Al i V l ili I dAlternative Volatility Indexes · Trading Products – VIX FuturesVIX Futures ......

Al i V l ili I dAlternative Volatility Indexes

Russell Rhoads, CFARussell Rhoads, CFAInstructor – The Options Institute

2011 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, y y g p g pSuite 500, Chicago, Illinois 60606. 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 asany 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.

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Copyright© 2011 CBOE. All rights reserved.

CHICAGO BOARD OPTIONS EXCHANGE2

Outline

• VIX® Review• Alternative Volatility Indexes• Alternative Volatility Indexes

– Euro CurrencyOil– Oil

– Gold• Equity Specific• Equity Specific

– StocksExchange Traded Funds– Exchange Traded Funds


Outline

• Equity Market IndexesOther Market Indexes– Other Market Indexes

– 3-Month Volatility IndexSKEW– SKEW

• Strategy Indexes• Uses as an Indicator• Uses as an Indicator• VIX Network

S / Q&A C t t• Summary / Q&A Contact


VIX Review

The VIX –CBOE Volatility Index®CBOE Volatility Index®.Measures S&P 500® implied volatility.B d S&P 500 O ti bid/ k tBased on S&P 500 Option bid/ask quotes.Uses the nearby options with at least 8 days until expirationuntil expiration.Has been promoted as a ‘fear index’ by the business mediabusiness media.


VIX Review

Trading Products –VIX FuturesVIX FuturesVIX OptionsW kl O ti VIX F tWeekly Options on VIX FuturesOver a Dozen Exchange Traded Fund / Note productsproducts


Alternative Volatility Indexes

Euro Currency (EVZ) –• CBOE EuroCurrency Volatility Index• CBOE EuroCurrency Volatility Index• Measures market expectation of volatility of the

$US / Euro exchange rate$US / Euro exchange rate• Based on option prices on FXE exchange traded

fundfund



175 50

FXE - EVZ

125

150

175

40

50

75

100

125

30

25

50

75

10

20

0

25

Jan-08 May-08 Sep-08 Jan-09 Jun-09 Oct-09 Feb-10 Jul-10 Nov-10 Mar-110



Oil (OVX) –• CBOE Crude Oil Volatility Index• CBOE Crude Oil Volatility Index• Measures market expectations of volatility of the

crude oil marketcrude oil market• Based on option pricing of USO exchange

traded fundtraded fund• CBOE filed for approval to trade options on this

indexindex



USO - OVX

125 200

100

125

150

200

75

100

150

25

50

50

0May-07 Oct-07 Mar-08 Aug-08 Feb-09 Jul-09 Dec-09 Jun-10 Nov-10

0



USO – WTI Oil125 200

100

125

150

200

75

100

150

25

50

50

0May-07 Oct-07 Mar-08 Aug-08 Feb-09 Jul-09 Dec-09 Jun-10 Nov-10

0



Gold (GVZ) –CBOE Gold ETF Volatility IndexCBOE Gold ETF Volatility Index Measures market expectations of volatility of the

price of goldp gBased on option pricing of GLD ETF

Futures and options available on this Index



GLD - GVZ150 100

125

150

80

90

100

75

100

50

60

70

25

50

20

30

40

0

25

Jun-08 Nov-08 Apr-09 Sep-09 Mar-10 Aug-10 Jan-110

10


Equity Specific Volatility

Stocks –Amazon AMZN VXAZNAmazon AMZN VXAZNApple AAPL VXAPLG ld S h GS VXGSGoldman Sachs GS VXGSGoogle GOOG VXGOGIBM IBM VXIBMIBM IBM VXIBM



AMZN – VXAZN

200 75

150

200

60

75

100

150

45

5015

30

0Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11

0



AAPL – VXAPL

400 75

300

350

400 75

200

250

30050

100

15025

0

50

Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-110



GS – VXGS

200 75

150

200

60

75

100

150

45

5015

30


0



GOOG – VXGOG

200 75

150

200

60

75

100

150

45

5015

30


0



IBM – VXIBM

200 75

150

200

60

75

100

150

45

5015

30


0



Stocks –30 day implied volatility indicated by option pricing30 day implied volatility indicated by option pricingPlans to add more names over timeCBOE h fil d f l t t d tiCBOE has filed for approval to trade options on

these indexes



Exchange Traded –• 30 day implied volatility indicated by option• 30 day implied volatility indicated by option

pricing• Plans to add more names over time• Plans to add more names over time• Number of instruments with derivative trading to

expand over timeexpand over time



Exchange Traded Funds –

EuroCurrency XLF EVZGold GLD GVZGold GLD GVZ Crude Oil USO OVXEmerging Markets EEM VXEEMe g g a etsSilver SLV VXSLVChina Equity Market FXI VXFXIq yGold Miners GDX VXGDXBrazilian Equity Market EWZ VXEWZ


Equity Market Volatility

Market Indexes –

CBOE DJIA® Volatility Index – VXDCBOE N d 100® V l tilit I d VXNCBOE Nasdaq-100® Volatility Index – VXNCBOE S&P 100® Volatility Index – VXOCBOE R ll 2000® V l ili I d RVXCBOE Russell 2000® Volatility Index – RVX



DJIA – VXD

16000 160

12000

16000

120

160

8000

12000

80

120

4000 40

0Oct-97 Nov-98 Nov-99 Dec-00 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Jul-09 Aug-10

0



NDX – VXN

2500 175

2000

2500

125

150

175

1500 100

125

500

1000

50

75

0Feb-01 Mar-02 Apr-03 Apr-04 May-05 Jun-06 Jul-07 Aug-08 Sep-09 Oct-10

0

25



OEX – VXO

1000 250

750

1000

200

250

500

50

150

25050

100

0Jan-86 Oct-87 Jul-89 May-91 Feb-93 Nov-94 Sep-96 Jun-98 Mar-00 Jan-02 Oct-03 Aug-05 May-07 Mar-09 Dec-10

0



RUT – RVX

1000 250

750

1000

200

250

500

150

25050

100

0Jan-04 Oct-05 Aug-07 May-09 Feb-11

0



CBOE S&P 500 3-Month Volatility Index – VXV• Measure of 3 month implied volatility as• Measure of 3 month implied volatility as

indicated by S&P 500 index options• Similar to VIX with longer time frame• Similar to VIX with longer time frame• May be compared to VIX to be used as a market

indicatorindicator



VXV – SPX

1750 150

1250

1500

1750 150

750

1000

1250100

500

750

50

0

250

Dec-07 Mar-08 Jul-08 Oct-08 Feb-09 Jun-09 Sep-09 Jan-10 Apr-10 Aug-10 Nov-10 Mar-110



CBOE S&P 500 SKEW Index – SKEW• Introduced in February 2011• Introduced in February 2011• Sort of a black swan index

M th l ti i li d l tilit f t f• Measures the relative implied volatility of out of the money options


Strategy Based Indexes

SKEW – SPX

1750

1250

1500

1750

275

1000

1250

175

225

500

750

125

175

0

250

Jan-90 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep-00 Jun-02 Apr-04 Jan-06 Nov-07 Aug-0975



SKEW

150150

125

100

75Jan-90 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep-00 Jun-02 Apr-04 Jan-06 Nov-07 Aug-09



CBOE VIX Premium Strategy Index – VPD• Tracks performance of consistent short position• Tracks performance of consistent short position

in front month VIX future contract• The portfolio consists of a money market• The portfolio consists of a money market

investment and short VIX futures• As a risk control measure a 25 point VIX rally is• As a risk control measure a 25 point VIX rally is

assumed as a worst case scenario• The capital committed assumes a 25 point rallyThe capital committed assumes a 25 point rally

would result in a 25% loss to the portfolio



VPD – SPX

1750 250

1250

1500

1750

200

250

1000

1250

150

500

750

50

100

0

250

Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-100



CBOE Capped VIX Premium Strategy Index – VPN• Tracks performance of consistent short position in• Tracks performance of consistent short position in

front month VIX future contract• The portfolio consists of a money market• The portfolio consists of a money market

investment and short VIX futures• As a risk control measure out of the money call• As a risk control measure out of the money call

options are purchased against the short future positionp



VPN – SPX

1750 250

1250

1500

1750

200

250

750

1000

1250

150

500

750

50

100

0

250

Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-100



CBOE S&P 500 VARB-X – VTY• Tracks the performance of a hypothetical• Tracks the performance of a hypothetical

volatility arbitrage trading strategy• Strategy involves capitalizing on the historical• Strategy involves capitalizing on the historical

difference between SPX implied and realized volatilityo at ty



VTY – SPX

1750 250

1250

1500

1750

200

250

750

1000

1250

150

500

750

50

100

0

250

Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-100



CBOE S&P 500 Implied Correlation Indexes –ICJ JCJ KCJICJ, JCJ, KCJ• Strategy index that compares individual equity

and S&P 500 index option volatilityand S&P 500 index option volatility• Implied volatility of S&P 500 index options and

that of largest 50 stocks in the indexthat of largest 50 stocks in the index• Current – JCJ 2011 / KCJ 2012 / ICJ 2013



JCJ 2011 - SPX1500 200

1250

1500

150

200

750

1000

100

250

50050

0

250

Nov-08 Jul-09 Feb-10 Sep-100



KCJ 2012 - SPX1500 200

1250

1500

150

200

750

1000

100

150

250

50050

0

250

Nov-09 Mar-10 Jun-10 Oct-10 Feb-110



ICJ 2013 - SPX1500 100

1250

1500

75

100

1000

1250

50

75

750 25

500Nov-10 Dec-10 Feb-11 Mar-11

0


VIX as a Market Indicator

• VIX Futures are 100% anticipatory• There is an inverse relationship between the S&P• There is an inverse relationship between the S&P

500 Index and the VIX• Futures prices are based on the direction the• Futures prices are based on the direction the

market expects the VIX Index to settle at expiratione p at o

• Since futures anticipate the VIX, they also indicate the market’s S&P 500 expectationsp



VIX Futures vs. VIX Index• VIX Futures anticipate the direction of the VIX• VIX Futures anticipate the direction of the VIX

Index• The Index moves in an inverse direction to the• The Index moves in an inverse direction to the

S&P 500 • A forecasting tool may consist of comparing the• A forecasting tool may consist of comparing the

VIX Future price to that of the VIX Index• Different VIX Futures prices may also beDifferent VIX Futures prices may also be

compared to each other



S&P 500 vs. VIX Index & VIX Future

60

70 1250

40

50 1050

VIX IndexVIX Future

30

40

850

S&P 500

10

20

Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10650

CHICAGO BOARD OPTIONS EXCHANGE

Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10

45

VIX Network

• Venture created by Standard and Poor’s and CBOECBOE

• Created in March 2011• Partnership to provide information sharing• Partnership to provide information sharing

regarding VIX methodology• Goal to promote VIX as global standard of• Goal to promote VIX as global standard of

measuring market volatility


VIX Network

VIX agreements in place –• Australian Securities ExchangeAustralian Securities Exchange• CME Group• Deutsche BorseDeutsche Borse• Hang Seng Indexes• National Stock Exchange of Indiaat o a Stoc c a ge o d a• Euronext LIFFE• Taiwan Futures Exchangeg• TMX Group


Summary

Q i / C ?Questions / [email protected]

[email protected]

www.cboe.com/learncenterwww cboe com/vixwww.cboe.com/vix


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