S&P 500 Variance Futures - Cboe · S&P 500 Variance Futures: Exchange-Traded/OTC Conventions 2013...

S&P 500 Variance Futures: Exchange-Traded/OTC Conventions

2013 CBOE Risk Management Conference

March 4, 2013 Presented by:

John Hiatt | Director, Research and Product Development

CBOE FUTURES EXCHANGE 2

Agenda

Overview of CFE S&P 500 Variance futures

Margins

Market Data / Conversion Calculator

S&P 500 Volatility Term Structure

S&P 500 options / Variance Futures / VIX futures / VIX options


CFE S&P 500 Variance Futures

Exchange-traded futures contract whose final settlement value

depends upon a measure of the variance of the S&P 500 Index

over the life of the contract.

Quote and trade in the same convention as variance swaps

currently offered in the OTC market.

Final settlement value adjusted to reflect daily accrual of

interest payments on variation margin.

How did we get here?

Overview


S&P 500 Index options (SPX) listing cycle

– Through two years

Spot-starting annualized implied volatility

– Nickel ticks

Vega notional

– Quotes/Orders must be in increments of 1,000 vega notional

Overview

VA Futures expirations on 10-Dec-12

Expiry Inception

Date Initial Strike

Number of expected Prices

Number of returns elapsed

Realized Variance

18-Jan-13 20-Aug-12 396.41 106 77 41.29851

15-Feb-13 22-Oct-12 353.44 81 33 21.87491

15-Mar-13 19-Mar-12 484.88 251 184 130.6523

21-Jun-13 20-Jun-11 587.58 507 372 621.0312

20-Sep-13 24-Sep-12 561.69 251 53 31.4607

20-Dec-13 21-Dec-10 707.56 758 496 695.0652

20-Jun-14 18-Jun-12 655.87 507 121 78.11002

19-Dec-14 19-Dec-11 721.46 758 245 164.6751

Quoted Using OTC Conventions

Expiry Bid Size Bid Offer Offer Size

18-Jan-13 48 15.65 16.20 25

15-Feb-13 75 16.55 17.15 87

15-Mar-13 105 17.20 17.80 100

21-Jun-13 86 19.55 19.95 95

20-Sep-13 97 20.25 20.65 103

20-Dec-13 103 21.20 21.60 125

20-Jun-14 128 22.10 22.50 156

19-Dec-14 135 23.75 24.15 124


Overview

Post Trade

Price is converted from implied volatility to a futures price.

Quantity is converted from vega notional to variance units.

All four pieces of information are included on fill reports.

Clearing and Trade Match will only receive futures price and variance units. Data

vendors will receive prices/quantity in volatility and vega notional.

Fill Information Class: VA (Future) Underlying Symbol: VA Session Name: CFE_MAIN Product: VA Mar-15-13 Side: Sell Trade ID: 106772:1268316180 Executed Total Vol: 100 Remaining Vol: 0 Price: 17.80 Position: N/A Date/Time: 2012/11/29 11:17:50.740 Firm: CBOE.053 Originator: Executing Broker: XXS CMTA: CBOE.501 Account: MM SubAccount: MM Acronym: CBOE.MM User Id: MM User Assigned ID: MM Extensions: VPRICE=730.5701,VSIZE=10640,billingType=Taker


Overview

P&L of an OTC Variance swap

Assume an investor enters into a long S&P 500 March 2013

variance swap position on December 10, 2012, at an implied

volatility of 17.25 and is looking to terminate the swap on

February 26, 2013.


Overview

P&L of a CFE S&P 500 Variance future

Investor enters into the same 100,000 vega notional exposure at

an implied volatility of 17.25 but this time uses the CFE variance

future…

Day Discount factor

Par Variance ARMVM Futures price

Futures P&L Total P&L

0 0.9996 297.5625 0 1000 0 0

1 0.9996 291.2495 0 993.6893 -6.31066 -$18,291.77

2 0.9996 308.7508 -0.000028 1011.1841 11.1841 $32,417.72

52 0.9999 169.8330 -0.024365 872.3035 -127.7208 -370,205.30


Outright Customer Margins

Expiration Symbol Margin per Variance unit Margin by Vega notional

18-Jan-13 VAF13 $175 17.45x

15-Feb-13 VAG13 $300 13.78x

15-Mar-13 VAH13 $100 10.21x

21-Jun-13 VAM13 $50 4.67x

20-Sep-13 VAU13 $125 3.76x

20-Dec-13 VAZ13 $50 3.33x

20-Jun-14 VAM14 $50 1.43x

19-Dec-14 VAZ14 $50 1.55x

100,000 Vega (Mar13) 10,206 variance units

• 100,000 vega converts to 10,206 Variance units of March 2013 futures

• Margined at $100 per variance unit for a total margin of $1,020,616

• ~ 10.21 times vega for 100K of 3-month variance


Spread Customer Margins

100,000 Vega (Mar13) 10,206 variance units

Expiration 18-Jan-13 15-Feb-13 15-Mar-13 21-Jun-13 20-Sep-13 20-Dec-13 20-Jun-14 19-Dec-14

Symbol VAF13 VAG13 VAH13 VAM13 VAU13 VAZ13 VAM14 VAZ14

Scan Range $175 $300 $100 $50 $125 $50 $50 $50

Tier 1 2 3 4 5 6 7 8

18-Jan-13 VAF13 $175 1 4-3 2-5 1-5 2-5 2-15 1-5 1-15

15-Feb-13 VAG13 $300 2 $525 3-10 3-20 3-10 1-10 3-20 1-10

15-Mar-13 VAH13 $100 3 $145 $475 1-2 1-1 1-3 1-2 1-3

21-Jun-13 VAM13 $50 4 $85 $455 $20 2-1 2-3 1-1 2-3

20-Sep-13 VAU13 $125 5 $225 $455 $30 $15 1-3 1-2 1-3

20-Dec-13 VAZ13 $50 6 $240 $155 $35 $20 $10 3-2 1-1

20-Jun-14 VAM14 $50 7 $140 $455 $45 $15 $15 $10 2-3

19-Dec-14 VAZ14 $50 8 $295 $150 $50 $30 $20 $5 $5

Example: 100K vega 3-month forward starting variance with June 2013 expiration

200,000 Vega (Jun13) 18,668 variance units

• 100,000 vega converts to 10,206 Variance units of March 2013 futures

• 200,000 vega converts to 18,668 Variance units of June 2013 futures

• Spread ratio for March/June is 1-2 (i.e. 9,334 March futures to 18,668 June futures)

These contracts are margined at the spread rate of $20 per variance unit. The

remaining contracts are margined at the outright rate

• Total margin = $273,880 = ($20*9,334+$100*872)


Conversion Inputs/Calculator

The conversion formula inputs are loaded on the CFE website daily. Also, CFE provides a variance calculator to convert from vol/vega to futures price/var units or vice versa.

http://cfe.cboe.com/products/VACData.aspx

http://www.cfe.cboe.com/products/VA_Calculator.xls

18-Jan-13 15-Feb-13 15-Mar-13 21-Jun-13 20-Sep-13 20-Dec-13 20-Jun-14 19-Dec-14

Inception Date (SPX option listing) 20-Aug-12 22-Oct-12 19-Mar-12 20-Jun-11 24-Sep-12 21-Dec-10 18-Jun-12 19-Dec-11

Realized Variance to date 40.823856 21.400256 130.177678 620.556572 30.986046 694.590592 77.635365 164.200427

Number of expected Prices (Ne) 106 81 251 507 251 758 507 758

Number of returns elapsed 72 28 179 367 48 491 116 240

Previous settlement value 788.2177 714.0620 739.3040 833.4282 833.0102 689.5229 781.5450 713.7348

Discount Factor 0.999797702 0.999684369 0.999574166 0.999207147 0.9988745 0.998549324 0.997812656 0.996797229

Initial Strike (K0) 396.41 353.44 484.88 587.58 561.69 707.56 655.87 721.46

ARVM -0.048857 -0.004568 -0.06185 -0.041569 -0.049167 -0.076532 -0.068374 -0.07661

Fed Funds Rate 0.0016

http://cfe.cboe.com/products/VACData.aspx

http://www.cfe.cboe.com/products/VA_Calculator.xls


S&P Volatility Term Structure

http://www.cboe.com/data/volatilityindexes/volatilityindexes.aspx

December 10, 2012




How this relates to VIX derivatives…

Forward Variance / VIX futures / Convexity / VIX options


Disclaimer

John Hiatt

Director | Research and Product Development

[email protected]

312.786.7779

Futures trading is not suitable for all investors, and involves risk of

loss. CFE® is a registered trademark and CBOE Futures Exchange

and SPX are service marks of Chicago Board Options Exchange,

Incorporated. S&P® and S&P 500® are trademarks of Standard &

Poor’s Financial Services, LLC and have been licensed for use by

CBOE Futures Exchange, LLC (CFE). S&P does not sponsor,

endorse, sell, or promote any S&P index-based investment product.

Copyright © 2012 CFE. All rights reserved.

mailto:[email protected]

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