CBOE Futures Exchange
June 28, 2013 Volume 7 Issue 2


A CFE Newsletter focused on Volatility Futures

2013 has been a fabulous year for the CBOE Futures Exchange. New records have been broken as volume continues to soar. VIX Futures reached a new all-time record volume day on April 15th trading 449,955 contracts! It was the first time VIX Futures topped the 400,000 contract mark in a single day. April 2013 was also a record setting month with new all-time highs in total monthly volume, monthly average daily volume and as mentioned above, single day volume.

VIX Futures Last Trade Dates

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Contract Last Trade Date
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
January 2014 01/21/2014
February 2014 02/18/2014
March 2014 03/18/2014


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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 Summer Trading Network in New York City July 10th.

The CBOE Futures Exchange is sponsoring the Alpha Hedge West Conference in San Francisco, CA September 15 – 17th.

The CBOE Futures Exchange will also be attending the Inside Commodities Event September 23rd in New York City.

Register Now! CBOE's Risk Management Conference EUROPE September 30 through October 2, 2013 Sintra-Linho, Portugal

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 Finally Explodes

Volatility has started to increase, slowly at first then explosively as the stock market took big hits on June 19th and 20th, resulting in the CBOE Volatility Index® (VIX®) spiking higher and creating both good and bad news for stocks. The bad news is that when volatility is trending higher stocks are typically bearish and the good news being that when volatility is accelerating into a spike peak and falls back, that is a typical buy signal for stocks and usually indicates the end of a downtrend in stock prices.

Spike Peaks in VIX

It has been pointed out in prior articles that a spike peak in VIX during a sharply declining stock market is typically a buy signal for stocks, or more specifically, a buy signal for the S&P 500® Index (S&P 500) and derivatives on the S&P 500. For example, Figure 1 below shows there were spike peaks in VIX in late December 2012, late February 2013, twice in April 2013 (most notably in mid-April), and then one in early June. Three of these were strong buy signals.

We recently did research on spike peaks in VIX in order to quantify a trading system based on that chart pattern, concluding that it tends to be quite a profitable approach. We define VIX as "spiking" if it is up at least 3 points in the last one, two or three days. Once VIX has been identified as "spiking," we then keep track of the highest intraday point VIX reaches. If VIX goes into an extended uptrend, as it did in October 2008 or again in August 2011, then that intraday high gets pushed higher and higher. Eventually, when VIX closes at least 3 points below that intraday high, a buy signal is generated.

Any viable trading system needs to have exit rules. The first exit rule for this system is its stop out, which is to exit if VIX subsequently closes at a higher price than the previous intraday high. In this case, begin tracking the highest point reached, intraday. This stop out generally leads to another buy signal if VIX subsequently closes 3 points below that new intraday high.

The other exit rule is to close the position after 22 trading days have passed. Twenty two days are the average number of trading days per calendar month, and the signals tend to go a bit stale after that much time.

Consider the mid-April signal as an example of how this works. VIX spiked up from 12 to 17.27 in just two days and then it quickly fell to close at 13.96, which was more than 3 points below the intraday high of the "spiking" move. The S&P 500 was bought. However, two days later, the S&P 500 fell further and VIX closed at 17.56, which is higher than the previous intraday high of 17.27. The system was stopped out. The new intraday high was 18.20. At this point we were looking for VIX to close more than 3 points below 18.20 in order to generate another buy signal. It did the next day, closing at 14.97, so the S&P 500 was bought again – at roughly the 1555 level. From there the S&P 500 soared more than 100 points higher in the next 22 trading days.

At the current time, another such VIX buy signal appears to be setting up. There was a stopped out buy of the S&P 500 when VIX spiked higher to an intraday high of 21.32 on June 20th. A close below 18.32 would be an indication of another buy signal.

Figure 1 Source: McMillan Analysis Corp

Term Structure

We usually comment on the term structure of VIX futures in these reports, and this is an interesting time to do so. For the past several years, the term structure has been sloping steeply upwards – reflective not only of a bullish market, but also attributable to many institutions and other traders heavily buying protection in the form of VIX futures or S&P 500 puts – either directly or through exchange traded products that track VIX futures.

But after the market took a beating this week, the term structure flattened out considerably. The first four month VIX futures all settled at a discount to VIX on June 20th. However, the term structure still retained a slight upward slope. Thus it appears to be clinging to some vestiges of bullishness.

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.

Applying the Mass Index for VIX Futures Trading

By Mark Shore, Founder of Shore Capital Management.

Our series of trading strategies for the CBOE Volatility Index® (VIX®) futures contract traded on CBOE Futures Exchange, LLC (CFE®), have discussed various VIX futures trading ideas. This article discusses the Mass Index. As the VIX futures tends to be a range bound product, this strategy may be of special interest to our readers as it seeks market turning points.

First let's examine the recent liquidity of CFE. On June 3, 2013, an increased volume of 59% was reported for May 2013 versus May 2012. The volume was 3,220,913 in May 2013 versus 2,022,253 in May 2012.i Year-to-date volume was 16,534,805 for 2013 versus 7,838,325 for 2012, an increase of 111%.

Specific to VIX futures, May 2013 experienced trading volume of 3,212,399, the third highest month, behind March and April 2013 (3,220,977 and 4,056,760 respectively) and 61% higher than May 2012. The month of May was the fourth consecutive month in the contract's history of trading volume exceeding 3 million contracts. In May 2013 the monthly average daily volume was 146,018 versus 90,908 in May 2012, an increase of 61%.

The Mass Index was developed by Donald Dorsey and was initially discussed in the June 1992 issue of Technical Analysis of Stocks and Commodities magazine. The Mass Index seeks to identify trend reversals for overbought and oversold markets. This is measured by the increasing or decreasing of the market's range between high and low prices. The Mass Index will increase as the range increases and will decrease as the range decreases.

The Mass Index is a 25-period moving sum of the ratio of two moving averages. The first average is a 9-period exponentially moving average of the high and the low differential. The second average is a 9-period exponential moving average of the first average. Increasing the sum widens the gap and the Mass Index moves higher.ii

Dorsey refers to the "reversal bulge" as an important Mass Index pattern for a high probability of the market reversing direction. This tends to occur when the Mass Index exceeds 27 and quickly falls below 26.5. To determine the reversal direction of the move, buy if the 9-period exponential moving average of the market is trending down and sell if the 9-period exponential moving average is trending up.iii However, a reversal bulge may be an infrequent occurrence.

In Chart 1 noted below, the near-term VIX futures contract offers suggests times when the reversal bulge appears. In each case the VIX futures contract was at or near its historical resistance level then began a sell off that lasted several months.

In October 2008 (during the financial crisis) VIX futures reached a high of 69.40 and the Mass Index signaled an overbought market since late September / early October 2008. Between March 23 and March 29, 2009, the reversal bulge appeared as the Mass Index fell below 26.5. The exponential 9-week moving average was higher as the market rallied. This would then be a signal to short VIX futures. This signal lasted into early 2010.

Between July 26, 2010 and Oct 11, 2010, the reversal bulge signal appeared again. The exponential 9-week moving average was signaling a short position. This signal lasted until early or mid 2011.

In the last few months of 2011, the Mass Index indicated an overbought position. During January, the Mass Index signaled a shorting signal for VIX futures. This signal lasted into May or June of 2012. Basis, weekly data and the Mass Index does not offer frequent signals, but they tend to offer signals when the market is overbought and the reversal may last for several months.

Chart 1: VIX Futures Weekly Nearest Futures with a 9 Day Exponential Moving Average and Mass Index, Ending June 18, 2013

Sources: www.barchart.com

In Chart 2 below of the daily nearest VIX futures, the Mass Index nears the 26.5 level four times, but doesn't exceed it until the fifth time on June 16, 2013. However, each time the Mass Index neared the 26.5 level it quickly turned and then the market sold off. But the moves were not as large or extensive in duration as in the weekly data. Perhaps the daily data can be utilized as a confirmation of the continuation of the weekly data signals.

Chart 2: VIX Futures Daily Nearest Futures with a 9-Day Exponential Moving Average and Mass Index, Ending June 18, 2013

Sources: www.barchart.com

In Chart 3 below, the July 2013 VIX futures contract offers two moments of the reversal bulge. On April 29, 2013, the Mass Index fell below 26.5; however, it never reached 27 but entered into the region. As of June 19, 2013, the VIX futures has likely entered the reversal bulge area, but has not exceeded 27 as of yet.

When combining the daily data and the weekly data it could be implying one of two patterns: 1) VIX futures are already becoming overbought at least in the short run and may be nearing a selloff in the near future; and 2) regardless of the short term indications, the weekly data may be implying there is more upside for the VIX futures in the coming weeks and months, thus suggesting the S&P 500® would be vulnerable to more volatility over the summer.

Chart 3: Daily July 2013 VIX Futures with 9 Day Exponential Moving Average and Mass Index Ending July 19, 2013

Sources: www.barchart.com

As noted previously, the reversal bulge is an infrequent signal. However, it may be used in conjunction with other signals or indicators, such as when the VIX futures contract nears its major reversal price point or supports price point levels or combining the daily data with the weekly data to determine the market direction.

This article may offer some ideas for investors, Commodity Trading Advisors or hedge funds as a method to include VIX futures into their portfolios. This article is not intended to recommend a specific trading strategy, but to educate the reader on various strategy ideas to 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"May 2013 Trading Volume in VIX Futures Post Gains Over a Year Ago" CFE Press Release June 3, 2013


iiiAchelis, S. (2001). Technical Analysis from A to Z. New York, McGraw-Hill, 181:183

Copyright© 2013 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com

Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.


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.