Primer on Options and Volatility Strategies - Cboe · Primer on Options and Volatility Strategies ... VIX ® and Volatility Trading Primer on Options and Volatility Strategies

Primer on Options and Volatility Strategies

3rd Annual RMC Europe - IrelandColin Bennett, Santander; Paul Stephens, CBOESeptember 2014

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Outline

� Volatility Risk Premia

� Hedging / Long Volatility Strategies

� VIX® and Volatility Trading

Primer on Options and Volatility Strategies

Copyright © 2014 Chicago Board Options Exchange, Incorporated. All rights reserved.

Volatility Risk Premia

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CBOE Index Option Strategy Benchmarks

S&P 500®

BXMSM

– Long S&P 500, with dividends, short first available OTM 1-month SPX call

BXYSM

– Long S&P 500, with dividends, short 2% OTM 1-month SPX call

PUTSM

– Long treasuries, short first available OTM 1-month SPX put (fully collateralized)

CLLSM

– Long S&P 500, with dividends, short 10% OTM 1-month SPX call, long 3-month SPX put

Russell 2000 ®

BXRSM

– Long Russell 2000, with dividends, short first available OTM 1-month call


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Benchmark Returns and Volatility Over 25 Years

Sources: Bloomberg, CBOE and Citigroup Fixed Income Indexes.


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www.cboe.com/benchmarks

Total return indexes reflect reinvested dividends, but indexes may not reflect all transaction costs a nd are not investable. Past performance is not predictive of future results.

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The Source of Outperformance

Why does it work? Volatility Risk Premium

Implied Volatility vs Historical VolatilityCurrent IV has historically been greater than subsequent HVInsurance Risk Premium – Investors pay a premium for Insurance

* Chart - Pension Consulting Alliance Inc. (PCA) presentation at 2014 CBOE Risk Management Conference || Options-based strategies in Public Pension Funds


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Quiz Rules

Rules For Quiz

Need to get ALL questions right (if no one gets all questions right, top scorer gets a mystery prize)

Have to do quiz on your own (no merging scores with colleagues)

No Santander employee (or relations) can win

No CBOE employee (or relations) can win

Must answer question before I give the answer

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Question

What is the fair price of implied volatility?

Below expected future realised volatility (WHITE)

Equal expected future realised volatility ( RED)

Above expected future realised volatility ( GREEN)

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Implied should be above realised

Assuming a positive equity risk premium, implied vo l should be above realised

Implied volatility is on average 1-2 pts above realised volatilityShort volatility strategies are effectively long equity risk (assuming negative spot volcorrelation)If long equity is expected to earn more than the risk free rate (i.e. positive equity risk premium) then short volatility should also be profitable (as exposed to the same risk)Fair value of implied volatility is therefore above realised volatility

Shorting implied volatility is an opportunity, but returns are likely to be similar to going long equityThere are many structured products based on selling variance swaps, their returns have suffered in the downturn as volatility spiked and equities fell

Structured products selling variance contain equity risk

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Call overwriting can yield enhancedreturns

Reasons why volatility is usually overpriced

Demand for protectionUnwillingness to sell low premium (near dated) options High gamma of near dated options has gap risk premiumIndex implied lifted by structured products

Selling expensive implieds can lift performance, but note that the delta of position is lower (reduces benefit of equity risk premium)On balance call overwriting has tended to be a winn ing strategy in most market environments (except in very bullish ma rkets)

Call overwriting can improve portfolio performance

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Question

Is volatility (standard deviation) the best measure of risk for call overwriting?

No (RED)

Yes (GREEN)

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Overwriting with 1 month 104% strike may be optimal

Strike of optimal strategy depends on period of tim e examined

Overwriting with near dated options tends to outperform as can sell 12 one month options in a year, but only 4 three month options. BUT selling multiple short dated options can be seen as more risky (if markets rise one month, then fall)Equities must have a realistic positive return during back test period (negative return optimum strike is < ATM). In these periods a strike of 103-104% is best for 1 month SX5E options (107-108% for 3 month options).Strike should be higher for higher volatility stocks (rule of thumb is use c25% delta calls)

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-8% -7% -6% -5% -4% -3% -2% -1% 0%Call overw riting volatility - index volatility

Cal

l ove

rwrit

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retu

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inde

x re

turn

Exact peak strike for overwriting depends on period of backtest

Index

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103% 104%

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110%

Call overwriting

Only upside risk is reduced (use

Sortino ratio rather than standard dev)

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Question

Do you get best outperformance from call overwritin g an index or single stock?

Index ( RED)

Single stock ( GREEN)

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Performance depends on environment

Overwriting may be optimal on an index rather than single stock

Overwriting outperforms, but there were periods where it underperformedIndex implieds are more overpriced than stocks (implied correlation too high) As call overwriting less attractive for single stocks, there is greater chance enhanced call overwriting can lift returns

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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Relative performance (rebased)

BXM / S&P500 total return

Outperform Signif icantly Breakeven Signif icantly Underperform Signif icantly Signif icantly Underperform Outperform Outperform Underperform

Start of late 90's bull market

Asiancrisis

TMTpeak

2003trough

Creditcrunch

2009troughCall overwriting performance depends on market envi ronment

Call overwriting outperforms

Call ovewritingunderperforms

S&P500 1m ATM call overwriting performance since 19 88

Hedging / Long Volatility Strategies

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Hedging

HedgingIndividual Underlying, Sector, or Index

– Buy Puts• Defines Risk• Allows to maintain position and still reap upside

Tail-Hedge– Hedges overall Portfolio

• Buy SPX Puts• Buy VIX calls


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VXTHSM - CBOE VIX Tail Hedge Index

VIX futures less than or equal to 15 No VIX calls are purchased

VIX futures above 15 and less than or equal to 30 1% of portfolio in 30 delta VIX calls

VIX futures above 30 and less than or equal to 50 ½% of portfolio in 30 delta VIX calls

VIX futures above 50 No VIX calls are purchased


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Question

What may be the optimal protection strategy?

Deep Out Of the Money or DOOM puts (WHITE)

Put spread ( RED)

Selling your equity position ( GREEN)

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Markets can crash, correct or enter bear market

DAX declines since 1959 can be grouped into 3 categ ories

Crash has a high annualised decline (c90%) for a pe riod of 3 months or less Near dated DOOM puts best

Bear markets are multiple year declines of 23% or m ore Best to exit position (long dated protection is too expensive)

Corrections are remaining declines of up to a year and up to 22% Put spreads may be optimal (or put spread collar or knock out puts))

Average Duration

Average decline

Average annualised decline

Duration range

Decline range

Crash 1 month 31% 96% < 3 months 19% - 39%

Correction 3 months 14% 58% <= 1 year 10% - 22%

Bear market 2.4 years 44% 26% 1-5 years 23% - 73%

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fit

Stock priceCall price † Short stock Call + short stock

Delta hedged (call + short stock) position profits from a movement

up or down in equity market

Delta hedging removes equity risk• Delta is the measure of equity risk (by definition a

long equity position has delta = 1 = 100%)• Delta hedging is the process where the equity risk of

an option position is removed by going long or short stock (e.g. a long call is delta hedged by going short stock).

• Profile of delta hedged call, put and straddle is identical (are all convex).

Gamma scalping locks in profit Assume an investor has a long volatility position (e.g. long call, put or straddle) that is delta hedged (i.e. delta = zero).

If underlying falls shares need to be boughtIf underlying rises shares need to be sold

Gamma scalping (delta rehedging) always gives a profit.Profit from gamma scalping is offset by cost of time decay (theta), i.e. the fact time value of option decreases approaching expiry.

Delta hedging

Rehedging locks in profit

Delta hedging gives vol exposure

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)

Stock priceStraddle Straddle + long stock Straddle + short stock

1) Start (zero delta)

2) As have -ve delta buy shares to return to zero delta (and lock in gains)

3) Now have +ve delta hence close long and go short

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Question

If an index (c20% vol) rises 10% in 1 year, what is the most profitable strike for a 1 year call option?

ATM (WHITE)

ITM (RED)

OTM (GREEN)

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ITM options trade like a future

ITM options have highest delta, hence highest retur n if investor is confident

Typically investors trade ATM or OTM options as they are cheapestHighest return for a given market move occurs for ITM options, as their higher delta more than outweighs their higher cost (ITM options similar to futures)ITM options do not have much convexity (compared to ATM), hence is a risky strategy as the high cost of ITM options could be lost

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Return

Strike

OTM options have low profit due to low delta

ITM options have highest profitProfit of 1 year call if markets rise 10%

Strike Premium Payout ProfitProfit (% of premium)

90 15 20 5 33%

95 12 15 3 25%

100 9 10 1 11%

105 6 5 -1 -17%

Breakdown of 1 year call profit if markets rise 10%

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Question

If a stock (c30% vol) falls 10% in 1 year, what is the most profitable structure?

Long put ( RED)

Long call spread ( GREEN)

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ITM call spreads can be profitable when equities decline

Unless underlying moves are exceptional, you earn m ore from theta than delta

If an ITM call spread is purchased, the short call is more ATM than the long call (hence the structure earns theta)For a 10% decline, an ITM 85-90% call spread earns peak profits (for call spreads whose strikes are 5% apart). Profit from buying an ITM call spread can be greater than a put (if equity decline is not excessively large)Buying an ITM call spread is a viable trade for fixed income investors

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Return

StrikeCall spread (5% wide) profit Put profit

Max call spread profit is above 60% while max put profit is below 30%

Profit of 1 year call spread and put if markets fal l 10%

Strikes Premium Payout ProfitProfit (% of premium)

75-80 3.81 5 1.19 31%

80-85 3.49 5 1.51 43%

85-90 3.14 5 1.86 59%

90-95 2.79 0 -2.79 -100%

Breakdown of 1 year call spread profit

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Option structures incorporate delta & vol view

Choice of structure depends on view on equity and v olatility markets

For any given equity and volatility view a suitable structure can be chosen by referring to the below diagramAs 1x2 put spread has a theoretical profile similar to short put (for maturities over c3 months) we consider it to be a bullish trade (often used as pseudo-protection)

Market View

Market View

Vol

atili

ty V

iew BullishBearish

Implied expensive

Implied cheap

VIX and Volatility Trading

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What Does Implied Volatility Look Like?


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A measure of implied volatility:Derived from S&P 500 index option pricesCalculated from nearby expirations for constant, 30-day volatility measureUses the entire range of available strike prices

– VIX is calculated from the value of a portfolio of options that replicates

the square of 30-day volatility

What is VIX?


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A specially designed portfolio of optionsOption weights inversely proportional to the strike price (K) squaredConstant volatility exposure over several strike pricesDelta-hedging P&L not path-dependent

The Option Strip

50 65 80 95 110 125 140 155

Underlying Price

Vega

50 65 80 95 110 125 140 155

Underlying Price

Vega

Vega exposure of single option Vega exposure of option “strip”


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Multiplier is 100 for options Multiplier is 1000 for futures

Settlement is cash, European-style options

Expiration is 30 days before the following month’s SPX expiry.

Expires on opening print.

VIX Futures/Options Trading & Settlement


Series Used in Settlement - August 20, 2014173 Strikes used, 174 options prices

Date Expiration Strike P/C Trade Price Volume

20-Aug-14 19-Sep-14 1275 Put 0.05 67320-Aug-14 19-Sep-14 1280 Put 0.05 50520-Aug-14 19-Sep-14 1285 Put 0.05 47020-Aug-14 19-Sep-14 1290 Put 0.05 46720-Aug-14 19-Sep-14 1295 Put 0.05 46320-Aug-14 19-Sep-14 1300 Put 0.05 48920-Aug-14 19-Sep-14 1305 Put 0.05 48620-Aug-14 19-Sep-14 1310 Put 0.05 48320-Aug-14 19-Sep-14 1315 Put 0.05 47820-Aug-14 19-Sep-14 1320 Put 0.05 475………. ………. ………. ………. ………. ……….………. ………. ………. ………. ………. ……….………. ………. ………. ………. ………. ……….20-Aug-14 19-Sep-14 1975 Put 21.9 38720-Aug-14 19-Sep-14 1975 Call 22.6 64………. ………. ………. ………. ………. ……….………. ………. ………. ………. ………. ……….………. ………. ………. ………. ………. ……….20-Aug-14 19-Sep-14 2090 Call 0.35 72120-Aug-14 19-Sep-14 2095 Call 0.2 36620-Aug-14 19-Sep-14 2100 Call 0.2 36420-Aug-14 19-Sep-14 2105 Call 0.15 33320-Aug-14 19-Sep-14 2110 Call 0.15 33320-Aug-14 19-Sep-14 2115 Call 0.25 71920-Aug-14 19-Sep-14 2120 Call 0.15 33020-Aug-14 19-Sep-14 2125 Call 0.1 80720-Aug-14 19-Sep-14 2150 Call 0.1 1,04520-Aug-14 19-Sep-14 2175 Call 0.05 1,132

95,301

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VIX is 30-day volFutures are 30-day forward vol

All options priced on that month’s futures contract

On Bloomberg: Futures Quotes - “VIX <index> CT” Options Quotes - “VIX <index> OMON”Settlement Price - “VRO <index>”

VIX Futures and Options Basics


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VIX Futures Term Structure


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VIX and VVIXSM (VIX of VIX)


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SPX and VIX Indices


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Correlations


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Question

Is close to close volatility an unbiased measure of volatility?

No (RED)

Yes (GREEN)

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0 1 2 3 4 5DaysRandom walk / normal markets

Integrated vol = close to close vol = weekly vol

In normal markets equities random walk • Market makers and stat arb funds remove

autocorrelation . In developed liquid markets with no short selling restrictions market makers and stat arb funds should remove any autocorrelation, hence markets normally random walk.

• In crisis equities no longer random walk . Because of the risk, many market makers and stat arb funds withdraw from stressed markets.

Reasons why not always random walk • Panic trading . Stop losses & panic trading can cause

market overreaction intraday, but this is normalised after a few days.

• Political “pin risk” . Politicians only do what is necessary when markets plummet, and backtrack when they rise.

• Low volumes . Market moved by few big trades on low volume.

• Correction / misunderstanding of statements . Markets moved by central bank comments, which can be misread.

Random walk / normal markets

Whipsaw / stressed markets

Markets do not random walk in crisis

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Using intraday prices can improve historical volati lity measurement • When comparing volatility between regions, weekly volatility is better than daily to reduce effect of

different time zones. This is only appropriate for large data samples, if this is not available / practical an advanced volatility measure is better.

• Close to close volatility needs c20 or more days of data to be accurate, for smaller periods e.g. 5 days close to close volatility is very noisy. An advanced measuring Open (O), High (H), Low (L) and Close (C) is better for small samples.

EstimatePrices Taken

Handle Drift? Handle Overnight Jumps?Efficiency

(max)

Close to close C No No 1

Parkinson HL No No 5.2

Garman-Klass OHLC No No 7.4

Rogers-Satchell OHLC Yes No 8

G-K Yang-Zhang ext

OHLC No Yes 8

Yang-Zhang OHLC Yes Yes 14

Close to close overestimates volatility

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-5%

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Performance long daily var short weekly var

1) Delta hedging frequencyHedge long gamma positions on the close . While close to close volatility overestimates true volatility in a crisis, you can extract this premium by delta hedging on close.Hedge short gamma positions intraday . By delta hedging intraday (as frequently as is practical) you can extract the implied volatility premium to the true (approximated by Yang-Zhang) volatility.

2) Long daily var and short weekly varMarkets overreact when they are stressed . In a crisis markets often overreact (potentially due to stop losses), then correct after a few days. Investors can profit from this by going long daily variance and short weekly variance.No options or variance swaps need to be traded . As a variance swap is simply a delta hedged log contract, a portfolio of long daily variance and short weekly variance can be replicated by delta hedging only (as log contracts cancel). Alternatively a structured product can be bought.

Close to close – Yang-Zhang vol (30 day)

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Long daily variance short weekly

variance outperforms in a crisis

2 ways to profit from stressed markets

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Square root of time rule has volatility surfaces mo ve power 0.5Near dated implieds move more than far dated implieds. Can adjust whole surface by adjusting implieds for maturity T by “one year implied vol move / T^p”. P is the power of the move (rule of thumb is P=0.5, or square root of time rule).

If 1 year implied volatility rises 1pt, how much s hould 3 month implied rise?More than 2 pts, i.e. power more than 0.5 (WHITE)

2pts, i.e. power = 0.5 or square root of time rule (RED)

Less than 2pts, i.e. power less than 0.5 ( GREEN)

NB: 3 months = 0.25 years, and square root of 0.25 = 0.5 (& dividing by 0.5 = 2).

Question

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23%

3 months 6 months 1 year 2 years 3 years 4 years

Impl

ied

vol

Rise in implied Flat term structure Fall in implied

1 year implied moves half amount of 3 month implied

+2%+1%

-1% -0.5%

4 year implied moves half amount of 1 year implied

Vol move weighted by square root of time is roughly constant • Near dated implieds move more than far dated implieds. Can adjust whole surface by

adjusting implieds for maturity T by “one year implied vol move / Tp”. P is the power of the move.

• Typically volatility move weighted by square root of time is approximately constant (power 0.5).

• Surfaces also sometimes move in parallel (power 0).• On average surfaces move power 0.44, hence usually square root of time but sometimes

parallel. Volatility moving by square root of time

Surfaces move by “square root of time”

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Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

Skew (normalised √T)

3 month skew (90-100%) 6 month skew (90-100%)

In 2010 Q2 skew spiked, particularly at the far end, due to changes in US regulation

Term structures can be normalised If assume term structure is a fixed vol for infinite maturity and a square root of time bump, then different term structures can be comparedMultiplying standard V2 – V1 term structure by √(T2T1)/ (√T2- √ T1) allows different term structures to be comparedNormalised term structure puts term structure in same units as 1 year – 3 month term structure

Skew multiplied by square root of time is roughly constant

Skew is greater for near dated implieds than far datedCan compare different skews when multiply by square root of time

Term structure (normalised)

Skew (normalised)

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Term structure x √(T2T1)

(√T2-√T1)

6 mths - 3 mths (normalised) 1 year - 6 mths (normalised)

Can compare different term structure & skew

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Question

How does the realised volatility of a stock after e arnings compare to the realised volatility pre-earnings?

Realised post earnings > realised pre earnings (WHI TE)

Realised post earnings = realised pre earnings ( RED)

Realised post earnings < realised pre earnings ( GREEN)

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Near dated expiries usually bestBacking out implied jump needs the “diffusive” volatility (volatility without jumps) to be estimatedIf an expiry exists before earnings date then this can be used, if not then forward volatility needs to be calculatedAs a jump has a bigger relative effect for near dated expiries, using near dated expiries is best

Stocks c25% less volatile after reporting

Before reporting the uncertainty of the results can lift volatilityIn the 1-2 week period before reporting analysts typically issue research publications, which can move stock pricesAfter reporting stocks are usually ¾ as volatile as they were before reportingMost analysis for implied jumps assume constant diffusive volatility

Using implied vol as vol assumption

Using forward vol as vol assumption

σJump

Time now Expiry before jump

σDiffusive (σBefore jump )

σExpiry after jump

Expiry after jump(T)

σJump

(First) Expiry after jump(T1)

Second Expiry (T2)

σExpiry after jump (σ1) σDiffusive (σ12)

σ2

Time now

Option prices include implied jump on reporting

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1 2 3 Expiry

Implied volatility

Equity - Index term structure Index term structure (diff to expiry 1)

Reporting date

Adjusting for index term structure flattens equity term structure to give more accurate implied jump

Implied difference due to reporting

Most analysis assumes flat term structure

Assumption of constant diffusive volatility implies flat term structureFront end of volatility surfaces often have the steepest term structure

Adjusting term structure improves results

Adjusting equity term structure by index term structure gives more accurate resultsUsing current index term structure, rather than historic average equity term structure, ensures the current market risks are priced inUsing average of peers term structure is less accurate, due to wider bid offer spreads

Equity and index term structure

Equity term structure adjusted by index

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1 2 3 Expiry

Implied volatility

Equity Index Index term structure (diff to expiry 1)

Reporting date

Implied jump is too big as expiry 3 implied is lifted by term structure and reporting date Implied

difference due to reporting

Need to adjust for index term structure

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Question

How much should ATM implied volatility move by if m arkets rise/fall?(we assume skew is fairly priced)?

Amount equal to skew, i.e. sticky strike (WHITE)

Between 1x and 2x skew ( RED)

Twice skew ( GREEN)

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Black-Scholes implied volatility is average volatility of all paths between

spot and strike

Local volatility skew is double Black-Scholes skew Black-Scholes is the average volatility of all paths from spot to strike, which is approx the average of ATM local volatility and the local volatility of the strike. This leads to 2 results:

ATM local volatility and ATM Black-Scholes volatility are identicalBlack-Scholes skew is half the local volatility skew

ATM volatility moves by twice the Black-Scholes skewIf ATM is 20% and the 90% local volatility is 22%, then the 90% Black-Scholes volatility is 21% (average of 20% and 22%). Local volatility 90-100% skew is 2% while Black-Scholes 90-100% skew is 1%. If spot moves down 10% then the ATM Black Scholes (= ATM local volatility) is now 22%.

Local volatility is instantaneous volatilityof underlying

Expiry

Strike

Spot

Underlying price

Low local volatility

High local volatility

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There are 4 idealised regimes to describe movement of volatility surfaces

Sticky delta / moneyness . Constant volatility for options of same strike as percentage of spot (e.g. ATM constant)Sticky strike . Constant volatility for options with same fixed currency strike (e.g. €50 strike constant)Sticky local volatility . When markets fall Black-Scholes implied volatility rises, and vice versaJumpy volatility . Very high negative correlation between spot and implied volatility (panicked markets)

Volatility surface with equities falling 10% Volatil ity surface with equities rising 10%

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Impl

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vol

Sticky delta Sticky strike (and before) Sticky local vol Jumpy vol

Fixed strike implieds rise as markets fall

Fixed strike implieds decline as markets fall

Markets fall 10%

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Impl

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vol

Sticky delta Sticky strike (and before) Sticky local vol Jumpy vol

Fixed strike implieds increase as markets rise

Fixed strike implieds decline as markets rise

Markets rise 10%

Skew trading profitability determined by volatility regime

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Fixed strike implied volatility change

P&L breakdown for long skew (e.g. long put, short call)

Volatilityregime

Equity decline

Equity rise

Remark Skew theta Total

Sticky delta Falls Rises + =

Sticky strike - - + =

Sticky localvolatility

Rises Falls + =

Jumpy volatility

Risessignificantly

Fallssignificantly + =

Skew trades breakeven with sticky local volatility

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0 25 50 75 100Spot

Premium

Straddle Straddle + long stock Straddle + short stock

Market fallsBuy underlying

Market risesSell underlying

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Premium

Premium Premium if market falls Premium if market rises

Market fallsBuy underlying

Market risesSell underlying

Mathematically, skew trading is similar to gamma tr ading• Vanna (size of skew position) = dDelta/dVol (and = dVega/dSpot)

As Vol α Spot (negative spot vol correlation) => Vanna α dDelta/dSpot = Gamma hence vanna can be considered to be second order gamma

Delta hedging long skew is identical to delta hedgi ng gammaWhen spot falls, the higher implied lifts the delta of long put which means more underlying needs to be bought. When spot falls the lower implied causes delta to increase (call has lower delta, hence short call has higher delta) which means more underlying needs to be sold. Buying on falls and selling on rises is identical to gamma scalping.

Delta hedging due to trading skew Delta hedging due to trading gamma

Skew trading is equivalent to trading 2nd order gamma

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VOLATILITY RISK PREMIAFair price implied volatilityCall overwriting

HEDGING / LONG VOLATILITY STRATEGIESCBOE VIX Tail Hedge Index Put / put spread protectionBest choice of strike for option trades

VIX AND VOLATILITY TRADINGWhat does implied volatility look likeAdvanced volatility measuresSquare root of time ruleSkew trading

Any Questions?

CBOE 53

CBOE Disclosures

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. Copies are available by calling 1-888-OPTIONS or 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. 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 stock, options and futures 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 regarding how the profit or loss of a particular options strategy will be taxed. Tax laws and regulations

change from time to time and may be subject to varying interpretations. The CBOE S&P 500 BuyWrite Index (BXMSM), CBOE S&P 500 2%

OTM BuyWrite Index (BXYSM), CBOE S&P 500 PutWrite Index (PUTSM), CBOE VIX Tail Hedge Index and CBOE S&P 500 95-110 Collar Index

(CLLSM) (the “Indexes”) are designed to represent proposed hypothetical buy-write strategies. Like many passive benchmarks, the Indexes

do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for a buy-write strategy could

be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors attempting to replicate the

Indexes should discuss with their brokers possible timing and liquidity issues. Past performance does not guarantee future results. These

materials contain comparisons, assertions, and conclusions regarding the performance of indexes based on backtesting, i.e., calculations of

how the indexes might have performed in the past if they had existed. Backtested performance information is purely hypothetical and is

provided in this document solely for informational purposes. Annualized returns cited might be achieved only if the parameters described

can be duplicated and there is no certainty of doing so. Supporting documentation for any claims, comparisons, statistics or other technical

data in this presentation are available by contacting CBOE at www.cboe.com/Contact. The Russell 2000® Index is a registered trademark of

The Frank Russell Company, used under license. S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services, LLC

and are licensed for use by Chicago Board Options Exchange, Incorporated (CBOE) and CBOE Futures Exchange, LLC (CFE). CBOE'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. CBOE®, Chicago Board Options Exchange®, CFE®, Execute Success® and VIX® are registered

trademarks and BuyWrite, BXM, BXY, BXR, CLL, PUT, VVIX, VXTH and SPX are service marks of CBOE. All other trademarks and service

marks are the property of their respective owners. Copyright © 2014 CBOE. All rights reserved.


Thank you.Institutional and International Business Development1-312-786-8310 | [email protected] 400 South LaSalle Street | Chicago, Illinois 60605www.cboe.com


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