CBOE Futures Exchange
March 28, 2013 Volume 7 Issue 1


A CFE Newsletter focused on Volatility Futures

Welcome to our first quarterly newsletter of 2013!

2013 has already been a fabulous year for the CBOE Futures Exchange breaking new records in first quarter! February's average daily VIX futures volume reached an all-time high of 161,176 contracts. VIX futures reached an all-time record volume day on February, 25th trading 302,278 contracts! It was the first time VIX futures topped the 300,000 contract mark in a single day. On January 16, exchange-wide open interest stood at 501,559 contracts, a new all-time high, and the first time CFE open interest surpassed the 500,000-contract benchmark.

VIX Futures Last Trade Dates

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Contract Last Trade Date
April 2013 04/16/2013
May 2013 05/21/2013
June 2013 06/18/2013
July 2013 07/16/2013
August 2013 08/20/2013
September 2013 09/17/2013
October 2013 10/15/2013
November 2013 11/19/2013
December 2013 12/17/2013


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London HubCFE's London Hub went live on February 1. The Hub is a cross connection (telephone switch and communication lines) from the Equinix facility in England to the CBOE Command Center at the Equinix facility in New Jersey. The Hub provides direct access to CFE's trading system and market data, as well as index data made available by Market Data Express. For additional information on the London Hub, click here.

Look for us at the Markets Media Trading and Investing Summit in Toronto on Thursday, April 4th!

The CBOE Futures exchange will be sponsoring the CTA Expo in New York, Thursday April 25th.

The CBOE Futures exchange will also be attending the EuroHedge Summit in Paris, May 22nd and 23rd.

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

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.

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Volatility's Continued Decline

Since spiking sharply higher at the end of 2012, volatility has generally declined throughout much of the first quarter. Eventually, in late March, the CBOE Volatility Index® ("VIX® Index") value went down to nearly 11 - the lowest level for VIX since late February 2007. There is some valuable information that can be gleaned from these VIX movements, and they should be helpful in traders' plans going forward.

Lowest VIX Since 2007

It is important to understand that a low VIX Index level may be a sign of an overbought market, but in and of itself, it is not generally a sell signal. A more likely sell signal arises when VIX Index level begins to increase and trend upwards. For example, the 2003-2007 period was the bull market coming off the bottom in late 2002 or early 2003 (either could be considered to be correct). During that bull market, the VIX Index level first fell to 11 in July 2005. Except for a few spikes upward (April 2005, October 2005, June 2006) the VIX Index level remained at those low levels until February 2007. It even fell below 10 a few times. This is important to understand if a trading strategy involves trying to "time a market top," because it will likely not be sufficient to merely note that the VIX Index level is "too low." The VIX Index level can remain low for quite some time and the prediction is not that the VIX Index level will remain at a low level for two years, but that it is possible.

With this understanding, market participants looking to buy VIX products as protection for stock portfolios should consider entering positions when the VIX Index is at this level, just in case an event takes place that causes the market to gap lower (and VIX Index to gap higher). An example of this occurred in late February 2007. Specifically, the Chinese government raised margin rates in an attempt to dampen speculation, which impacted markets around the world to gap sharply lower. On February 27, 2007, the Dow Jones Industrial Average ("DJIA®") Index fell 416 points, and the S&P 500® Index dropped 50.3 points. The VIX Index dramatically rose from 11.15 to a high of 19.01 in that same day, closing at 18.31. Even though the VIX Index level did fall back to nearly 11 shortly after that, it never declined to below 11 again. Instead it began to trend higher – and in retrospect the actual warning sign that a market top was forming - although it took 6 to 8 months to do so.

Spike Peaks in VIX

The decline in the VIX Index level in the first quarter of 2013 has not been completely uniform and there have been a couple of volatility spikes along the way. Those occasions are generally buying opportunities. That is, when the VIX Index level spikes up and then spikes right back down again, it is a strong buy indication signal for stocks. Moreover, such a buy signal is often of intermediate-term length, although admittedly traders could easily disagree on what "intermediate-term" means. One can trade these spike peaks in a systematic way: after a spike upward, if the VIX Index level retreats almost immediately by at least three points, then a strong buy indications signal exists for the broad stock market (S&P 500). The stop indication for this trade would be if the VIX Index level exceeded the previous peak - at which point one may consider exiting the trade and wait for a new set-up to take place.

The current chart of the VIX Index level is shown in Figure 1. In late December, 2012, the VIX Index level spiked upwards and then again in late February, 2013, and then just a week or so ago. Each of these spikes in volatility was generally associated with some negative news that worried the market. The seeming causes, in order, were: 1) worries over the fiscal cliff (late December 2012), 2) worries over sequestration (late February 2013), and 3) worries over Cyprus (March, 2013). When volatility spikes up like that, but then almost immediately retraces at least three points lower, then a buy signal is typically registered for stocks.

The buy signal for stocks in late December appeared accurate. The buy signal in late February appeared accurate, too, and now a third one has been issued in the wake of the Cyprus "scare." Some might say that the spike upward in the VIX Index level last week was "too low" - but that is not part of the system. As long as the 3-point spike reversal in the VIX Index level occurs - which it did -- a buy signal is generally at hand.

Where will the next scare come from? No one knows, but one scenario that could possibly unfold is a surprise rise in interest rates - or even a speculation of such a surprise. One similar example occurred in late March, 1994: the Federal Reserve surprised the markets by raising interest rates by one-quarter of a point. The stock market sold off sharply, and the VIX Index level quickly spiked from about 12 to 24. But then the VIX Index level quickly declined, registering a "spike peak" buy signal. A solid stock market rally unfolded over the next two months.

Figure 1 Source: McMillan Analysis Corp

Protection Trade and The Term Structure

We have written about the "protection trade" in this newsletter many times. That term describes the action by institutional investors to buy stocks and to simultaneously protect them by buying either S&P 500 Index (SPX) puts or VIX futures (or VIX calls). The heavy amount of protective activity has distorted certain pricing measures at times - especially the term structure. That is, VIX futures expiring in months two through seven were each successively much more expensive than their immediate predecessor.

The term structure's steepness has abated somewhat in recent weeks, although it remains sloped upward. Table 1 shows the current state of the term structure. You can see that the premiums in the front months are rather modest, and the term structure slopes upward to the extent that the longest-term December futures are trading at a premium of 5.66 points to the VIX Index. This is nowhere near the double-digit premiums that 7-month VIX futures were carrying at times during 2012.

While it is hard to define "normal," this is about as "normal" of a construct of the VIX futures - in terms of premium and term structure - as you are going to get. Note that the fact that December VIX futures are trading at 19.40 does not mean that VIX futures traders are predicting a volatility increase over the remainder of this year. Rather, this upward-sloping term structure during a bull market is typical, as each contract trades at a price higher than its shorter-term predecessor. This typically occurs when the marketplace cannot predict - and does not necessarily want to predict - very long-term volatilities, so three-year volatility is generally priced at about 25 or so. If the term structure extended out that far, the term structure would likely continue to rise modestly throughout.

Figure 2 Source: McMillan Analysis Corp


To date, 2013 has been a year of declining volatility, but there is plenty of time remaining for that to change. Investors looking to protect stocks should consider buying cheap protection now - perhaps not the "full boat" of protection, but at least a representative amount to ward off the effects of any large market surprise. Speculators can likely wait for an upward trend in volatility before taking bearish positions.

Finally, hedgers might want to buy SPX and VIX calls . This is an intriguing hedge, for it could profit if the market tanks (the VIX Index level would rise) or if the market continues to plow higher (the S&P 500 Index level would rise). This is somewhat similar to owning a straddle on the stock market, but with the added factor that a truly bearish market development would cause the VIX Index level to rise much faster than S&P 500 Index level falls.

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Replicating Portfolios and Arbitrage Markets

The article below is provided by Michael McCarty. Mr. McCarty is the founding member and chief strategist of Differential Research.

The "fair price" of a derivative security is typically measured and determined against an economically equivalent replicating portfolio, e.g., a security or portfolio that has the same cash flows as the derivative security.

For example, the price of an S&P 500® Index (S&P 500) future is equal to the present value (including interest and dividends) of a properly weighted portfolio of 500 component stocks delivered at the time of the future's expiration. Any difference in the prices of the future and the replicating portfolio of stocks is rapidly erased by stock-index arbitrageurs taking positions in lower priced assets while simultaneously selling more expensive ones. This concept is well established and forms the basis for the calculation and broad media coverage of the pre-market S&P 500 Index "Fair Value".

With the proliferation of derivative instruments based on the S&P 500 Index, a myriad of arbitrage strategies exist involving the S&P 500 future, portfolio stocks in the S&P 500 Index, the SPDR® S&P 500 ETF (SPY) and, for purposes of this discussion, the future and the reversal/conversion market for the S&P 500 Index (SPX) options market. Different margin considerations may yield slightly different values for the future or "forward" value for the S&P 500 Index.

Much like how the S&P 500 Index became recognized as the benchmark for equity returns, the CBOE Volatility Index® (VIX®) has become the benchmark for equity market implied volatility.

VIX Futures

While an S&P 500 Index futures contract represents a portfolio of stocks, the VIX futures contract represents a portfolio of SPX options. As a consequence, the construction of a portfolio whose returns mimic a VIX future is not as intuitive and the calculation of its value not as direct.

Sources: CFE, Differential Research, LLC

A reasonable approximation can be obtained by applying the VIX methodology or calculation as detailed in the VIX White Paper, which may be accessed at: http://www.cboe.com/micro/vix/vixwhite.pdf. First, a description of what value a VIX futures contract represents will be provided and a discussion about deconstructing the VIX calculation to reveal its components will be provided. We will then introduce how a replicating portfolio could theoretically be constructed and priced. Next, we will describe how a close approximation can be reproduced with SPX options and publically available data. We will close with a more detailed examination of the limitations of our model and suggest avenues for potential refinement.

While the purpose of this discussion is to provide an alternative price for a VIX futures contract, during the process we will have also laid the foundation for a simplified volatility arbitrage model. Today's stock-index arbitrageurs who trade only a portion of the 500 stocks that comprise the S&P 500 Index consider their "basket" to have a competitive advantage. Similarly, volatility arbitrageurs seek to gain a competitive advantage through a refinement of this model and its limitations.

When discussing volatility, we start with the standard deviation (or the square-root) of the variance of a distribution of daily lognormal returns expressed on an annualized basis. For historical or realized volatility that equation is straightforward:

With the assumption that the mean return on a daily basis is not significantly different than zero, the equation is often reduced for simplicity to the zero-mean version:

Future Volatility

One variable that figures into options' pricing is the market's estimate for future or implied volatility. However, the shape of the future distribution of lognormal returns is unknown. Consequently, any attempt to derive an estimate for future volatility from options' implied volatilities using a model which assumes a known distribution is inaccurate.

The VIX calculation provides that each successive out-of-the-money option's price properly weighted reflects the incremental contribution to volatility for returns exceeding the strike price regardless of the distribution's shape.

Further, a VIX futures contract reflects the market's expectation for the final 30-days implied volatility derived from a portfolio of SPX options. But how is that portfolio created and valued?

Deconstructing a Single VIX Expiration

We start exactly 30-days before the expiration of SPX options, which is when a VIX future expires.

The VIX settlement value is determined by applying the VIX methodology as outlined in the VIX White Paper to a broad series of SPX options expiring the following month. A series of steps is used to identify which options will be used in the VIX calculation. Those options are then priced and then weighted according to the VIX calculation.


First, we find the options' implied forward price (F) for the S&P 500 Index at that option series' expiration "by identifying the at-the-money SPX options, at which the absolute difference between the call and put price is smallest" using the formula from the VIX White Paper:

Next, we choose the strike prices (Ki) for inclusion in our calculation selecting all puts below K0, the strike price below (F) the forward price, and calls greater than K0. For the strike K0 both the price for the call and the put are included. Successively lower puts and higher calls are selected until two strikes in a row have zero bids. No further options are included. This can be done using a Microsoft Excel spreadsheet and inputting a series of embedded IF statements.

Each month on VIX settlement days, a modified opening procedure for SPX options is used to facilitate price discovery and opening prices. The opening prices for SPX options or in their absence the opening bid-ask midpoint, for the selected strikes are inserted into the VIX calculation.

Note that the VIX calculation is the square root of the general equation multiplied by 100.

While the general form of the VIX calculation references Q (Ki), at expiration the bid-ask midpoint is only used in the absence of an opening trade price. Today, with the growing volume in VIX futures, the modified opening procedure used for SPX options on volatility index settlement days is extremely active and covers a broad range of strikes.

For the March 2013 VIX expiration, a total of 220,540 April SPX options traded on the opening, with strike prices that ranged from the 1065 put to the 1750 call. Lower priced puts, such as the April 100 and April 900, traded on the opening; however, not all of these strikes were used to calculate the VIX settlement value. K0 or the strike below the calculated forward price was determined to be 1560. (Source CFE: http://cfe.cboe.com/data/EOSpage.aspx)

Beyond Expiration

We are able to calculate the value of a VIX future that settles for cash, but what about at any other time? Consider the application of the VIX calculation to the same series of SPX options the following morning. The range between double no-bids is tighter, so fewer strikes would be used in the VIX calculation. There are fewer trades so midpoints are used and finally it is now less than 30 days. Arguably the result of the calculation is the theoretical price of a (non-existent) 29-day volatility future.

Similarly, the calculation can be applied to all series of SPX options from which a series of annualized volatility estimates can be constructed–using various terms each approximately 30-days apart.

While, we can continue to do this using a Microsoft Excel spreadsheet, the series are also published by CBOE as the VIX term Structure, which can be found at http://www.cboe.com/data/volatilityindexes/volatilityindexes.aspx.

Sources: CFE, Differential Research, LLC

The volatility values that we arrive at however represent annualized volatility for the life of the SPX options contracts and not our desired target volatility for the final 30-days.

Sources: CFE, Differential Research, LLC

A Simple Model:

With data available for SPX option expirations approximately 30-days apart, the incremental contribution to volatility for the final 30-days is typically a function of the implied volatility of that series and the previous series. Unfortunately, we can't just subtract one from the other. First, we must de-annualize to arrive at simple period implied volatility and then square implied volatility to arrive at implied variance. Because we are looking at independent random variables, variance is additive. If we subtract-29 days of variance from 59 days of implied variance we have 30 final days implied variance for the longer dated SPX option series. Squared and re-annualized to reflect 30 days, we now have a reasonable approximation for prices of a replicating portfolio for a VIX future expiring 30-days prior to the longer dated SPX option series. The replicating portfolio for a VIX future is comprised of long position in a series of SPX options in the targeted month and short positions in previous monthly series.

In similar fashion a longer dated SPX option strip, or longer dated volatility, could be replicated using a series of VIX futures and the strip of SPX options for the series with maturity less than 30 days.

Model Limitations

Our model is limited by the results of our reliance on publicly available data. We generally are forced to rely on the bid/ask mid-point due to the infrequent trading of many out-of-the money SPX options. The breadth of strikes included in the calculation may be significantly reduced by the increased occurrence of zero-bid strikes. Historically, the near simultaneous calculation of the VIX Index which only uses midpoints at the time of VIX expiration has yielded a result below the VIX settlement value. This suggests that either the midpoint is below the true value or many zero-bid options have non-zero values. The reliance on bid/ask midpoints likely understates the true price of volatility.

The VIX calculation remains a discrete calculation and assumes implied volatility of the range between strikes is constant. The difference in modeled implied volatility between strikes would suggest otherwise. The effect of this difference is less clear but most-likely overstates true implied volatility.

Finally, if we stack VIX futures to hedge longer dated volatility exposures, we are assuming that at expiration the next future has 30-days until expiration. Typically, when a VIX future ascends to the front month position it expires in 4 weeks or 28 days, although a couple of times a year it will expire in 5 weeks or 35 days. Most of the time VIX futures overlap by two days and occasionally there is a five-day gap

Sources: CFE, Differential Research, LLC

VIX White Paper: (http://www.cboe.com/micro/vix/vixwhite.pdf)

Utilizing the Commodity Channel Index on VIX Futures

By Mark Shore, Founder of Shore Capital Management.

In the continuing series of discussing methods of trading the CBOE Volatility Index® (VIX®) futures contract traded on CBOE Futures Exchange, LLC (CFE®), this article will discuss utilizing the Commodity Channel Index (CCI).

In each article, readers are reminded that the liquidity of a trading instrument is always very important. On March 1, 2013, CFE again reported a continuing trend of increased volume in the VIX futures contract. Specifically, February 2013 was the second consecutive month that achieved record average daily volume, total volume and single-day volume for the VIX futures contract and for CFE.i

The average daily volume (ADV) for the VIX futures contract reached a record 161,176 contracts traded. This was an increase of 141% from February 2012 and an increase of 17% from January of 2013. February 25 and 26, 2013 experienced record volume days of 302,278 and 299,566 contracts traded respectively. This was also the first time that the VIX futures daily volume exceeded 300,000 contracts. The previously single-day record volume of 221,323 contracts was set on January 2, 2013. In February 2013, 3,062,344 VIX futures contracts were traded, representing an increase of 129% from February 2012. February 2013 trading represented a 6% increase from the record of 2,897,739 traded contracts set in January 2013. February 2013 was the sixth consecutive month in which trading exceeding two million VIX futures contracts and it was the first month in which trading exceeded 3 million VIX futures contracts.

The CCI was developed by Donald Lambert and introduced in the October 1980 issue of Commodities magazine (aka Futures magazine). Application of the CCI is not limited to physical commodities and may apply to financial instruments as well. The CCI is a metric of an investment's variance from its statistical mean. The CCI reports high values when a market reaches an extended high price relative to its average price. It will report low values when a market reaches an extended low price relative to its average price. In basic terms, the CCI is an overbought/ oversold indicator.ii

The CCI is based on the premise that all markets have cycles from low to low or high to high. The CCI is calculated by calculating a typical price of the day from the high + low + close and then creating a simple moving average of the typical price. The final equation of the CCI = (typical price – moving average)/ (0.015* mean deviation). Lambert applies a constant of 0.015 to keep 70% to 80% of the CCI value between +100 and -100.iii

The CCI is considered overbought when the value exceeds +100 and is considered oversold when the value is below -100. However the CCI may extend beyond +100 and -100 and the market could remain overbought/ oversold for an extended period of time. If a market continues to remain overbought/ oversold, but the CCI is reversing (divergence appears) it may imply the market is nearing a correction. Some examples of divergence are provided in this article.

Parameters of the CCI are based on cyclical periods of the market. For this article we assumed a 60 day cycle, using a 20 day (1/3 of the cycle) CCI parameter setting. The lower the parameter setting, the greater the probability of the CCI to reach overbought/ oversold values.

Chart 1: Nearest Monthly VIX Futures Chart, 20 Month CCI

Sources: www.barchart.com

When the 20 month CCI was applied to the nearest VIX futures month in Chart 1,we found several instances when the CCI indicated an overbought period and the VIX futures market was in breakout mode. Due to the monthly basis, VIX futures tended to remain overbought for an extended period. For example, in 2007 the CCI showed the market overbought, but over time a divergence appeared as the market was finding lower highs and the CCI was gradually decaying. The same situation occurred in 2008/ 2009. In 2010 an interesting divergence occurred when VIX futures peaked, but the CCI did not reach an overbought condition. Instead the CCI was decaying and implying the market would probably be correcting and the market did.

Chart 2: Nearest Weekly VIX Futures Chart, 20 Week CCI

Sources: www.barchart.com

In Chart 2 we applied the 20 week CCI to the VIX futures nearest weekly chart. As the data is more frequent, we found a higher frequency of overbought/ oversold conditions than in the monthly chart. In 2009 and early 2010 the CCI spent most of the year hovering around the oversold region as the market continued to trend lower. In late 2011 and early 2012, the market was building a base as the CCI once again hovered in the oversold territory.

Mid 2010 is another example of the CCI peaking and decaying while VIX futures gradually trended lower with lower highs and lower lows, then moving into oversold territory and consolidating before the next rally in 2011.

Chart 3: Nearest Daily VIX Futures Chart, 20 Day CCI

Sources: www.barchart.com

Chart 3 of the VIX futures nearest daily contract demonstrates the CCI tends to remain overbought/ oversold for a short period of time. CCI often shows a divergence from the market as it reverses direction after a peaked move. As this occurs the market plateaus (moves sideways) or begins to reverse. April 12, 2012 is an example of the CCI reversing as the market peaked and traded sideways before it corrected. May 18, 2012 to June 4, 2012 is another example of VIX futures becoming overbought and the CCI reversing. November 20, 2012 demonstrates how the market traded sideways with an upper bias after overselling and the CCI reversed.

Based on recent data from March 2013, the CCI is implying the market is coming off the lows and maybe developing a rally or about to become overbought in the near future. Basis the April 2013 contract, will the market test 18 or move into a breakout mode?

Chart 4: Daily April 2013 VIX Futures Contract with 20 Day CCI. Ending March 19, 2013

Sources: www.barchart.com

Chart 4 utilizes the CCI on the VIX futures basis April 2013. Although the April 2013 contract continued to trend lower, there were moments where the market became overbought and oversold. As noted in Chart 3 and again in Chart 4, the VIX futures may be setting up for a rally. As mentioned in previous articles, VIX futures tends to be a range bound market and often rally after consolidating in the 14 to 16 index level (the current range).

Over the last 30 years, the CCI has grown in popularity as a component used for trading strategies. The four time-periods tested demonstrate the CCI may be worth an investigation for analysis of the VIX futures contract.

This article may offer some ideas for the investor or Commodity Trading Advisor or hedge fund as a method to include VIX futures into their portfolio. This article is not intended to recommend a specific trading strategy, but to educate the reader on various strategy ideas and investigate beyond the common spread or hedging of VIX futures.

If you have a favorite volatility futures trading strategy you would like to share, please email: info@shorecapmgmt.com

i"Trading Volume in VIX Futures reaches New All-Time High for Second Consecutive Month", March 1, 2013, CFE Press Release

iiAchelis, S. (2001). Technical Analysis from A to Z. New York, McGraw-Hill, 103:106



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.

About Mark Shore
Mark Shore has more than 20 years of investment, research and futures experience. In 2008 he founded Shore Capital Management LLC where he consults in alternative investments regarding due diligence, research, educational workshops and business development. He is a frequent speaker at alternative investment events. He has published several papers on alternative investments and asset allocation. His research is found at www.shorecapmgmt.com.

Mr. Shore is an Adjunct Professor at DePaul University's Kellstadt Graduate School of Business where he teaches a graduate level managed futures/ global macro course. He is also an Adjunct Instructor at the New York Institute of Finance and a Contributing Writer for Reuters HedgeWorld and the CBOE Futures Exchange. Prior to founding Shore Capital, Mr. Shore was Head of Risk for Octane Research Inc ($1.1 billion AUM) in NYC from 2007 to 2008, where he was responsible for quantitative risk management analysis and due diligence of Fund of Funds. He chaired the Risk Management Committee and was a voting member of the Investment Committee.

Prior to joining Octane, he was at VK Capital Inc from 1997 to 2006, a wholly owned Commodity Trading Advisor ($250 million AUM) of Morgan Stanley. As Chief Operating Officer of VK Capital, Mr. Shore provided research and risk management expertise on portfolio issues, product development and business strategy. Mr. Shore graduated from DePaul University with a degree in Finance. He received his MBA from the University of Chicago.

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.