CBOE Futures Exchange - Interactive Brokers · When you trade VIX futures you are not trading the spot VIX ... VIX at expiration (forward VIX). • Standard “cost of carry” model

CBOE Futures Exchange

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®

Trading VIX® FuturesThursday, April 5, 2007

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DisclaimerFor the sake of simplicity, the examples included do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any strategy.

Futures trading involves substantial risk and is not suitable for everyone.

Any strategies or uses of futures products discussed, including those examples using actual securities and price data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell futures contracts. Supporting documentation will be supplied upon written request. Past performance is not indicative of future results.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.

CFE® is a registered trademark of CBOE Futures Exchange, LLC. CBOE® and VIX® are registered trademarks of Chicago Board Options Exchange, Incorporated (CBOE). S&P 500® is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by CBOE. "DJIA“ is a trademark of Dow Jones & Company, Inc. and has been licensed for use for certain purposes by CBOE.

The methodologies of the CBOE Volatility Index (VIX) and the CBOE DJIA Volatility Index (VXD) are owned by CBOE and may be covered by one or more patents or pending patent applications.

Copyright © 2007 CBOE Futures Exchange, LLC. All Rights Reserved.

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Trading VIX Futures®

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Welcome to Today’s Presentation!Mark Haraburda

Director


Trading

VIX Futures. . .

www.cboe.com/cfe


Agenda1. Building Blocks of VIX Futures & Options

2. VIX Index Fundamentals & Characteristics

3. VIX Futures Fundamentals & Characteristics

4. Why Trade VIX Futures?

5. Trading Strategies and Examples

6. Q&A

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Today’s Markets

Source: CFE

3:00 pm CST Last ChangeS&P 500 Index 1443.42 4.05VIX Index 13.17 -0.07VIX Apr07 13.5 -0.15

Source: ILX / Thomson

www.cboe.com/cfe


Building Blocks of VIX Futures

Volatility

S&P 500 Index

S&P 500 Index Options

VIX Index

VIX Futures

VIX Options

www.cboe.com/cfe


VolatilityA measure of the fluctuation of a market price. Measure of risk or uncertainty. Mathematically, volatility is the annualized standard deviation of returns.

Historical or Realized Volatility

Implied or Expected Volatility

Volatility

12.5 or 12.5% 20.20 or 20.20%

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S&P 500 IndexBenchmark U.S. equity index

S&P 500 Index

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

Jan-

98

May

-98

Sep-

98

Jan-

99

May

-99

Sep-

99

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

Source: CFE

www.cboe.com/cfe


S&P 500 Index Options• CBOE listed equity index options

• Options (calls and puts on S&P 500 Index)

• Option Pricing (Intrinsic Value, Time Value; Greeks: Delta, Theta, Vega, etc.)

• Implied Volatility Component (Vega)

Higher Volatility, higher expected fluctuation

Lower Volatility, lower expected fluctuation

SPX Options

*The expected or implied volatility is factored into option premiums

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VIX IndexThe CBOE Volatility Index (VIX) is a key measure of the market’s expectation of 30-day S&P 500 volatility implicit in the prices of near-term S&P 500 Index options. VIX is an implied or expected volatility index. VIX is quoted in percentage points, e.g. 15.10 is 15.10%.

VIX is widely followed and is often referred to as the “investor fear gauge” or as a measure of market sentiment.

VIX is derived from S&P 500 Index options and is a measure of 30-day implied or expected volatility.

VIX Index

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VIX FuturesFutures contracts on forward or futures levels of VIX, not spot VIX level. **May VIX Futures – Level of VIX Index in mid-May (May 16)

Prior to expiration, VIX futures are not based on the current level of VIX. When you trade VIX futures you are not trading the spot VIX Index, you are trading the future value of VIX relative to the contract month you are trading.

• VIX futures contracts are based on the market’s expectation of the level of VIX at expiration (forward VIX). • Standard “cost of carry” model used in pricing of stock indexes does not apply. VIX term structure curve can be upward, downward, flat, etc.• “Forward” VIX is based on the implied volatility of SPX options at different expiration dates; e.g., NOV forward VIX reflects DEC SPX options.

VIX Futures

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VIX Options• Traded at CBOE (SEC-regulated)

• Options on future levels of VIX

• Cash settled to VIX Special Opening Quotation (SOQ) of VIX on Final Settlement Day

• VIX options follow VIX futures

Option Pricing: VIX futures as underlying; each option expiration tied to a corresponding futures expiration

VIX Options

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Building Blocks of VIX Futures

Volatility

S&P 500 Index

S&P 500 Index Options

VIX Index

VIX Futures

VIX Options

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VIX Index

VIX is a measure of 30-day implied volatility in the S&P 500 Index.

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VIX Historical DataVIX Index (2000 - Current)

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

Source: CFE

www.cboe.com/cfe


VIX vs S&P 500VIX vs S&P 500 Index (2000 - Current)

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

700

800

900

1000

1100

1200

1300

1400

1500

1600

VIXS&P 500

Source: CFE

www.cboe.com/cfe


VIX Characteristics• Negative or inverse correlation to equity

market indexes• Mean reversion• VIX tends to increase by larger amounts in

falling markets compared to VIX decreasing by smaller amounts in rising markets

• VIX and VIX Futures are volatile compared to other asset classes

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Volatility of VolatilityHistorical Volatility (2006)

94%

56%

10%

34%

14%

41%

0%

20%

40%

60%

80%

100%

VIX Index VX Futures(near-term)

SPX GOOG IBM GM

Source: CFE

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VIX Futures

Futures contracts on forward or future levels of VIX.

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VIX Futures SpecificationsFutures Symbol: VXHours: 8:30 am – 3:15 pm CSTTrading Platform: CBOEdirect®

Contract Size: $1,000 times VIX Futures price ($100 x 14.00 = $14,000)

Minimum Tick Size: 1/100th of one VIX point $10 per tick / $1,000 per point14.01…14.02…14.10…14.20

Contract Months: Up to 6 near-term serial months and five months on Feb quarterly cycle

Last Trading Day: Close of trading on the day before Final Settlement Date

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VIX Futures SpecificationsFinal Settlement Date: Wednesday that is 30-days prior to

the 3rd Friday of the month following the month in which the contract expiresFeb 2007 settles on Feb. 14

Final Settlement Value: Special Opening Quotation (SOQ) calculated from opening traded prices in SPX index options (10* VIX SOQ)

Delivery: Cash SettlementMargin: Initial: $2,250 Maintenance: $1,800

Spread: $50 / $40

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VIX Futures & VIX Index RelationshipsFutures contracts on forward or futures levels of VIX, not spot VIX level.

**May VIX Futures – Level of VIX Index in mid-May (May 16)

Today 30 days

VIX Index

Represent VIX Futures contract expirations, level of VIX Index at a future point in time

time

**VIX futures are based on the market’s expectation of the level of VIX at expiration.

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VIX Futures & VIX Index Relationships

• Sensitivity of VIX futures to changes in VIX Index. Shorter-term futures usually have higher sensitivity.

• Spread or basis between VIX index and VIX futures contracts or between different VIX futures contracts.

• Slope or shape of volatility term structure curve. Plot on a chart VIX Index and VIX futures prices. The curve structure can change and can be upward, downward, flat, etc.

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VIX Futures & VIX Index Relationships

VIX Index and VIX Futures2/26/07 - 2/27/07

10

11

12

13

14

15

16

17

18

19

VIX Mar07 Apr07 May07 Jun07 Aug07 Nov07

2/26/20072/27/2007

Source: CFE

http://cfe.cboe.com/publish/CFEVolNewsletter/CFEVolNews20070326.htm

VIX Index vs VIX FuturesVIX Index vs VIX Futures

12/14/06 - 3/5/07

8

10

12

14

16

18

20

22

12/1

4/06

12/1

8/06

12/2

0/06

12/2

2/06

12/2

7/06

12/2

9/06

1/4/

07

1/8/

07

1/10

/07

1/12

/07

1/17

/07

1/19

/07

1/23

/07

1/25

/07

1/29

/07

1/31

/07

2/2/

07

2/6/

07

2/8/

07

2/12

/07

2/14

/07

2/16

/07

2/21

/07

2/23

/07

2/27

/07

3/1/

07

3/5/

07

Sensitivity of VIX Futures to VIX Index relative to time to expiration

Until late February 2007 Mar07 VIX Futures generally trended downward towards the VIX Index, as the VIX Index remained low, less of a downward approach was seen in May07 and Nov07 VIX Futures

More sensitivity is seen in Mar07 VIX Futures vs May07 and Nov07 on 2/27/07

Why? The market's longer-term view of expected 30-day volatility did not change as much as the shorter-term view

VIX Index

Mar07 Futures

May07 Futures

Nov07 Futures

®

Source: CFE

Trading VIX Futures

www.cboe.com/cfe

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VIX Futures Liquidity• Designated market-maker in VIX futures. Constant two-side quotes.

• 2007 Average Daily Volume: 2,300

• Current Open Interest: 42,000

• Growth

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VIX Futures GrowthVIX Futures Average Daily Volume (30-day)

0

500

1000

1500

2000

2500

3000

3500

4000

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Sep-

06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Source: CFE

www.cboe.com/cfe


VIX Futures GrowthVIX Futures Average Daily Open Interest (30-day)

0

10000

20000

30000

40000

50000

60000

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Sep-

06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Source: CFE

www.cboe.com/cfe


Why Trade VIX Futures?• Pure play on implied volatility

• High volatility of volatility

• Mean reversion

• Negative correlation with equity indexes

• Futures leverage

• Exchange-listed volatility product

• Diversify and volatility as an asset class

www.cboe.com/cfe


VIX Futures Trading Opportunities• Trade the direction of equity market implied volatility• Trade the term structure curve of implied volatility

(calendar spreads)• Spread against DJIA Volatility Index Futures• Use VIX Index and VIX Futures as indicators• Portfolio hedging (equity and credit)• Trade implied vs. realized volatility• Manage options positions

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Trading Strategies & Examples1. Long VIX Futures

2. Short VIX Futures

3. Calendar Spread

*Market Outlook

*Performance (Profit & Loss)

More Strategies . . .www.cboe.com/cfenewsletter


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Long VIX Futures

Position P&L Chart

8

9

10

11

12

13

14

15

16

17

18

1/4

1/6

1/8

1/10

1/12

1/14

1/16

1/18

1/20

1/22

1/24

1/26

1/28

1/30 2/

1

2/3

2/5

2/7

2/9

2/11

2/13

$(18,000)

$(16,000)

$(14,000)

$(12,000)

$(10,000)

$(8,000)

$(6,000)

$(4,000)

$(2,000)

$-

$2,000

$4,000

Feb07 Settlement

Feb07 P&L

VIX Futures Trading Example Long Nearby FuturesLong Feb07 (5 Contracts)Trade:

Equity Market Outlook:Volatility Outlook:

1/4/07 - 2/14/07BearishHigher

Time Horizon:

Source: CFE

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Short VIX Futures on VIX SpikeVIX Futures Trading Example Sell Spike in VIX on 2/27/07Trade: Short Mar07 (2 Contracts)

Volatility Outlook: Lower

Time Horizon: 2/27/07 - 3/21/07Equity Market Outlook: Bullish

Position P&L Chart

8

9

10

11

12

13

14

15

16

17

18

19

20

2/27

2/28 3/1

3/2

3/3

3/4

3/5

3/6

3/7

3/8

3/9

3/10

3/11

3/12

3/13

3/14

3/15

3/16

3/17

3/18

3/19

3/20

3/21

$(6,000)

$(4,000)

$(2,000)

$-

$2,000

$4,000

$6,000

Mar07 SettlementMar07 P&L

Source: CFE

www.cboe.com/cfe


VIX Futures Calendar SpreadVIX Futures Trading Example CALENDAR SPREADTrade: Short Dec06, Long May07 (5 per side)

Volatility Outlook: Neutral to Lower (short-term)

Time Horizon: 11/1/06 - 12/20/06Equity Market Outlook: Neutral to Bullish

Position P&L Chart

8

9

10

11

12

13

14

15

16

17

18

11/1

11/3

11/5

11/7

11/9

11/1

111

/13

11/1

511

/17

11/1

911

/21

11/2

311

/25

11/2

711

/29

12/1

12/3

12/5

12/7

12/9

12/1

112

/13

12/1

512

/17

12/1

9

$(2,000)

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000Dec06 SettlementMay07 SettlementPosition P&L

Source: CFE


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More Information on VIX FuturesCBOE Futures Exchange Website

www.cboe.com/cfe

Quotes, Historical Data, White Papers, Education, Presentations, Specifications

Futures in Volatility Newsletter

www.cboe.com/cfenewsletter

Market Summary & Analysis, Trading Strategy Ideas

www.cboe.com/cfe


Q&AMark Haraburda

Director – Business Development


312-786-7978

[email protected]

Thank you for attending!

Documents

CBOE Futures Exchange - Interactive Brokers · When you trade VIX futures you are not trading the spot VIX ... VIX at expiration (forward VIX). • Standard “cost of carry” model