Interactive Brokers Webcast CBOE Equity Market Volatility ...€¦ · presentation should be construed as a recommendation to buy or sell a security or future or to ... Dollar Value

CBOE Equity Market

Volatility Indexes

March 26, 2014Presented by Russell Rhoads, CFA

Interactive Brokers Webcast

THE OPTIONS INSTITUTE at CBOE 2

Disclosure

Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of

Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from

The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors and involves risk of loss.

The information in this presentation is provided solely for general education and information purposes. No statement within this

presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any

strategies discussed, including examples using actual securities or futures price data, are strictly for illustrative and educational

purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in

the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to

entering into any transactions. Multiple leg strategies involve multiple commission charges. Investors should consult with their tax

advisors to determine how the profit and loss on any particular option strategy will be taxed. Past performance does not

guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this

presentation is available from CBOE upon request. CBOE, Chicago Board Options Exchange, CBOE Volatility Index, CFE and

VIX are registered trademarks and CBOE Futures Exchange, CBOE Short-Term Volatility Index, CBOE 3-Month Volatility Index,

CBOE Mid-Term Volatility Index, Execute Success, RVX, SPX, The Options Institute VXST, VXN, VXV and VXMT are service

marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P 500® is a registered trademark of Standard & Poor's

Financial Services, LLC and has been licensed for use by CBOE and CBOE Futures Exchange, LLC (CFE). CBOE's and CFE’s

financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no

representation regarding the advisability of investing in such products. Russell 2000® is a registered trademark of Russell

Investments, used under license. The NASDAQ-100 Index®, NASDAQ-100®, and NASDAQ® are trademark or service marks of

The NASDAQ Stock Market, Inc. (with which its affiliates are the "Corporations"). These marks are licensed for use by CBOE in

connection with the trading of products based on the NASDAQ-100 Index. The products have not been passed on by the

Corporations as to their legality or suitability. The products are not issued, endorsed, sold or promoted by the Corporations. THE

CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). CBOE is not

affiliated with Interactive Brokers. This presentation should not be construed as an endorsement or an indication by CBOE of the

value of any non-CBOE product or service described in this presentation.

Copyright © 2014 CBOE. All rights reserved.


CBOE Equity Market Volatility Indexes

Outline

S&P 500® Related Indexes

CBOE Russell 2000® Volatility Index

CBOE Nasdaq-100® Volatility Index

Summary / Q&A


Volatility Indexes on the S&P 500

Introduction

The CBOE Volatility Index® (VIX®) was the first implied volatility

related index

The VIX methodology is applied to a wide variety of markets to

calculate a standard measure of implied volatility

CBOE now publishes quotes on four volatility indexes that use

S&P 500 Index options as the underlying market



Volatility Indexes based on S&P 500 Option Pricing

Index Ticker Days

CBOE Short-Term Volatility Index VXSTSM 9 Days

CBOE Volatility Index VIX 30 Days

CBOE 3-Month Volatility Index VXVSM 93 Days

CBOE Mid-Term Volatility Index VXMTSM 184 Days



2013 Price Action

VXST – VIX – VXV – VXMT

Source: CBOE.com

10

15

20

25

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

VXST VIX VXV VXMT



2013 Price Action

VXST vs. S&P 500

Sources: CBOE.com and Bloomberg

10

15

20

25

30

35

40

1200

1300

1400

1500

1600

1700

1800

1900


VXST

S&P 500



2013 Price Action

VIX vs. S&P 500

Sources: Bloomberg and CBOE.com

10

15

20

25

30

1100

1300

1500

1700

1900

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13

S&P 500

VIX



2013 Price Behavior

VXST vs. VIX

Source: CBOE.com

10

15

20

25


VIX

VXST



2011 – 2013

VXST – VIX – SPX Relationship

Market Correlations –

20 Day Average Realized Volatility –

VIX SPX

VXST 0.9296 -0.7212

VXST VIX VXV VXMT

175% 109% 67% 48%



2011 – 2013

VXST – VIX Relationship by Year

VXST

VIX

Average High Low

H/L

Range

H/L

Percent

Range

VXST /

S&P 500

Correlation

2011 24.48 68.00 12.81 55.19 431% -0.7833

2012 17.16 26.93 11.50 15.43 134% -0.6309

2013 13.85 23.54 10.20 13.34 131% -0.7514

Average High Low H/L Range

H/L

Percent

Range

VIX /

S&P 500

Correlation

2011 24.20 48.00 14.62 33.38 228% -0.8592

2012 17.80 26.66 13.45 13.21 98% -0.7629

2013 14.23 20.49 11.30 9.19 81% -0.8232



Volatility Curves

Selected Term Structure Curves in 2013 –

Source: CBOE.com

10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

VXST VIX VXV VXMT

6/20/2013 Average 8/2/2013



VXST Futures Trading

Weekly futures based on the CBOE Short-Term Volatility Index

began trading on February 13, 2014

There are futures contracts expiring on a weekly basis available

for trading at the CBOE Futures Exchange

This gives traders an opportunity to take advantage of an

outlook for near term volatility pricing


CBOE Russell 2000 Volatility Index

Russell 2000 Index (RUT)

The Russell 2000 Index is considered a leading benchmark for

the performance of small cap stocks

Many market participants think of the Russell 2000 as being a

better indicator of the domestic economy than other broad

based equity market indexes

As a group Russell 2000 stocks generated over 80% of their

revenues from inside the United States in 2012



Introduction

The CBOE Russell 2000 Volatility Index (RVX) utilizes the CBOE

Volatility Index (VIX) methodology

The calculation uses RUT index options as the inputs with the

result being a 30 day measure of implied volatility

Small cap and large cap stock prices are influenced by different

economic factors

At times RVX and VIX do not necessarily correlate with each

other



2013 Price Action

RVX vs. Russell 2000 –


10

15

20

25

30

35

40

600

700

800

900

1000

1100

1200


Russell 2000

RVX


Russell 2000 Volatility Index

RVX Futures

Futures on RVX began trading at the CBOE Futures Exchange

on November 18, 2013

The pricing characteristics of RVX futures contracts are very

similar to VIX futures



RVX Futures Contract Specifications

Underlying Ticker

Futures Symbol

Contract Multiplier

Minimum Price Intervals

Dollar Value Per Tick

Contract Months

Trading Hours

Settlement Date

RVX

VU

$1,000

0.05

$50

Up to 9 Serial Months

8:30 am to 3:15 pm Chicago Time

30 Days Prior to Following Month's 3rd Friday



RVX Futures Pricing

CBOE Russell 2000 Index / Futures Prices – 12/6/2013

Contango – ‘normal shape’

Backwardation – usually occurs in times of high volatility

Index /

Future Close

Spread

vs. RVX

Days to

Expiration

RVX 17.83

VUZ3 18.35

VUF4 19.75

VUG4 20.95

VUH4 21.60

+0.52

+1.92

+3.12

+3.77

12

47

75

102



RVX Options

Options on the Russell 2000 Volatility Index began trading at

CBOE late last year

So far these options appear to share the same pricing

characteristics as the other volatility related option markets

The best underlying market to gauge the value of an RVX option

may be the corresponding futures contract



RVX Options Contract Specifications

Underlying Ticker

Multiplier

Strike Prices

Minimum Tick < $3

Minimum Tick > $3

Contract Months

Trading Hours

Settlement Date

RVX

$100

Minimum Strike Price Increment of $1

0.05

0.10

Three near term plus three additional on Feb cycle

8:30 am to 3:15 pm Chicago Time

30 Days Prior to Following Month's 3rd Friday



RVX Option Pricing

December 6, 2013 – Pricing

RVX @ 17.83

RVX Feb 20 Put @ 1.50

20.00 – 1.50 = 18.50

VUG4 @ 20.95

The Best Underlying Pricing Vehicle for

RVX Options may be the Corresponding Future



RVX Option Trade

Trade on December 4, 2013 –

Bought 50 RVX Jan 18 Puts @ 0.58

Sold 50 RVX Jan 17 Puts @ 0.23

Net Cost = 0.35*

*Excluding Commissions



Option Trade

Payoff Diagram –

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

Break Even 17.65

RVX @

18.50

VUF4 @

20.00



RVX Option Trade

Payoff At Expiration –

RVX Settlement Over 18.00

Both Options Expire – 0.35 Per Contract Loss

RVX Settlement Between 17.00 and 18.00

Partial Gain or Loss

RVX Settlement Under 17.00

Both Options In the Money – 0.65 Per Contract Gain



Summary

The Russell 2000 is considered the standard for measuring the

performance of small-cap stocks

As a measure of expected volatility of the Russell 2000 RVX is a

standard for determining expected 30 day volatility for small

cap stocks

RVX futures and options now offer traders and investors an

efficient way to gain exposure to this volatility measure


CBOE Nasdaq-100 Volatility Index

Overview

The CBOE Nasdaq-100 Volatility Index (VXN) is calculated using

options on the Nasdaq-100® (NDX) Index

VXN is typically at a premium to VIX, but has fallen to a

discount

There has been a bit of a seasonal pattern for VXN based on the

earnings calendar


CBOE NASDAQ-100 Volatility Index

2013 in Context

VXN vs. NASDAQ-100


10

15

20

25

30

35

1750

2250

2750

3250

3750


NASDAQ-100

VXN


CBOE NASDAQ-100 Volatility Index

VXN Futures Pricing

September 6, 2013

16.00

18.00

20.00

VXN Sep-13 Oct-13 Nov-13 Dec-13

17.25

18.30

18.9019.20

16.32



VXN Futures Pricing

November 1, 2013

12.00

14.00

16.00

18.00

20.00

VXN Nov-13 Dec-13 Jan-14 Feb-14

19.05

14.76

15.90

16.90

18.20



Summary

VXN pricing behaves in a similar manner to VIX pricing

The shape of the curve varies with the outlook for volatility

based on NDX option pricing

Curve trading is popular with VIX futures and is a logical

approach to trading VXN futures as well



Summary

CBOE quotes dozens of volatility indexes and offers trading

vehicles on eight of those indexes

Four of those tradable volatility indexes are based on the US

markets

The underlying markets tend to be highly correlated, but do

have periods of divergent performance

This sort of divergent performance shows up in the respective

volatility indexes as well



More Information / Contact

www.cboe.com/volatility

cfe.cboe.com

[email protected]

@russellrhoads

http://www.cboe.com/volatility

http://www.cfe.cboe.com/

mailto:[email protected]

Documents

Interactive Brokers Webcast CBOE Equity Market Volatility ...€¦ · presentation should be construed as a recommendation to buy or sell a security or future or to ... Dollar Value