Interactive Brokers Webcast CBOE Equity Market Volatility ...€¦ · presentation should be...
Transcript of Interactive Brokers Webcast CBOE Equity Market Volatility ...€¦ · presentation should be...
CBOE Equity Market
Volatility Indexes
March 26, 2014Presented by Russell Rhoads, CFA
Interactive Brokers Webcast
THE OPTIONS INSTITUTE at CBOE 2
Disclosure
Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of
Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from
The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors and involves risk of loss.
The information in this presentation is provided solely for general education and information purposes. No statement within this
presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any
strategies discussed, including examples using actual securities or futures price data, are strictly for illustrative and educational
purposes only. 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. Multiple leg strategies involve multiple commission charges. Investors should consult with their tax
advisors to determine how the profit and loss on any particular option strategy will be taxed. Past performance does not
guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this
presentation is available from CBOE upon request. CBOE, Chicago Board Options Exchange, CBOE Volatility Index, CFE and
VIX are registered trademarks and CBOE Futures Exchange, CBOE Short-Term Volatility Index, CBOE 3-Month Volatility Index,
CBOE Mid-Term Volatility Index, Execute Success, RVX, SPX, The Options Institute VXST, VXN, VXV and VXMT are service
marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P 500® is a registered trademark of Standard & Poor's
Financial Services, LLC and has been licensed for use by CBOE and CBOE Futures Exchange, LLC (CFE). CBOE's and CFE’s
financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in such products. Russell 2000® is a registered trademark of Russell
Investments, used under license. The NASDAQ-100 Index®, NASDAQ-100®, and NASDAQ® are trademark or service marks of
The NASDAQ Stock Market, Inc. (with which its affiliates are the "Corporations"). These marks are licensed for use by CBOE in
connection with the trading of products based on the NASDAQ-100 Index. The products have not been passed on by the
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CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). CBOE is not
affiliated with Interactive Brokers. This presentation should not be construed as an endorsement or an indication by CBOE of the
value of any non-CBOE product or service described in this presentation.
Copyright © 2014 CBOE. All rights reserved.
THE OPTIONS INSTITUTE at CBOE 3
CBOE Equity Market Volatility Indexes
Outline
S&P 500® Related Indexes
CBOE Russell 2000® Volatility Index
CBOE Nasdaq-100® Volatility Index
Summary / Q&A
THE OPTIONS INSTITUTE at CBOE 4
Volatility Indexes on the S&P 500
Introduction
The CBOE Volatility Index® (VIX®) was the first implied volatility
related index
The VIX methodology is applied to a wide variety of markets to
calculate a standard measure of implied volatility
CBOE now publishes quotes on four volatility indexes that use
S&P 500 Index options as the underlying market
THE OPTIONS INSTITUTE at CBOE 5
Volatility Indexes on the S&P 500
Volatility Indexes based on S&P 500 Option Pricing
Index Ticker Days
CBOE Short-Term Volatility Index VXSTSM 9 Days
CBOE Volatility Index VIX 30 Days
CBOE 3-Month Volatility Index VXVSM 93 Days
CBOE Mid-Term Volatility Index VXMTSM 184 Days
THE OPTIONS INSTITUTE at CBOE 6
Volatility Indexes on the S&P 500
2013 Price Action
VXST – VIX – VXV – VXMT
Source: CBOE.com
10
15
20
25
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
VXST VIX VXV VXMT
THE OPTIONS INSTITUTE at CBOE 7
Volatility Indexes on the S&P 500
2013 Price Action
VXST vs. S&P 500
Sources: CBOE.com and Bloomberg
10
15
20
25
30
35
40
1200
1300
1400
1500
1600
1700
1800
1900
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
VXST
S&P 500
THE OPTIONS INSTITUTE at CBOE 8
Volatility Indexes on the S&P 500
2013 Price Action
VIX vs. S&P 500
Sources: Bloomberg and CBOE.com
10
15
20
25
30
1100
1300
1500
1700
1900
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
S&P 500
VIX
THE OPTIONS INSTITUTE at CBOE 9
Volatility Indexes on the S&P 500
2013 Price Behavior
VXST vs. VIX
Source: CBOE.com
10
15
20
25
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
VIX
VXST
THE OPTIONS INSTITUTE at CBOE 10
Volatility Indexes on the S&P 500
2011 – 2013
VXST – VIX – SPX Relationship
Market Correlations –
20 Day Average Realized Volatility –
VIX SPX
VXST 0.9296 -0.7212
VXST VIX VXV VXMT
175% 109% 67% 48%
THE OPTIONS INSTITUTE at CBOE 11
Volatility Indexes on the S&P 500
2011 – 2013
VXST – VIX Relationship by Year
VXST
VIX
Average High Low
H/L
Range
H/L
Percent
Range
VXST /
S&P 500
Correlation
2011 24.48 68.00 12.81 55.19 431% -0.7833
2012 17.16 26.93 11.50 15.43 134% -0.6309
2013 13.85 23.54 10.20 13.34 131% -0.7514
Average High Low H/L Range
H/L
Percent
Range
VIX /
S&P 500
Correlation
2011 24.20 48.00 14.62 33.38 228% -0.8592
2012 17.80 26.66 13.45 13.21 98% -0.7629
2013 14.23 20.49 11.30 9.19 81% -0.8232
THE OPTIONS INSTITUTE at CBOE 12
Volatility Indexes on the S&P 500
Volatility Curves
Selected Term Structure Curves in 2013 –
Source: CBOE.com
10.00
12.00
14.00
16.00
18.00
20.00
22.00
24.00
VXST VIX VXV VXMT
6/20/2013 Average 8/2/2013
THE OPTIONS INSTITUTE at CBOE 13
Volatility Indexes on the S&P 500
VXST Futures Trading
Weekly futures based on the CBOE Short-Term Volatility Index
began trading on February 13, 2014
There are futures contracts expiring on a weekly basis available
for trading at the CBOE Futures Exchange
This gives traders an opportunity to take advantage of an
outlook for near term volatility pricing
THE OPTIONS INSTITUTE at CBOE 14
CBOE Russell 2000 Volatility Index
Russell 2000 Index (RUT)
The Russell 2000 Index is considered a leading benchmark for
the performance of small cap stocks
Many market participants think of the Russell 2000 as being a
better indicator of the domestic economy than other broad
based equity market indexes
As a group Russell 2000 stocks generated over 80% of their
revenues from inside the United States in 2012
THE OPTIONS INSTITUTE at CBOE 15
CBOE Russell 2000 Volatility Index
Introduction
The CBOE Russell 2000 Volatility Index (RVX) utilizes the CBOE
Volatility Index (VIX) methodology
The calculation uses RUT index options as the inputs with the
result being a 30 day measure of implied volatility
Small cap and large cap stock prices are influenced by different
economic factors
At times RVX and VIX do not necessarily correlate with each
other
THE OPTIONS INSTITUTE at CBOE 16
CBOE Russell 2000 Volatility Index
2013 Price Action
RVX vs. Russell 2000 –
Sources: Bloomberg and CBOE.com
10
15
20
25
30
35
40
600
700
800
900
1000
1100
1200
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Russell 2000
RVX
THE OPTIONS INSTITUTE at CBOE 17
Russell 2000 Volatility Index
RVX Futures
Futures on RVX began trading at the CBOE Futures Exchange
on November 18, 2013
The pricing characteristics of RVX futures contracts are very
similar to VIX futures
THE OPTIONS INSTITUTE at CBOE 18
Russell 2000 Volatility Index
RVX Futures Contract Specifications
Underlying Ticker
Futures Symbol
Contract Multiplier
Minimum Price Intervals
Dollar Value Per Tick
Contract Months
Trading Hours
Settlement Date
RVX
VU
$1,000
0.05
$50
Up to 9 Serial Months
8:30 am to 3:15 pm Chicago Time
30 Days Prior to Following Month's 3rd Friday
THE OPTIONS INSTITUTE at CBOE 19
Russell 2000 Volatility Index
RVX Futures Pricing
CBOE Russell 2000 Index / Futures Prices – 12/6/2013
Contango – ‘normal shape’
Backwardation – usually occurs in times of high volatility
Index /
Future Close
Spread
vs. RVX
Days to
Expiration
RVX 17.83
VUZ3 18.35
VUF4 19.75
VUG4 20.95
VUH4 21.60
+0.52
+1.92
+3.12
+3.77
12
47
75
102
THE OPTIONS INSTITUTE at CBOE 20
Russell 2000 Volatility Index
RVX Options
Options on the Russell 2000 Volatility Index began trading at
CBOE late last year
So far these options appear to share the same pricing
characteristics as the other volatility related option markets
The best underlying market to gauge the value of an RVX option
may be the corresponding futures contract
THE OPTIONS INSTITUTE at CBOE 21
Russell 2000 Volatility Index
RVX Options Contract Specifications
Underlying Ticker
Multiplier
Strike Prices
Minimum Tick < $3
Minimum Tick > $3
Contract Months
Trading Hours
Settlement Date
RVX
$100
Minimum Strike Price Increment of $1
0.05
0.10
Three near term plus three additional on Feb cycle
8:30 am to 3:15 pm Chicago Time
30 Days Prior to Following Month's 3rd Friday
THE OPTIONS INSTITUTE at CBOE 22
Russell 2000 Volatility Index
RVX Option Pricing
December 6, 2013 – Pricing
RVX @ 17.83
RVX Feb 20 Put @ 1.50
20.00 – 1.50 = 18.50
VUG4 @ 20.95
The Best Underlying Pricing Vehicle for
RVX Options may be the Corresponding Future
THE OPTIONS INSTITUTE at CBOE 23
Russell 2000 Volatility Index
RVX Option Trade
Trade on December 4, 2013 –
Bought 50 RVX Jan 18 Puts @ 0.58
Sold 50 RVX Jan 17 Puts @ 0.23
Net Cost = 0.35*
*Excluding Commissions
THE OPTIONS INSTITUTE at CBOE 24
Russell 2000 Volatility Index
Option Trade
Payoff Diagram –
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
Break Even 17.65
RVX @
18.50
VUF4 @
20.00
THE OPTIONS INSTITUTE at CBOE 25
Russell 2000 Volatility Index
RVX Option Trade
Payoff At Expiration –
RVX Settlement Over 18.00
Both Options Expire – 0.35 Per Contract Loss
RVX Settlement Between 17.00 and 18.00
Partial Gain or Loss
RVX Settlement Under 17.00
Both Options In the Money – 0.65 Per Contract Gain
THE OPTIONS INSTITUTE at CBOE 26
Russell 2000 Volatility Index
Summary
The Russell 2000 is considered the standard for measuring the
performance of small-cap stocks
As a measure of expected volatility of the Russell 2000 RVX is a
standard for determining expected 30 day volatility for small
cap stocks
RVX futures and options now offer traders and investors an
efficient way to gain exposure to this volatility measure
THE OPTIONS INSTITUTE at CBOE 27
CBOE Nasdaq-100 Volatility Index
Overview
The CBOE Nasdaq-100 Volatility Index (VXN) is calculated using
options on the Nasdaq-100® (NDX) Index
VXN is typically at a premium to VIX, but has fallen to a
discount
There has been a bit of a seasonal pattern for VXN based on the
earnings calendar
THE OPTIONS INSTITUTE at CBOE 28
CBOE NASDAQ-100 Volatility Index
2013 in Context
VXN vs. NASDAQ-100
Sources: Bloomberg and CBOE.com
10
15
20
25
30
35
1750
2250
2750
3250
3750
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
NASDAQ-100
VXN
THE OPTIONS INSTITUTE at CBOE 29
CBOE NASDAQ-100 Volatility Index
VXN Futures Pricing
September 6, 2013
16.00
18.00
20.00
VXN Sep-13 Oct-13 Nov-13 Dec-13
17.25
18.30
18.9019.20
16.32
THE OPTIONS INSTITUTE at CBOE 30
CBOE Nasdaq-100 Volatility Index
VXN Futures Pricing
November 1, 2013
12.00
14.00
16.00
18.00
20.00
VXN Nov-13 Dec-13 Jan-14 Feb-14
19.05
14.76
15.90
16.90
18.20
THE OPTIONS INSTITUTE at CBOE 31
CBOE Nasdaq-100 Volatility Index
Summary
VXN pricing behaves in a similar manner to VIX pricing
The shape of the curve varies with the outlook for volatility
based on NDX option pricing
Curve trading is popular with VIX futures and is a logical
approach to trading VXN futures as well
THE OPTIONS INSTITUTE at CBOE 32
CBOE Equity Market Volatility Indexes
Summary
CBOE quotes dozens of volatility indexes and offers trading
vehicles on eight of those indexes
Four of those tradable volatility indexes are based on the US
markets
The underlying markets tend to be highly correlated, but do
have periods of divergent performance
This sort of divergent performance shows up in the respective
volatility indexes as well
THE OPTIONS INSTITUTE at CBOE 33
CBOE Equity Market Volatility Indexes
More Information / Contact
www.cboe.com/volatility
cfe.cboe.com
@russellrhoads