or $50. +/- 1.00 price change = +/- $1000. 7
VIX Futures Expiration Months VIX Futures Next 8 Months Currently Jan, Feb, Mar, Apr, May, Jun, Jul, Aug 8
VIX Futures Open Interest Growth - 160,000 120,000 80,000 40,000 0 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 9
VIX Futures Wednesday Settlement 30 Days Before the Next Option Settlement Date VIX Option Expiration Next Standard Option Expiration January 2011 Jan 19 Feb 18 February 2011 Feb 16 Mar 18 March 2011 Mar 16 Apr 15 April 2011 Apr 20 May 20 May 2011 May 18 Jun 17 June 2011 Jun 15 Jul 15 July 2011 Jul 20 Aug 19 August 2011 Aug 17 Sep 16 10
VIX Futures Settlement Pricing VIX futures are AM settled contracts. AM settlement involves a special calculation of the VIX Index taking place the morning after the end of trading for a futures contract. This is known as the Special Opening Quotation. 11
VIX Futures Special Opening Quotation (SOQ) This is a unique VIX index quote that involves only actual S&P 500 option trades. The regular VIX Index calculation uses the mid-point between bids and offers. The symbol for the SOQ is VRO. 12
VIX Futures AM Settlement Recent Results Settlement Date VIX Index Tuesday Close VIX Future Tuesday Close VIX AM Settlement Dec 2010 16.49 16.75 16.01 Nov 2010 22.58 22.25 22.21 Oct 2010 20.63 20.95 21.41 Sep 2010 21.56 21.70 22.97 Aug 2010 24.33 24.35 24.82 July 2010 23.93 24.40 23.79 June 2010 25.87 25.85 26.11 May 2010 33.55 32.70 34.53 April 2010 15.73 16.00 15.80 March 2010 17.69 17.45 16.68 February 2010 22.25 22.60 22.50 January 2010 17.58 17.85 18.87 13
VIX Futures AM Settlement Settlement Date Index Value Future Value Settlement Value Dec 2010 $16,490 $16,750 $16,010 Sep 2010 $21,560 $21,700 $22,970 May 2010 $33,550 $32,700 $34,530 March 2010 $17,690 $17,450 $16,680 AM Settlement May Result in a Surprise 14
VIX Futures Unique Features Pricing is anticipatory, no cost of carry. Future price reflects market opinion of the future direction of the spot VIX Index. At times the VIX future price is higher than the index and at times it is lower. 15
VIX Futures 32.00 29.00 26.00 Index Future 23.00 20.00 17.00 14.00 11.00 6/1/07 6/15/07 6/29/07 7/13/07 7/27/07 8/10/07 8/24/07 9/7/07 9/21/07 16
VIX Futures 43.00 40.00 37.00 Index Future 34.00 31.00 28.00 25.00 22.00 4/1/09 4/15/09 4/29/09 5/13/09 5/27/09 6/10/09 6/24/09 7/8/09 7/22/09 17
VIX Futures 10 Worst S&P 500 Days Since 2007 Date SPX Change VIX Front Month Future Change 10/15/2008-9.03% 18.61% 12/1/2008-8.93% 13.61% 9/29/2008-8.81% 14.14% 10/9/2008-7.62% 14.79% 11/20/2008-6.71% 5.29% 11/19/2008-6.12% 9.79% 10/22/2008-6.10% 10.34% 10/7/2008-5.74% 11.93% 1/20/2009-5.28% 10.09% 11/5/2008-5.27% 8.12% 11/12/2008-5.19% 9.13% 18
VIX Futures Curve Taking VIX Index and VIX Futures prices a curve of the pricing may be developed There is a typical shape to the curve with contracts that have more time to expiration having higher pricing This shape does not always hold up, but is prevalent in a normal market environment 19
VIX Futures Curve VIX Index and Futures Prices 11/15/10 - Close VIX Index 20.20 Nov 10 19.75 Dec 10 21.95 Jan 11 25.05 Feb 11 26.00 Mar 11 26.75 Apr 11 27.05 May 11 27.35 Jun 11 27.65 20
VIX Futures Curve VIX Index and Futures Prices 11/15/10-29 27 25 23 21 19 17 VIX Index Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 21
VIX Futures Curve VIX Index and Futures Prices 11/16/09 - Close VIX Index 22.89 Nov 09 23.40 Dec 09 25.45 Jan 10 27.00 Feb 10 27.60 Mar 10 27.55 Apr 10 27.90 May 10 27.60 Jun 10 27.65 22
VIX Futures Curve VIX Index and Futures Prices 11/16/09-29 27 25 23 21 VIX Index Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 23
VIX Futures Curve VIX Index and Futures Prices 11/14/08 - Close VIX Index 66.31 Nov 08 62.90 Dec 08 53.51 Jan 09 49.66 Feb 09 46.09 Mar 09 42.35 Apr 09 40.13 May 09 39.28 Jun 09 38.82 24
VIX Calendar Spread VIX Index and Futures Prices 11/14/08-70 65 60 55 50 45 40 35 VIX Index Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 25
VIX Futures Curve Typical Curve 27 26 25 24 23 22 Sell Short Buy 21 20 VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 26
VIX Futures Curve Four Months Later Normal Curve 27 26 25 24 23 22 21 Cover Short Sell Long 20 VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 27
VIX Futures Curve Four Months Later Volatility Spike 40 36 Cover Short 32 28 24 Sell Long 20 VIX Index Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 28
VIX vs. SPX There is an inverse relationship between the VIX and the S&P 500 Generally when the S&P 500 is under pressure the VIX moves higher This inverse relationship creates a wide variety of trading opportunities 29
VIX vs. SPX University of Massachusetts Paper Studied the 2008 market and the diversification benefits of VIX futures or options. Compared a variety of portfolios and combined exposure to the VIX. Results showed return and diversification benefits of including the VIX in a portfolio. 30
VIX vs. SPX University of Massachusetts Paper Full study available on the CBOE website. www.cboe.com/institutional/reports.aspx 31
VIX Futures as a SPX Signal From the 10 Worst Days - Date SPX Change VIX Front Month Future Change 11/20/2008-6.71% 5.29% Guess What Happened the Next Few Days Date SPX Change 11/21/2008 +6.32% 11/24/2008 +6.47% 11/25/2008 +0.66% 11/26/2008 +3.53% 32
VIX vs. SPX 1050 1000 950 900 850 800 750 11/20/2008 700 11/3/08 11/7/08 11/13/08 11/19/08 11/25/08 12/2/08 12/8/08 Data Source Bloomberg 33
VIX vs. SPX 5/6/2010 5 Min 1180 42.50 1160 38.50 1140 1120 S&P 500 VIX Index 34.50 30.50 1100 26.50 1080 8:30 9:30 10:30 11:30 12:30 13:30 14:30 22.50 Data Source Bloomberg 34
VIX vs. SPX 5/6/2010 5 Min 1180 42.50 1160 38.50 1140 1120 S&P 500 May VIX Future 34.50 30.50 1100 26.50 1080 8:30 9:30 10:30 11:30 12:30 13:30 14:30 22.50 Data Source Bloomberg 35
VIX vs. SPX 5/6/2010 5 Min 42.5 38.5 34.5 VIX Index May VIX Future 30.5 26.5 22.5 8:30 9:30 10:30 11:30 12:30 13:30 14:30 Data Source Bloomberg 36
VIX vs. SPX VIX Futures are 100% anticipatory There is an inverse relationship between the S&P 500 Index and the VIX Futures prices are based on the direction the market expects the VIX Index to settle at expiration Since futures anticipate the VIX they also indicate the market s expectation regarding the S&P 500 37
VIX vs. SPX The VIX often has a relationship (inverse) to the price changes in the S&P 500 At times when you have an opinion regarding the S&P 500, using VIX futures may be a good alternative 38
Summary VIX Futures may be traded against each other to take advantage of the effect of time on each contract Some market observers use the VIX and VIX futures as a signal for the overall market The VIX and related futures may also be directionally traded based on an outlook for the overall stock market Next Month We will cover these three points in depth! 39
Contact / Presentation CBOE Volatility Index www.cboe.com/vix CBOE Futures Exchange www.cfe.cboe.com Russell Rhoads rhoads@cboe.com 40