CBOE Futures Exchange

April 30, 2012, Volume 6, Issue 04


A CFE Newsletter focused on Volatility Futures

Volatility Newsletter

VIX Futures Last Trade Dates

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Contract Last Trade Date
May 2012 05/15/2012
June 2012 06/19/2012
July 2012 07/17/2012
August 2012 08/21/2012
September 2012 09/18/2012
October 2012 10/16/2012
November 2012 11/20/2012
December 2012 12/18/2012
January 2013 01/15/2013


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CBOE Futures Exchange And DRW Trading Group Complete Agreement To Create Stock Index Variance Futures.   Read more...

CBOE Futures Exchange will be attending The SkyBridge Alternatives (SALT) Conference in Las Vegas May 8-11th.   Read more...

On March 26, 2012, CBOE Futures Exchange, LLC (CFE) listed security futures on the CBOE Crude Oil ETF Volatility Index (OVX).   Read more...

On February 21, 2012, CBOE Futures Exchange, LLC (CFE) listed security futures on the CBOE Brazil ETF Volatility Index ("VXEWZ"). Read more...

On February 2, 2012, CBOE Futures Exchange, LLC (CFE) listed Radar Logic 28-Day Real Estate Index (RPX) Futures.  Read more...

CBOE Futures Exchange Puts Real Estate on the Radar  Read more...

View our first two webinars with OptionsCity:

Record VIX Volume How and why trade VIX options and futures

Trading VIX futures and futures spreads

A CBOE Community Blog
Whats on Our Minds: Read the CBOE Blogs

Product Specifications Overview Weekly Options on VIX Futures

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Contract Size One (1) VIX futures contract
Trading Hours 8:30 a.m. - 3:15 p.m., Chicago time
Ticker Symbols VOW1 - Week 1
VOW2 - Week 2
VOW3 - Week 3
VOW4 - Week 4
VOW5 - Week 5 (if needed)
Strike Price Intervals May be no less than $0.50
Minimum Price Intervals 0.05 points
Dollar Value Per Tick $50.00 per contract
Exercise Style American - any day up to and including the expiration date
Expiration Date/Last Day to Trade Week 1 -- 1st Friday of contract month
Week 2 -- 2nd Friday of contract month
Week 3 -- 3rd Friday of contract month
Week 4 -- 4th Friday of contract month
Week 5 --5th Friday of contract month
(if needed)
Delivery Exercise of Weekly VIX Futures Options results in delivery of VIX futures with an expiration date closest to, but after the expiration date of the options contract.

Market Summary & Analysis

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Market Summary and Analysis is provided by Larry McMillan. Mr. McMillan is the President of McMillan Analysis Corporation.

Volatility finally increases
After languishing near 14 a month ago, the CBOE Volatility Index (VIX) finally increased at the same time the S&P 500 Index (SPX) topped out and declined modestly. The VIX settlement value rose substantially to 19.06 this month, from the multi-year low of 14.55 in April.

Figure 1 shows the entire history of the monthly VIX settlement prices, since the inception of futures trading in May 2004 (trading first began in March, 2004, and the first contracts that settled were the May, 2004, futures). The symbol for the monthly settlement price is VRO. The S&P 500 Index (SPX) is also overlaid on the graph. While there is not a perfect (inverse) correlation between SPX and VRO (and, by inference, VIX), one can see the general tendency of the two to move in opposite directions.

You can see that, despite the large percentage increase in VRO this month (from 14.55 to 19.06) the settlement price is still relatively low.

Figure 1 Source: McMillan Analysis Corp

Currently, VIX is trading in the 17-21 range while at the same time the action in the broad stock market (SPX) has become more volatile, increasing from the low-volatility environment of March.

In fact, one might use the technical pattern of VIX as confirmation of broad stock market moves:

1) As long as VIX remains in the 17-21 range, the stock market can be expected to be volatile.
2) If VIX breaks out to new highs over 21, that could be a bearish signal for stocks.
3) If VIX falls back below 17, that could be a bullish signal for stocks.

As this is written, VIX is just above 17 nearing a bullish signal. However, with various fundamental news items being a bit negative recently, it is possible that something might cause VIX to remain elevated above 17 until the economic picture becomes more resolved.

Premium and Term Structure
Table 1 shows the state of the VIX futures term structure on April 20th. Premiums remain quite large on the futures. These large premiums continue to reflect traders' demand for protection.

The continued rise in the term structure in later months is unusual. Normally, such long-term contracts will not respond favorably to an increase in VIX if the stock market should turn bearish. Therefore, it is usually better to buy near-term contracts as protection.

In general, large futures premiums and steeply upward-sloped term structures reflect a bullish market. If and when the market ever becomes truly bearish again, we would expect to see the term structure flatten and go negative.

The difference between the first and third month futures is somewhat high; once again above 3.50. So, while it might be tempting right now to sell the spread (i.e., sell July and Buy May), it theoretically may not be an attractive position.

Perhaps a better strategy would be to combine entry into the futures spread with the level of VIX. When the market turns bearish, the term structure flattens. So, if VIX breaks out over 21, one might consider buying May VIX futures and selling either June or July.

If VIX clearly breaks below 17, then one would expect the term structure to steepen in the ensuing bullish environment for stocks. In that case, one would Sell May VIX futures and buy June or July.

Another, more direct, strategy would be to trade the VIX futures in a speculative manner. Buying (near-term) VIX futures if VIX breaks over 21 and selling (near-term) VIX futures if VIX breaks down below 17.

VIX Futures in Focus

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VIX Futures in Focus is provided by Michael McCarty. Mr. McCarty is the founding member and chief strategist of Differential Research.

Inter Market Volatility Arbitrage

With the continued roll-out and growth in trading of futures based upon the implied volatility of asset classes extending beyond the initial US Equity scope of the original CBOE Volatility Index (VIX), we choose to continue to look at the relationships between different asset classes and different asset volatility classes seeking to better define, quantify and ultimately capitalize on inter-market volatility arbitrage opportunities.

Sources: CFE, Differential Research, LLC

While last month witnessed the expiration of three different volatility futures: VIX Index Futures (VX) and two security futures, the CBOE Emerging Markets ETF Volatility Index Security futures (VXEM) and the CBOE Gold ETF Volatility Index Security Future (GV), this month's series of expirations expands to four with the first ever expiration of a CBOE Brazil ETF Volatility Index Security Future (VXEW).

Sources: CFE, Yahoo Finance, Differential Research, LLC

First looking at the backdrop, this past year has seen the associated volatility indexes rising for equity markets through the New Year, before falling steadily through March while Gold Volatility as represented by the GVZ index has fallen steadily.

Sources: CFE, Differential Research, LLC

the April VIX future managed to rise from its introduction on 8/22/11 to set a high of $35.30 on October 3, 2011, the broadest measure of equity volatility fell to a low of $15.60 on March 26, 2012 before its final settlement value of $19.06.

Sources: CFE, Differential Research, LLC

The high settlement value for the April Gold ETF volatility security future was equivalent to its first settlement value of $30.00 on November 21, 2011. In a similar fashion, the lowest settlement value of $17.92 was set at April expiration.

The April Emerging Markets ETF volatility security future was introduced on January 9, 2012 first settling at $35.25 shortly before hitting its peak settlement value of $35.35 on January 13, 2012. The low for the contract was $26.80 on April 2, 2012 slightly below the final settlement value of $26.92.

Introduced on February 21, 2012, the April Brazil ETF volatility security future with an initial settlement value of $34.60, settled between $35.40 and $27.85 over the life of the contract, before final settlement of $31.30.

Sources: CFE, Differential Research, LLC

Volume and Open Interest for the VIX contract grew steadily through 3/20/12, corresponding with the contracts transition from the 2nd serial contract to the front month, seeming to confirm that the daily activities of short-term VIX based Exchange Traded Products (ETP's) currently comprise a meaningful percentage of daily VIX volumes.

Sources: CFE, Differential Research, LLC

Having only traded on two days during its life, volume in the April Gold ETF volatility security future continued to disappoint, while April Emerging Markets ETF volatility security future volumes continued to show interest. Notably, the most recent introduction, the April Brazil ETF volatility security future showed promising interest.

Sources: CFE, Differential Research, LLC

While the data remains limited some relationships are beginning to emerge. Notably, volatility security futures for the Brazil and Emerging Markets ETF's seem to be highly correlated, at least visually. Although at settlement the two products diverged. Again visually at least, the spreads between the security futures and the VIX futures seem to expand as the VIX future declines. With its volatility remaining fairly constant for the period, this fact was most evident for the Gold ETF security future which managed to rise from a discount to a premium to the VIX future.

Sources: CFE, Differential Research, LLC

Looking forward, May expiration will include the first ever expiration of CBOE Crude Oil ETF Volatility Index Security Future (OV).

Finally, one important consideration for anyone considering establishing an arbitrage position in volatility futures is contract size. For VIX futures the multiplier is $1,000 while the multiplier for volatility security futures including VXEEM futures is $100.

VIX White Paper

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The CBOE Volatility Index (VIX ) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

VIX White Paper (Acrobat).

CBOE Volatility Indexes

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CBOE's volatility indexes are key measures of market expectations of near-term volatility conveyed by stock index option prices. The indexes measure the market's expectation of 30-day volatility implicit in the prices of near-term index options. The indexes are quoted in percentage points, just like the standard deviation of a rate of return, e.g. 19.36. CBOE disseminates the index values continuously during trading hours. The indexes are leading barometers of investor sentiment and market volatility relating to key stock indexes.

Unique Features of Futures and Options on the CBOE's Volatility Indexes

Futures and options on the CBOE's volatility indexes have several features that distinguish them from most equity and index options. Here are links to unique features of VIX options?


Please direct questions concerning this circular to:

Jay Caauwe

Jennifer Fortino

About Larry McMillan and McMillan Analysis Corporation
Lawrence McMillan is the recipient of the Sullivan Award for 2011, awarded by the Options Industry Council in recognition of his contributions to the Options Industry. 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.

About Michael McCarty
Michael McCarty is the founding member and chief strategist of Differential Research. An independent provider of derivative research for institutional investors. Differential Research was founded to capitalize on the growing importance of risk and volatility analysis in the investment process. Mr. McCarty is a frequent guest on BloombergTV, Fox Business News and CNBC, in addition to being quoted regularly by the financial press. Mr. McCarty also speaks frequently on the topics of risk and volatility at investment industry conferences.

Michael McCarty was formerly the Chief Strategist at Meridian Equity Partners, an independent broker dealer. As director of the firm's Option Market Operations, Mr. McCarty published two widely-read notes per day, targeting on the US marketplace and uncovering Noteworthy Option Activity.

Born in the Republic of Panama and raised in Central Florida, Mr. McCarty's fascination with the financial markets came early on, first studying finance and history at Emory University, then obtaining a Masters Degree in Finance from New York City's Baruch College – Zicklin School of Business. His vast knowledge and deep understanding of the equity and derivative markets, the result of a twenty-five year Wall Street career as sales-trader, analyst and market strategist has allowed him to accumulate a significant following of the most respected and accomplished investors worldwide.

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.

Copyright 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.