Chicago Board Options Exchange Trading the VIX VIX Futures and VIX Options Presented by The s Options Institute www.cboe.com 1
Disclosures In order to simplify the computations, commissions have not been included in the examples used in these materials. Commission costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Options involve risks and are not suitable for everyone. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained from your broker or from The Chicago Board Options Exchange, 400 S. LaSalle, Chicago, IL 60605. Investors considering options should consult their tax advisor as to how taxes may affect the outcome of contemplated options transactions. 2
Presentation Outline What is the VIX? VIX and the Market VIX Futures Contract Specs & Pricing VIX Options Unique Characteristics Trading Case Studies 3
VIX The Volatility Index VIX: a measure of 30-day implied volatility Created in 1993 by & Duke Univ. Goal: to trade and hedge against changing implied volatility Originally based on OEX options 2003 New formula based on SPX options 4
VIX & SPX 1/04-12/04 50.00 1250.00 1200.00 40.00 1150.00 30.00 1100.00 1050.00 20.00 1000.00 10.00 950.00 02/11/04 03/23/04 05/03/04 06/14/04 07/23/04 09/01/04 10/12/04 11/19/04 12/31/04 5
VIX & SPX 1/06-1/07 1500 50 1450 45 1400 40 1350 1300 1250 1200 1150 35 30 25 20 1100 15 1050 10 1000 5 2/7/06 4/5/06 6/2/06 7/31/06 9/26/06 11/21/06 1/23/07 6
VIX & SPS 4/07-3/08 80.00 1600.00 70.00 1500.00 60.00 50.00 1400.00 VIX SPX 40.00 1300.00 30.00 1200.00 20.00 10.00 1100.00 04/17/07 06/13/07 08/09/07 10/05/07 12/03/07 01/31/08 03/31/08 SPX VIX 7
VIX and the S&P 500 VIX is also known as the Fear Index. VIX tends to rise as the S&P 500 falls. Why? Options are like insurance. Volatility corresponds to risk. When people are afraid, they are willing to pay more for insurance. 8
VIX and the S&P 500 A low VIX indicates complacency. A high VIX indicates anxiety. What kind of market indicator is VIX? Leading Lagging Coincident? VIX readings are very difficult to interpret as an indicator of market direction. 9
VIX Highs and Lows Is the VIX today high or low? 25.22 The VIX today is 4/2/08 10
VIX All-Time High & Low VIX All-Time High Date 45.74?? 10?? / 8 / 98 VIX All-Time Low Date 9.31?? 12 /?? 22 / 93 11
1800 1500 1200 900 600 300 0 50 40 30 20 10 0 12 VIX SPX 1/2/2007 1/2/1990 1/2/1991 1/2/1992 1/2/1993 1/2/1994 1/2/1995 1/2/1996 1/2/1997 1/2/1998 1/2/1999 1/2/2000 1/2/2001 1/2/2002 1/2/2003 1/2/2004 1/2/2005 1/2/2006 1/2/2008 VIX & SPX 1990 March 2008
VIX Options Contract Specs Launched February 24, 2006 Ticker Symbol VIX Cash-settled $100 multiplier 1-point strikes below 20; 2½ above European-style exercise 13
European-Style Exercise Cannot be exercised early. Do not confuse exercise with trade. VIX options can be traded on any day. They can be exercised only at expiration. 14
VIX Options Contract Specs 6 expirations available (3 near term plus 3 in February quarterly cycle) If today is June 1, what expirations of VIX options are open for trading? 3 near-term: June, July, August 3 from Feb cycle: Nov, Feb, May 15
VIX Settlement (at Expiration) VIX expiration is the Wednesday 30 days prior to the next month s option expiration. Last trading day is the day before (Tues). 4 Weeks between stock option exp. VIX options settle on the Wed before 5 Weeks between stock option exp. VIX options settle on the Wed after. 16
VIX Settlement (at Expiration) Expiration settlement based on special VIX calculation using next-month options. Examples: May VIX settlement uses June SPX options. June VIX settlement uses July SPX options. July VIX settlement uses Aug SPX options. 17
VIX Options Pricing Date: 3/10 Anything unusual? Current VIX Index 22.70 May VIX Futures 24.50 Estimated May 25 Call 1.25 Estimated May 25 Put 1.75? 18
Inputs to Option Prices Underlying Price Strike Price Time to Expiration Interest Rates The VIX futures price is the underlying price for VIX options. Volatility Use 0% (to mimic the Black model) 19
Finding VIX Futures Prices VIX futures are traded at the Futures Exchange (CFE) www.cboe.com/cfe market data historical data free data is 20-minute delayed 20
Futures Prices / Underlying prices Corn is 4.00 per bushel Interest rates are 5% What is the price of a 1-yr Corn futures contract? Cash price + Cost of Carry = Futures Price 4.00 +.20 = 4.20 21
Futures Prices / Underlying prices The VIX index is 20.00 Interest rates are 5% What is the price of a 1-yr VIX futures contract? Before you answer, consider some history.. 22
35 30 25 20 15 10 5 VIX Index vs. August 07 VIX Futures Aug 07 VIX Futures VIX Index 8/2/2007 8/16/2007 23 2/1/2007 2/15/2007 3/1/2007 3/15/2007 3/29/2007 4/12/2007 4/26/2007 5/10/2007 5/24/2007 6/7/2007 6/21/2007 7/5/2007 7/19/2007 Futures VIX
35.00 30.00 25.00 20.00 15.00 10.00 VIX Index vs. November 07 VIX Futures 24 2/20/2007 3/20/2007 4/20/2007 5/20/2007 6/20/2007 7/20/2007 8/20/2007 9/20/2007 10/20/2007 11/20/2007 VIX VIX Futures 07 Nov
35.00 30.00 25.00 20.00 15.00 VIX Index vs. Jan 08 VIX Futures 25 12/31/07 01/07/08 01/14/08 12/24/07 10/29/07 11/05/07 11/12/07 11/19/07 11/26/07 12/03/07 12/10/07 12/17/07 VIX Jan 08 VIX Fut 10/22/07 10/15/07 10/08/07 09/24/07 10/01/07
VIX Futures vs. Index (Sample Dates) Date VIX 08 Jan Fut Date VIX 08 Jan Fut 11/28/07 24.11 23.29 12/12/07 22.47 22.22 11/29/07 23.97 23.38 12/13/07 22.56 22.52 11/30/07 22.87 23.02 12/14/07 23.27 23.27 12/03/07 23.61 23.25 12/17/07 24.52 24.00 12/04/07 23.79 23.48 12/18/07 22.64 23.20 12/05/07 22.53 22.61 12/19/07 21.68 23.02 12/06/07 20.96 21.59 12/20/07 20.58 22.66 12/07/07 20.85 21.98 12/21/07 18.47 21.39 12/10/07 20.74 21.48 12/24/07 18.60 20.46 12/11/07 23.59 22.61 12/26/07 18.66 20.23 26
VIX Futures vs. VIX Index What is the futures-to-index relationship? No traditional futures-to-cash relationship! There is no cost-of-carry relationship. The front-month VIX futures contract is most responsive to the Index 27
VIX Futures vs. VIX Index What does the VIX futures price mean? The VIX futures price is the market s estimate of what the VIX Index will be at settlement. VIX futures can trade at a premium or a discount to the VIX Index. 28
VIX Case Study 1 Date 7/23 (30 days to Aug expiration) VIX Index 19.81 VIX AUG Futures 19.54 VIX AUG 20 Call 1.85 29
Case Study 1 the Forecast - 1 Date 7/23 7/27 VIX Index 19.81 28.17 AUG Futures 19.54??? AUG 20 Call 1.85??? 30
Case Study 1 the Forecast - 2 Date 7/23 7/27 VIX Index 19.81 28.17 AUG Futures 19.54 26.00 AUG 20 Call 1.85??? 31
Case Study 1 the Forecast - 3 Date 7/23 7/27 VIX Index 19.81 28.17 AUG Futures 19.54 26.00 AUG 20 Call 1.85 6.20 NOTE: The 20 Call appears to be trading below parity to the VIX index! 32
VIX Case Study 2 Date 5/1 (16 days to May exp) VIX Index 29.65 VIX MAY Futures 30.40 VIX MAY 30 Call 2.20 VIX MAY 30 Put 1.80 VIX MAY 25 Put 0.60 33
Case Study 2 the Forecast - 1 Date 5/1 5/9 VIX Index 29.65 26.00 VIX MAY Futures 30.40?? VIX MAY 30 Call 2.20?? VIX MAY 30 Put 1.80?? VIX MAY 25 Put 0.60?? 34
Case Study 2 the Forecast - 2 Date 5/1 5/9 VIX Index 29.65 26.00 VIX MAY Futures 30.40 25.50 VIX MAY 30 Call 2.20?? VIX MAY 30 Put 1.80?? VIX MAY 25 Put 0.60?? 35
Case Study 2 the Forecast - 3 Date 5/1 5/9 VIX Index 29.65 26.00 VIX MAY Futures 30.40 25.50 VIX MAY 30 Call 2.20 0.20 VIX MAY 30 Put 1.80 4.50 VIX MAY 25 Put 0.60?? 36
Case Study 2 the Forecast - 4 Date 5/1 5/9 VIX Index 29.65 26.00 VIX MAY Futures 30.40 25.50 VIX MAY 30 Call 2.20 0.20 VIX MAY 30 Put 1.80 4.50 VIX MAY 25 Put 0.60 0.65 37
Conclusions VIX Options The underlying price for VIX options is the VIX Futures price. The front month futures and options are most responsive to the VIX Index. 38
The Volatility of Volatility Underlying 8/31/07 Price 06 Volatility VIX 23.55 94.2% VIX Futures (near) 22.68 56.0% SPX 1,477.38 10.0% NDX 1,992.03 15.7% RUT 794.16 17.4% GOOG 515.30 34.0% AAPL 138.30 38.1% GM 30.95 41.3% MSFT 28.83 21.0% 39
Summary 1 VIX is an index of implied volatility of SPX options. VIX has been negatively correlated to the market. VIX futures and options have unique contract specifications. 40
Summary 2 VIX futures prices are based on expectations, not cost of carry, and can swing from a premium to a discount. The underlying price for VIX options is the VIX Futures price. 41
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