CFE Futures In Volatility Newsletter
November 28, 2011, Volume 5, Issue 11 Subscribe | Unsubscribe | View In Browser

This Issue

Announcements & Calendar
CBOE Volatility Indexes
Market Summary and Analysis - featuring Larry McMillan
VIX Futures in Focus - featuring Mike McCarty
Volatility In Focus

For more information on the CBOE Volatility Index ("VIX"), volatility and variance futures including brokers, ISVs, symbols and product specifications, visit
For VIX market information including current quotes and historical data, please visit
To contact the CFE, please click here.


Welcome to Futures in Volatility!

Futures in Volatility is a monthly CFE publication focused on volatility and variance futures, featuring volatility market reports, trading strategies and feature articles from contributors such as Larry McMillan and Michael McCarty. CFE is the home of volatility futures, featuring CBOE S&P 500 Volatility Index (VIX) futures and Three and Twelve-month S&P 500 Variance futures. CFE makes trading volatility easier than ever.
Futures in Volatility includes several sections: Announcements and Calendar, Market Summary and Analysis, Trading Strategy Ideas, Volatility in Focus 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. Volatility In Focus includes feature articles and education focused on volatility related concepts. And, Events features upcoming CFE and Chicago Board Options Exchange (CBOE) conferences, seminars and webinar presentations.

Announcements & Calendar

VIX Futures Last Trade Dates

Contract Last Trade Date
December 2011
January 2012
February 2012
March 2012
April 2012
May 2012
June 2012
July 2012
August 2012


As of December 1, 2011 the last trading date of the VIX Futures expiry month will change from the day prior to the morning of expiration. The amendment will permit trading from 7:00am - 8:15am CST on their final settlement date. - Read More
On November 4, 2011, we launched Trade at Settlement (TAS) transactions in the CBOE Volatility Index (VIX) futures - Read More
Don't miss our third and final webinar with OptionsCity, on "VIX Index Options Trading" Monday, December 12th at 10:30am CST:
Join Russell Rhoads of the Options Institute for an introduction to Index Options that trade on the CBOE Volatility Index. Russell will cover the basics of these contracts and then jump into a couple of strategies that may be appropriate for all levels of option traders. - CLICK HERE to Register!
To view our first two webinars with OptionsCity click on the links below:
"Evolution of VIX Futures" written by CFE's own Jay Caauwe, found in the current issue of Swiss Derivatives Review. - Read More
Whats on Our Minds:   Read the CBOE Blogs
Weekly Options on Mini CBOE Volatility Index (Mini VIX) Futures celebrated its first anniversary (ticker symbol VOW) we'd like to celebrate this milestone by outlining the product for you. More information on the VOW can be found here. - Read More
Please direct questions concerning this circular to:

Jay Caauwe

Jennifer Fortino

Products Specifications Overview: Weekly Options on VIX Futures
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)
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.
Back To Top

Market Summary & Analysis

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.

Protection remains costly

The CBOE Volatility Index (VIX) is sometimes referred to as an indicator which measures the cost of protection. To understand the thinking behind this definition, consider that most portfolio managers using listed options to protect their portfolio either buy S&P 500 Index (SPX) puts or VIX calls. SPX put purchasing is still the more common method. When demand is high for SPX puts, the price of those puts is typically forced higher, increasing their implied volatility and thus usually increasing the price of VIX. Hence, in this sense, VIX is reflective of the higher demand (cost) of protecting a stock portfolio with SPX puts.
For the fourth month in a row, the settlement value of VIX was between 33 and 34. This is such a narrow range, that it almost appears to be a flat line on the chart in Figure 1. We know VIX did not just sit there all month and had wide fluctuations throughout the month only to settle right back where it started.
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.
If you look closely at the right hand side of Figure 1, you can see that SPX (the top, red line) has been rising over the past three months, while VRO has remained steady. This is a divergence. Usually VIX (and hence, VRO) will decline when SPX is rising. However, that has not been the case since August. This may be an indication that traders are worried about the forthcoming market events, and continue to buy protection despite a modestly rising market.
Content Graph
Figure 1   Source: McMillan Analysis Corp
Figure 2 shows the recent activity of VIX which has spiked for months. Spike peaks tend to be short-term buy signals for the stock market. This tends to hold true at all times in bull or bear markets; high or low VIX. In addition, recent probes below 30 have been interpreted as sell signals. That is not axiomatic. In other words, the "sell on probes below 30" phenomenon is something that appears to be unique in the current market. In addition, since mid-October, one can see that VIX rallies have faded near the 37 level, but that there is also a trend of rising lows (the rising trend line on the right of the chart), which has resulted in VIX trading in a narrower range over the past few weeks. VIX has hovered near the 30-32 area most of this time.
As we saw in last month's issue, there is a seasonal tendency for VIX to decrease through year-end. So far, that effect has been minimal, but it would not be surprising to see a positive market bias, with a falling VIX between Thanksgiving and Christmas, despite the negative news that traders have been bombarded with recently.
Content Graph
Figure 2   Source: McMillan Analysis Corp

Premium and Term Structure

Table 1 shows the state of the VIX futures term structure on November 21st. It is one of the strangest term structures that I can recall. First of all, it is very flat, which is a bit of a departure from the sharply downward-sloping term structure that has existed for much of the time since August. Although it is still downward-sloping from the viewpoint of the January and February futures.
Second, the December futures are seemingly out of line or "too low." This is likely caused by the fact that there are three CBOE holidays between mid-December and mid-January, before the January SPX options (upon which the Dec VIX futures are based) expire. Those holidays are Christmas Day, New Years Day, and Martin Luther King, Jr. Day. This lack of trading availability means that the market can not move on those days making traders pay a lower volatility over that time. I have been told that if the VIX calculation were based on business days instead of calendar days, the December anomaly would likely disappear.
In any case, the futures are trading at small premiums to VIX, which is regarded as a bit bullish. The term structure is still sloping downwards in the front end, which is regarded as a bit bearish. Overall, the term structure of VIX does not seem to be conveying an extremely pessimistic outlook from the raw, elevated levels of VIX.
Content Graph


One simple strategy is to sell VIX futures on rallies towards 37, and to buy them on dips below 30 (or at least on dips to the rising trend line in Figure 2). That will not work forever, but it seems to be a decent approach as long as traders continue to worry about the following items:
  1. European debit crisis
  2. Super Committee failure to achieve anything
  3. MF Global bankruptcy
Such perceived worries tend to lead to a lessening of confidence in all matters financial; when a nervous market can typically least handle it.
Back To Top

VIX Futures in Focus

VIX Futures in Focus is provided by Michael McCarty. Mr. McCarty is the founding member and chief strategist of Differential Research. Click Here for more information about Mr. McCarty.

This month I would like to take the title of this publication "Futures in Focus" and really focus on a specific future, the November 2011 CBOE Volatility Index (VIX) futures contract which expired Wednesday November 16, 2011. The final settlement price for the November 2011 VIX futures contract on that day was $33.36 which was $9.41 higher than its first traded price of $23.95 on March 21, 2011.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
The 39.29% gain in the November 2011 VIX futures contract for the period compares with a 3.12% loss for the S&P 500® Index (SPX) which fell 40.57 points from the closing value of 1,298.38 on March 21st to the opening value of 1,257.81 on November 16, 2011. Twenty-day realized volatility for the SPX rose from 18.39% to 28.67% during that period, creating a 55% increase.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
The daily low settlement value for the November 2011 VIX futures contract was $20.90 on July 7, 2011 and the settlement high for that contract was $40.55 set on October 3, 2011.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
This feature focuses on how to diversify an equity portfolio looking at relative returns and the volatility of an SPX Index portfolio with an allocation to a VIX Index future. While we have typically examined a portfolio that was rebalanced, today’s focus is on the life of the November 11 VIX futures contract. It seems worthwhile to look at the performance of a buy and hold portfolio comprised of the SPX Index and the November 11 VIX futures contract. With a static investment in two negatively correlated assets, performance evaluation alone is typically a trivial task. With one asset appreciating, and the other normally depreciating, the best return would be 100% investment in the asset that rises in price and complete avoidance of the one with a negative return. Not knowing which asset that will be, the purpose of the evaluation is to examine the dampening effect on the combined portfolio’s returns. Decreased portfolio or account volatility tends to increase confidence in returns and avoids real or imagined stop losses.
In further changes from our earlier analysis, accepting the greater volatility that took place during the period under examination, we will focus on daily returns for portfolios combining the SPX Index and the November 2011 VIX futures contract. On March 21, 2011 the SPX closed at a dividend adjusted value of 1298.38 while the November 2011 VIX futures contract closed at 18.39, or nominally 1.84% of the value of the SPX. To simplify our calculation we will assume the purchase of 1,000 units of the SPX Index representing a portfolio worth $1,298,380 and review portfolios with 1,2,3,4 and 5 November 2011 VIX future contracts worth $18,390 or 1.84% of the equity portfolio value serving as collateral for the future’s purchase. At any time the portfolio value will therefore be equivalent to the closing value for the SPX plus any net profit or loss on the November 2011 VIX futures contract's position. We will ignore for the moment the market reality that only 1 future actually traded at that price on March 21, 2011 and also that we are buying and holding.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
LAs we have discussed in the past, the performance of the allocation to the VIX futures contract is a function of the time to expiration; increasing responsiveness as expiration approaches. However, for the period under review, realized volatility for the SPX also increased later in the analysis.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
The mean reverting nature of equity return volatility with its negative correlation of equity returns, tends to favor the rebalancing of volatility diversified equity portfolios. As a result, this tends to make the simplicity of a "buy and hold" approach have significant merit and deserving of further evaluation.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
Back To Top

Volatility In Focus

VIX White Paper

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.

CBOE Volatility Indexes

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?
For more information on VIX and volatility futures including brokers, ISVs, symbols and product specifications, visit

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
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,, 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.
Back To Top

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.

Chicago Board Options Exchange, 400 South La Salle St Chicago, IL 60605
You are subscribed to as %%emailaddr%%. Make sure you add to your address book. If you prefer not to receive future email from the, please unsubscribe here. To unsubscribe by postal mail, please write to Internet Marketing, 400 S. LaSalle St., Chicago, IL 60605.