For more information on the CBOE Volatility Index^® ("VIX"), volatility and variance futures including brokers, ISVs, symbols and product specifications, visit www.cboe.com/cfe.

To contact the CFE, please click here.

Futures in Volatility includes several sections: Market Summary and Analysis, Trading Strategy Ideas, and Events. Market Summary and Analysis includes commentary related to VIX, VIX futures and other volatility products, as well as charts and data related to these markets. Trading Strategy Ideas features strategies focused on trading volatility products. And, Events features upcoming CFE and Chicago Board Options Exchange (CBOE^®) conferences, seminars and webinar presentations.

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Contact Information

Please direct questions concerning this circular to Jay Caauwe at (312) 786-8855 or caauwe@cboe.com.

VIX Futures Last Trade Dates

Announcements

Jay Caauwe and Michael Mollet will be sponsoring/exhibiting at the MFA conference, February 8-11, and will be at Booth 9

CFE is listing the worlds first exchange traded mini contract on volatility.....Mini S&P 500 Vix futures, set to trade Monday March 2nd

Market Summary and Analysis is provided by Larry McMillan. Mr. McMillan is the President of McMillan Analysis Corporation. Click Here for more information about Mr. McMillan.

Another Accurate Prediction

The January CBOE Volatility Index^® ("VIX^®") futures settled at 49.88, which was the fourth highest in history and the third decline in a row from the all-time high settlement of 63.04. This is still an extremely high level. The December CBOE S&P 500 3-Month Variance futures settled at 5053, which is a volatility of about 71% (square root). That is a figure which most observers of volatility would have once considered unreachable even for a short period of time, much less over a 90-day period. Longer-term Variance futures are much lower now, in the range of 38% to 43% volatility. That is still quite high. If actual market movements are in that area for most 90 day periods expiring this year, this is going to be a very volatile 2009.

In last month's newsletter, we pointed out that the front-month VIX futures were trading at a premium, and that such a development is usually bearish. Once again this proved to be true. A series of days in which VIX futures settle at a higher price than VIX oftentimes results in a sharp downward leg in the S&P 500^® Index. From December 17th through January 6th, the front two months of January and February, settled at significant premiums. At that point, the S&P 500 Index topped out and began to fall.

Even more ominously, the premium settlements did not abate when the market began to fall. In fact, they continue to persist, signaling a condition that in the past often has led to substantial downward legs in the bear market. The chart in Figure 1 is a scatter diagram that shows the daily premiums and discounts of the front month VIX futures going back to early 2007. Days on which VIX closed below 14 are not included, because a premium is a natural state in that case. One can clearly see the groupings of significantly large premium settlements led to sell signals, and groupings of significantly large discounts led to buy signals, with the exception of the huge discounts that existed after the Lehman bankruptcy last September. Those would have to be considered outliers, similar to many other indicators that jumped off the track last fall. Even so, when those premiums began to shrink in late November and early December, the market rose.

So we appear to have a sell signal from this indicator. In the previous five cases in this bear market (each marked as a red "S" in Figure 1) the S&P 500 Index continued to decline well after the premiums disappeared. It appears that this may be happening again, as the premiums persist while the S&P 500 Index is already declining (see data in Table 1). It appears to be quite similar to the conditions last June.

Term Structure

Perhaps at no time in the past has the term structure so smoothly expanded while the market declined. The term structure has been widening dramatically. This widening can easily be seen by the chart in Figure 2. One can see that the futures were all grouped together, when VIX was below 40, at the first of this year. Since then, the term structure has widened steadily as VIX has generally risen and the market has fallen. In addition, you can see that the two front month futures, January and February have generally been trading at a premium to VIX.

There is currently about a 7-point difference between the February and April VIX futures contracts. That is a large differential. If VIX declines, this spread may shrink (although VIX has not shown much proclivity for declining, even when the stock market rallies). But if VIX rises, the term structure may widen.

About CBOE Futures Exchange

CBOE Futures Exchange (CFE^®) is an all-electronic open access exchange, which utilizes the CBOE’s^® state-of-the-art trading system, CBOEdirect^®. CFE is the leader in providing innovative volatility risk management futures products, including VIX^® and variance futures, which enable market participants to manage volatility risk, as well as trade volatility directly. Access to CFE is available through numerous brokers, ISVs or directly via the CBOEdirect API or CBOE’s HyTS^® terminals. CFE trades are cleared by the AAA-rated Options Clearing Corporation (OCC). To contact the CFE, please click here.

About Larry McMillan and McMillan Analysis Corporation

Professional trader Lawrence G. McMillan is perhaps best known as the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies, which has sold over 200,000 copies. An active trader of his own account, he also manages option-oriented accounts for certain individuals and in addition, he is the Portfolio Manager of The Hardel Volatility Arbitrage Fund (a hedge fund). In a research capacity, he edits and contributes to his firm’s publications: Daily Volume Alerts, The Option Strategist and The Daily Strategist—derivative products newsletters covering equity, index, and futures options. Finally, he speaks on option strategies at many seminars and colloquia in the United States, Canada, and Europe. He is quoted in publications such as The Wall Street Journal, Barron’s, Technical Analysis of Stocks and Commodities, Data Broadcasting’s Exchange magazine, Futures Magazine, theStreet.com, and Active Trader Magazine. In these capacities, he is the President of McMillan Analysis Corporation, which he founded in 1991. Prior to founding his own firm, Mr. McMillan was a proprietary trader at two major brokerage firms—primarily Thomson McKinnon Securities, where he ran the Equity Arbitrage Department for nine years.

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Copyright © 2008 CBOE Futures Exchange, LLC. All rights reserved.

CFE®, CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index®, VIX® are registered trademarks of Chicago Board Options Exchange, Incorporated.

The information in this newsletter is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions that should be referred to for additional detail and are subject to changes that may not be reflected in this newsletter. The strategy discussions contained in this newsletter are designed to assist individuals in learning how volatility and variance futures as well as other volatility-based derivatives work and understanding various volatility derivatives strategies. The strategies discussed are for educational and illustrative purposes only and should be not be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Additionally, commissions and other transaction costs have not been included in the example strategies and will impact the outcome of security and futures transactions and must be considered prior to entering into any transactions. Investors considering volatility-based derivatives should consult a professional tax advisor as to how taxes affect the outcome of contemplated transactions in volatility-based derivatives. The charts and/or graphs contained herein are intended for reference purposes only. Past performance is not indicative of future results.

The views of third party contributors to this newsletter are their own and do not necessarily represent the views of CFE or its affiliates. Third party contributors are not affiliated with CFE. This newsletter should not be construed as an endorsement or an indication by CFE of the value of any third party product or service described in this newsletter.

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.

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.