The mysterious VIX!!The mysterious VIX!!The mysterious VIX!!The mysterious VIX!!

The tiers of the VIX and its productsThe tiers of the VIX and its productsThe tiers of the VIX and its productsThe tiers of the VIX and its products

1 Th SPX ( d SPY)1. The SPX (and SPY)2. Options on SPX (and SPY)3. The actual VIX calculation4. Options on the VIX5. Futures on the VIX6. The VIX ETPs (VXX, VIXY, VXZ, TVIX,6. The VIX ETPs (VXX, VIXY, VXZ, TVIX,

CVOL, and XIV [short 1X ST VIX])

35.002,500

1. SPX is the S&P500 Index ...

30.00

35.00

2,000

2,500S&P 500S&P 500 OEPSOEPS

Earnings shown are operatingoperating earnings not

20.00

25.00

1,500

operating operating earnings, not GAAP (media headline) earnings

10.00

15.00

1,000

5.00500

-5.00

0.00

088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

S&P500 Index Quarterly Operating Earnings per Share

Source: Data for this are taken from Standard and Poor’s Index Services downloads at http://us.spindices.com/indices/equity/sp-500

22. SPX Index Option Contract Specs .... SPX Index Option Contract Specs ...

Feb 2017Feb 2017

SPX options have a $100 multiplier!

Review the entire CBOE.COM VIX section!

2a. Some of 2a. Some of the the 2015 2015 quotations at quotations at eodeodqq

3. The actual VIX calculation ...3. The actual VIX calculation ...

It is this pricing convention that allows the VIXallows the VIX calculation to be a metric of volatility. If this rises for any given strike price, that is because premiums are getting fattergetting fatter.

3. VIX calc (continued)3. VIX calc (continued)

Notice this method (by ( yexample) for calculating forward prices and determiningand determining the closest ATM option.

Example using the 2015 data ...Example using the 2015 data ...Example using the 2015 data ... Example using the 2015 data ...

SPX Last: 2107.78Absolute

Bid Ask Average Strike Average Ask Bid DifferenceCALL PUT

Quoted data Calculated data Solution

Bid Ask Average Strike Average Ask Bid Difference11.80 12.40 12.10 100 6.20 6.50 5.90 5.90

8.60 9.40 9.00 105 8.05 8.40 7.70 0.956.00 6.60 6.30 110 10.35 10.70 10.00 4.053.80 4.30 4.05 115 13.25 13.70 12.80 9.20

F: 105.95K: 105

All of this notational complexity is just the method for determining the values to use forAll of this notational complexity is just the method for determining the values to use for the spread between bid and ask and to calculate the appropriate ATM choice. (You could use similar criteria for a strangle algo).

Historical VIXHistorical VIX

You can see why it is ycalled a “fear index” rather than a volatility index.

4. VIX options (not SPX options)4. VIX options (not SPX options)

From April 21, 2014

5. VIX futures contracts (always in 5. VIX futures contracts (always in ContangoContango))25.00

20.00

15.00

10.00This is the full life of the Jan 14 CBOE futures contract. Note how volatility expectations were priced into this, and never happened! These started out in pure contango (as this one is) as

5.00pp p g ( )

did every other futures contract in 2012-2014 that I have researched. This make it impossible for the ETPs to track the VIX.

0.004/22/2013 5/22/2013 6/22/2013 7/22/2013 8/22/2013 9/22/2013 10/22/2013 11/22/2013 12/22/2013 1/22/20

Futures Contract VIX Spot

5c. H Mar 14 and the 5c. H Mar 14 and the contangoscontangos are always wrong!!are always wrong!!

5a. The V Oct 13 contract in5a. The V Oct 13 contract in contangocontango ....5a. The V Oct 13 contract in 5a. The V Oct 13 contract in contangocontango ....

FuturesFutures in 2015in 2015 ......Futures Futures in 2015 in 2015 ......

and they are still in contango!!and they are still in contango!!

Futures Futures now (2017) ...now (2017) ...

and they are still in contango!!and they are still in contango!!

6. TVIX vs. VIX6. TVIX vs. VIX120

100

120

The deltas are somewhat correlated, but again you have general value decay in

80

have general value decay in the ETN.

60

20

40

0

TVIX VIX

The VXX ETN (total crap)The VXX ETN (total crap)9,000

7 000

8,000

6,000

7,000 This is the total life of this worthless ETN. The price shown is the “adjusted close,” which means they have had to reverse-split this financial garbage heap any number of times

4,000

5,000garbage heap any number of times.

2,000

3,000

0

1,000

The VXX reverse splits ...The VXX reverse splits ...

Unadjusted close price (red)

Adjusted close price (green)

11/8/20101 for 4

10/4/20121 f 6

11/7/20131 for 6

1 for 6

Recent “stable” VXX tracking against VIXRecent “stable” VXX tracking against VIX12025

100

120

20

25

80

15

60

10

VX

X A

xis

VIX

axi

s

20

40

5Still decaying, but at least there is some clear correlation in spikes. If you want to do some ANOVA, be my guest.

00

VIX VXX

The MiniThe Mini--SPX, XSPSPX, XSP

Note the quote difference between SPX and XSP ...

Th i iSPX b l XSP h b f i l 1/10 f SPX dThe miniSPX, symbol XSP, have a base reference price equal to 1/10 of SPX, and each contract size is equal to 100 times that (or 10 times the SPX).

So if the SPX is at 1800, then the notional value of an SPX options contract is , p$180,000. The XSP reference price is 180 (see above) and the notional value of an XSP options contract is $18,000. The two will track more or less identically of course.

These options are European style with no delivery, just final settlement.

Index options held to maturity are settled on the last trading day at either AM p y g ysettlement (opening price of the index) or PM settlement (closing price on settlement day).

CBOE CBOE alternative alternative volatilityvolatilityvolatility volatility productsproducts

You need to understand why a You need to understand why a contangocontango (on (on h i h ) d ( h l f )!!h i h ) d ( h l f )!!the right) generates decay (on the left)!!the right) generates decay (on the left)!!

If d ’t b b k d d di A2 f th Ch t 10 f tIf you don’t remember. go back and read appendix A2 of the Chapter 10 futures contracts for Econ 104: http://palmislandtraders.com/econ104/ch10futures.pdf