Al Alternative i V Volatility l ili Indexes I d Russell Rhoads, CFA Instructor The Options Institute 211 Chicago Board Options Exchange, Incorporated. All rights reserved.
CBOE Disclaimer Options 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 from The Options Clearing Corporation, One North Wacker Drive, Suite 5, Chicago, Illinois 666. 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. 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. Supporting documentation for any claims, statistics or other technical data in this presentation is available by calling 1-888-OPTIONS, or contacting CBOE at www.cboe.com/contact. Past performance is not a guarantee of future results. CBOE, Chicago Board Options Exchange, CBOE Volatility Index CFE and VIX, are registered trademarks and CBOE Futures Exchange, EVZ, GVZ, ICJ, JCJ, KCJ, RVX, SKEW, OVX, VXD, VXN, VXO, VXV, VPD, VPN, VTY and Weeklys are service marks of Chicago Board Options Exchange, Incorporated (CBOE). All other trademarks and service marks are the property of their respective owners. CBOE and CFE are not affiliated with Interactive Brokers. Copyright 211 CBOE. All rights reserved. 2
Outline VIX Review Alternative Volatility Indexes Euro Currency Oil Gold Equity Specific Stocks Exchange Traded Funds 3
Outline Equity Market Indexes Other Market Indexes 3-Month Volatility Index SKEW Strategy Indexes Uses as an Indicator VIX Network Summary / Q&A Contact t 4
VIX Review The VIX CBOE Volatility Index. Measures S&P 5 implied volatility. Based on S&P 5 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. 5
VIX Review Trading Products VIX Futures VIX Options Weekly Options on VIX Futures Over a Dozen Exchange Traded Fund / Note products 6
Alternative Volatility Indexes Euro Currency (EVZ) CBOE EuroCurrency Volatility Index Measures market expectation of volatility of the $US / Euro exchange rate Based on option prices on FXE exchange traded fund 7
Alternative Volatility Indexes FXE - EVZ 175 5 15 125 1 75 5 25 4 3 2 1 Jan-8 May-8 Sep-8 Jan-9 Jun-9 Oct-9 Feb-1 Jul-1 Nov-1 Mar-11 8
Alternative Volatility Indexes Oil (OVX) CBOE Crude Oil Volatility Index Measures market expectations of volatility of the crude oil market Based on option pricing of USO exchange traded fund CBOE filed for approval to trade options on this index 9
Alternative Volatility Indexes USO - OVX 125 2 1 15 75 1 5 25 5 May-7 Oct-7 Mar-8 Aug-8 Feb-9 Jul-9 Dec-9 Jun-1 Nov-1 1
Alternative Volatility Indexes USO WTI Oil 125 2 1 15 75 1 5 25 5 May-7 Oct-7 Mar-8 Aug-8 Feb-9 Jul-9 Dec-9 Jun-1 Nov-1 11
Alternative Volatility Indexes Gold (GVZ) CBOE Gold ETF Volatility Index Measures market expectations of volatility of the price of gold Based on option pricing of GLD ETF Futures and options available on this Index 12
Alternative Volatility Indexes GLD - GVZ 15 1 125 1 75 5 25 Jun-8 Nov-8 Apr-9 Sep-9 Mar-1 Aug-1 Jan-11 9 8 7 6 5 4 3 2 1 13
Equity Specific Volatility Stocks Amazon AMZN VXAZN Apple AAPL VXAPL Goldman Sachs GS VXGS Google GOOG VXGOG IBM IBM VXIBM 14
Equity Specific Volatility AMZN VXAZN 2 75 15 6 45 1 3 5 15 Jun-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 15
Equity Specific Volatility AAPL VXAPL 4 75 35 3 25 5 2 15 1 25 5 Jun-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 16
Equity Specific Volatility GS VXGS 2 75 15 6 45 1 3 5 15 Jun-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 17
Equity Specific Volatility GOOG VXGOG 2 75 15 6 45 1 3 5 15 Jun-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 18
Equity Specific Volatility IBM VXIBM 2 75 15 6 45 1 3 5 15 Jun-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 19
Equity Specific Volatility Stocks 3 day implied volatility indicated by option pricing Plans to add more names over time CBOE has filed for approval to trade options on these indexes 2
Equity Specific Volatility Exchange Traded 3 day implied volatility indicated by option pricing Plans to add more names over time Number of instruments with derivative trading to expand over time 21
Equity Specific Volatility Exchange Traded Funds EuroCurrency XLF EVZ Gold GLD GVZ Crude Oil USO OVX Emerging eg gmarkets EEM VXEEM Silver SLV VXSLV China Equity Market FXI VXFXI Gold Miners GDX VXGDX Brazilian Equity Market EWZ VXEWZ 22
Equity Market Volatility Market Indexes CBOE DJIA Volatility Index VXD CBOE Nasdaq-1 Volatility Index VXN CBOE S&P 1 Volatility Index VXO CBOE Russell 2 Volatility Index RVX 23
Equity Specific Volatility DJIA VXD 16 16 12 12 8 8 4 4 Oct-97 Nov-98 Nov-99 Dec- Jan-2 Feb-3 Mar-4 Apr-5 May-6 Jun-7 Jul-8 Jul-9 Aug-1 24
Equity Specific Volatility NDX VXN 25 175 2 15 15 125 1 1 5 Feb-1 Mar-2 Apr-3 Apr-4 May-5 Jun-6 Jul-7 Aug-8 Sep-9 Oct-1 75 5 25 25
Equity Specific Volatility OEX VXO 1 25 75 2 15 5 1 25 5 Jan-86 Oct-87 Jul-89 May-91 Feb-93 Nov-94 Sep-96 Jun-98 Mar- Jan-2 Oct-3 Aug-5 May-7 Mar-9 Dec-1 26
Equity Specific Volatility RUT RVX 1 25 75 2 15 5 1 25 5 Jan-4 Oct-5 Aug-7 May-9 Feb-11 27
Equity Market Volatility CBOE S&P 5 3-Month Volatility Index VXV Measure of 3 month implied volatility as indicated by S&P 5 index options Similar to VIX with longer time frame May be compared to VIX to be used as a market indicator 28
Equity Specific Volatility VXV SPX 175 15 15 125 1 1 75 5 5 25 Dec-7 Mar-8 Jul-8 Oct-8 Feb-9 Jun-9 Sep-9 Jan-1 Apr-1 Aug-1 Nov-1 Mar-11 29
Equity Market Volatility CBOE S&P 5 SKEW Index SKEW Introduced in February 211 Sort of a black swan index Measures the relative implied volatility of out of the money options 3
Strategy Based Indexes SKEW SPX 175 15 275 125 225 1 75 175 5 25 125 Jan-9 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep- Jun-2 Apr-4 Jan-6 Nov-7 Aug-9 75 31
Strategy Based Indexes SKEW 15 125 1 75 Jan-9 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep- Jun-2 Apr-4 Jan-6 Nov-7 Aug-9 32
Strategy Based Indexes CBOE VIX Premium Strategy Index VPD Tracks performance of consistent short position in front month VIX future contract The portfolio consists of a money market investment and short VIX futures As a risk control measure a 25 point VIX rally is assumed as a worst case scenario The capital committed assumes a 25 point rally would result in a 25% loss to the portfolio 33
Strategy Based Indexes VPD SPX 175 25 15 125 1 2 15 75 5 25 1 5 Jun-4 Jan-5 Aug-5 Mar-6 Oct-6 Jun-7 Jan-8 Aug-8 Mar-9 Oct-9 May-1 Dec-1 34
Strategy Based Indexes CBOE Capped VIX Premium Strategy Index VPN Tracks performance of consistent short position in front month VIX future contract The portfolio consists of a money market investment and short VIX futures As a risk control measure out of the money call options are purchased against the short future position 35
Strategy Based Indexes VPN SPX 175 25 15 125 1 2 15 75 1 5 25 5 Jun-4 Jan-5 Aug-5 Mar-6 Oct-6 Jun-7 Jan-8 Aug-8 Mar-9 Oct-9 May-1 Dec-1 36
Strategy Based Indexes CBOE S&P 5 VARB-X VTY Tracks the performance of a hypothetical volatility arbitrage trading strategy Strategy involves capitalizing on the historical difference between SPX implied and realized volatility oat ty 37
Equity Specific Volatility VTY SPX 175 25 15 125 1 2 15 75 1 5 25 5 Dec-7 Jul-8 Feb-9 Sep-9 Apr-1 Nov-1 38
Strategy Based Indexes CBOE S&P 5 Implied Correlation Indexes ICJ, JCJ, KCJ Strategy index that compares individual equity and S&P 5 index option volatility Implied volatility of S&P 5 index options and that of largest 5 stocks in the index Current JCJ 211 / KCJ 212 / ICJ 213 39
Strategy Based Indexes JCJ 211 - SPX 15 2 125 1 15 75 1 5 25 5 Nov-8 Jul-9 Feb-1 Sep-1 4
Strategy Based Indexes KCJ 212 - SPX 15 2 125 1 15 75 1 5 25 5 Nov-9 Mar-1 Jun-1 Oct-1 Feb-11 41
Strategy Based Indexes ICJ 213 - SPX 15 1 125 75 1 5 75 25 5 Nov-1 Dec-1 Feb-11 Mar-11 42
VIX as a Market Indicator VIX Futures are 1% anticipatory There is an inverse relationship between the S&P 5 Index and the VIX Futures prices are based on the direction the market expects the VIX Index to settle at expiration ato Since futures anticipate the VIX, they also indicate the market s S&P 5 expectations 43
VIX as a Market Indicator VIX Futures vs. VIX Index VIX Futures anticipate the direction of the VIX Index The Index moves in an inverse direction to the S&P 5 A forecasting tool may consist of comparing the VIX Future price to that of the VIX Index Different VIX Futures prices may also be compared to each other 44
VIX as a Market Indicator S&P 5 vs. VIX Index & VIX Future 7 125 6 5 15 4 VIX Index VIX Future S&P 5 3 85 2 1 Jan-1 Mar-1 Apr-1 Jun-1 Aug-1 Oct-1 65 45
VIX Network Venture created by Standard and Poor s and CBOE Created in March 211 Partnership to provide information sharing regarding VIX methodology Goal to promote VIX as global standard of measuring market volatility 46
VIX Network VIX agreements in place Australian Securities Exchange CME Group Deutsche Borse Hang Seng Indexes National a Stock Exchange of India Euronext LIFFE Taiwan Futures Exchange TMX Group 47
Summary Questions / Comments? rhoads@cboe.com cboerhoads@gmail.com www.cboe.com/learncenter www.cboe.com/vix com/vix 48