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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. CFE is the home of volatility futures, featuring CBOE Volatility Index (VIX) futures, DJIA® Volatility Index futures, Three and Twelve-month S&P 500® Variance futures and S&P 500 BuyWrite Index futures. CFE makes trading volatility easier than ever.
Futures in Volatility includes several sections: Market Summary and Analysis, Trading Strategy Ideas, 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. And, Events features upcoming CFE and Chicago Board Options Exchange (CBOE®) conferences, seminars and webinar presentations.
Contact Information
Please direct questions concerning this circular to Jay Caauwe at (312) 786-8855 or caauwe@cboe.com.
VIX Futures Last Trade Dates
Contract |
Last Trade Date |
|---|---|
| September 2008 | 09/16/08 |
| October 2008 | 10/20/08 |
| November 2008 | 11/18/08 |
| December 2008 | 12/16/08 |
| January 2009 | 01/20/09 |
| February 2009 | 02/17/09 |
| March 2009 | 03/17/09 |
| April 2009 | 04/14/09 |
| May 2009 | 05/19/09 |
| June 2009 | 06/16/09 |
Announcements
CFE is set on listing Binaries on CPI and Housing Starts. Watch this space for more details!
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.
Premium Building on VIX Futures During Broad Market Rally
The S&P 500® Index (SPXSM) has managed to put together a slow but steady rally since the July bottom. This rally environment has been one of decreasing volatility, particularly in terms of implied volatility as measured by the CBOE Volatility Index® (VIX®). However, actual volatility to date, as measured by the CBOE S&P 500 Realized Variance Indicator (RUG) (realized volatility is the square root of realized variance), has remained rather steady during the calculation period for the corresponding CBOE S&P 500 3-Month Variance Futures (VT) contract.
What's interesting to note is that the futures markets are not necessarily in agreement with the movements in VIX or RUG. For example, the September 2008 VT futures have been in a pretty steady downtrend in recent weeks, and the December 2008 VT futures are in an even steeper downtrend. That is worthy of note, but not particularly useful to traders.
However, the movements in VIX futures are useful as a trading indicator. As VIX has plunged to below 19 in the last week, VIX futures have not followed suit and have remained at more lofty levels in the 22-23 area. Thus, the VIX futures are trading with a rather large premium. Table 1 shows the premium levels as of the close on Thursday, August 21st.
Source: MAC
You can see that all of the futures have a significant premium that is: they are trading much higher than VIX. In our studies, any premium above about 85 cents is significant. The theory is, when these large premiums occur, they are predicting that VIX will rise. Normally, VIX only rises during falling markets. Hence, a large premium on the VIX futures is a negative outlook for the stock market.
There are a couple of interesting things to take from Table 1: 1) the spread between the September 2008 and October 2008 futures is quite large, a subject we'll address later in this letter, and 2) the December 2008 futures are trading at a much lower level than all the futures surrounding it. That's quite unusual. We don't recall having seen that before, so we'll just have to watch to see if it has any further meaning.
The chart of the recent trading in VIX futures is shown in Figure 1. VIX is the green line, and you can see that it has been clearly visible beneath the futures (all the other colored lines) for the last couple of weeks. You can also see that there were similar periods in the recent past when the green line was clearly visible beneath all the colored lines for a substantial period of time. Most recently, this occurred in late April and early May, preceding the 240-point decline in the S&P 500 Index. There was also a clearly visible period near the end of 2007, preceding the S&P 500 Index drop of over 200 points in January.
One could take the current period of inflated VIX futures premiums as fair warning of another market decline looming on the horizon. The timing isn't always the same, but once the premium gets inflated and stays there for over 2 or 3 weeks, the bearish meaning is clear.
Figure 1 Source: McMillan Analysis Corp.
StrategiesThe term structure of the VIX futures is often something worth observing. During bullish moves, the front month futures are lowest in price, followed sequentially by higher prices in each more distant futures month. This pattern persists and increases until the bull has run its course. At the top of the market, the pattern is quite extended (at market bottoms, just the opposite is true, with the near-term futures being the highest in price).
It is sometimes more efficient to play the spread in the futures, that is, to capitalize on the known shift in the term structure, rather than taking an outright position in either VIX or SPX options. In the current case, a bearish signal appears to be setting up. Once the market begins to fall, the September 2008 futures will likely rise faster than the October 2008 futures, thereby closing the gap between them, which now stands at about 1.00 point.
So a calendar spread, long September and short October, would take advantage of that. That spread moves at $1,000 per point. So if you establish it with October 2008 futures contract trading 1.00 point over the September 2008 futures contract, and the spread flattens to 0.00, you would make one point, or $1,000 (not including transaction costs). Since the margin requirement for the spread is $625, this is a highly leveraged way to play a potential market decline, with arguably less risk than is associated with an outright option or futures purchase.
| Live | CFE is an exhibitor at the WAISC conference September 9-10 . Stop by booth 31 to meet with Jay Caauwe and Michael Mollet. |
| Archive | Trading VIX Futures Webcast |
For more information on VIX and volatility futures including brokers, ISVs, symbols and product specifications, visit www.cboe.com/cfe |
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
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.
* This is a paid advertisement. The inclusion of these advertisements should not be construed as an endorsement of any product, service, or Web site or as an indication of the value of any claims, recommendations or other information contained therein.
Copyright © 2008 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.
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.
