CFE Futures In Volatility Newsletter
December 29, 2011, Volume 5, Issue 12 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
January 2012
February 2012
March 2012
April 2012
May 2012
June 2012
July 2012
August 2012
September 2012


Join us at MFA Network 2012 from January, 29-31st in Palm Beach, FL. Stop by our booth and meet Jim, Jay and Jennifer from the CBOE Futures Exchange. - Read More
On December 1, 2011 the last trading date of the VIX Futures expiry month changed from the day prior to the morning of expiration. This amendment permits 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
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.

VIX plunges, but futures premium is large

The stock market has struggled to maintain stability over the last month. A sharp decline around the Thanksgiving holiday was followed by a strong rally, most of which was accomplished in just two trading days. However, that rally did not hold and another decline ensued, only to be followed by another rally last week. Following the previous VIX expiration, the S&P 500 Index (SPX) has declined by a small amount (about 1%), but VIX itself has plunged 12 points, or by 36%.
Typically, VIX only declines like this when the stock market is in the midst of a strong rally. This was highly unusual action. In the past we have talked about the seasonality of VIX; where VIX has a strong tendency to decline from October through the end of the year. This certainly was the case this year, as VIX declined from 47 in early October to currently approximately 21.
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 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.
Content Graph
Figure 1   Source: McMillan Analysis Corp

Premium and Term Structure

Table 1 shows the VIX futures term structure on December 23rd. The term structure reverted to what is normally a very bullish state making the futures trade at large premiums to VIX, while the term structure slopes steeply upward.
Content Graph
Do these large VIX futures premiums have implications for the stock market movement? This is somewhat debatable. Back when VIX futures were primarily the venue of "smart money," large premiums tended to foreshadow market declines. This was certainly the case in 2007, when the situation was extremely similar to that of 2011. In 2007, there was a strong rally after Thanksgiving (1,000 Dow points), followed by a pullback, then another rally into Christmas; almost the same exact pattern of this year. On the last rally back in 2007 the VIX fell but the futures did not. The Jan futures closed with premiums near 4 for several days, and then the stock market collapsed, dropping over 200 SPX points by Martin Luther King, Jr. day in mid-January. Could this be a repeat?
There is always the chance, but in recent years when the term structure is positive and the premiums are large, we have typically seen the market rise. This has been the case during the strong rally that began the summer of 2010 leading into the early part of 2011 and rallying again that summer.
So which is it? You could say that eventually the large premiums give way to a market selloff, but it takes a long time to get there. The difference between 2007 and 2010-2011 is that in 2007 only a few people were looking to buy protection. These days everyone wants protection all the time, regardless of the imminent need for it. So in 2007, when the "smart money" bought protection, raising the price of VIX futures (as it always does) the market dropped simultaneously. Now to buy protection would still raise the price of VIX futures, but it is no longer necessarily a well-timed purchase.


There is heavy demand for protection. That is why VIX futures are trading with such large premiums. We hear about "crowded trades" all the time. This is a phrase used often in the media. It means that people seem to be of the same opinion about something.
Another type of trade that seems to me to be getting a lot of attention these days is "buy volatility." Most of the so-called experts who appear on TV are supporting the purchase of volatility. Many have opinions about VIX but yet do not really understand how derivatives work. However, even those who do understand often promote buying volatility. VIX at or below 21 seems to be pretty low for a market that still has European debt problems and American economic problems.
Of course, one cannot buy VIX, he must buy the VIX derivatives instead, and VIX derivatives are trading at some of the largest premiums in history. At the December 21st settlement, the January VIX futures were at a 5-point premium.
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.

Literally taking the title of this feature "VIX Futures in Focus," last month's column focused on a single futures contract from its first trade to expiration. This month we again would like to focus on a single futures contract, the recently expired VIX December 2011 contract.
Content Graph
Sources: CBOE, Differential Research, LLC
While, the first settlement value for the Dec 11 VIX future was $24.60 on April 25, 2011 the same day the S&P 500 (SPX) index closed at 1335.25. The future traded the following day at $24.20. Volatility was relatively low at the time, and 20-day realized volatility for the SPX on April 25th was only 8.62% and the VIX index stood at 15.77.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
For the first four months of the December VIX future's life, little changed in the equity market. While realized volatility rose slightly during the period, the December VIX future fell, hitting an intraday low of 21.05 and closing at a low of 21.10 on July 7th.
US budget woes likely contributed to a sharp decline in equities which coincided with a sharp increase in both realized and implied volatility. While the VIX index reached a multi-year closing high of 48.00 on August 8th and the SPX 20-day realized volatility peaked on August 29th at 49.37. The SPX index hit its low for the period of 1099.23 on October 3rd, the same day the December VIX future settled its high for the life of that contract, at $36.70. The next day, the December VIX contract hit its intraday trading high of $37.85.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
The equity market, represented by the SPX, managed to recover to 1285.09 on October 28th by which time 20-day SPX realized volatility had fallen to 27.25%, while VIX settled at 24.53 and the December VIX future settled at 25.55.
The market's gain was short-lived. The SPX index fell again in November to 1158.67 on November 25th pushing the December VIX future, now the front month future, to 34.50. The SPX managed to recover to 1243.72 by the VIX December expiration. The rise in equities coupled with an anticipation of a seasonal drop in equities likely put significant pressure on the December future which settled at 23.85 the day before expiration.
The December VIX future expiration was unique; it was the first VIX future to trade in an open market during the morning of expiration. It traded from 7am to 8:15am CST. The final settlement value of the December VIX future was $21.43. While only 252 December futures changed hands during the extended morning session, the extension of trading appears to have reduced the typical volume surge usually experienced the day prior to expiration as the expiring front month futures are rolled into other months.
Content Graph
Sources: CBOE, Yahoo Finance, Differential Research, LLC
Over the December VIX future contract's life, the single biggest volume day was the day preceding the November VIX expiration, when the December VIX future traded 30,872 contracts. Open interest peaked the following day at 65,282.
From its first settlement to expiration, the December VIX future fell 13.17% while the SPX index fell 6.85%.
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.