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For more information on the CBOE Volatility Index® ("VIX"), volatility and variance futures including brokers, ISVs, symbols and product specifications, visit www.cboe.com/cfe.
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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 S&P 500 Volatility Index® (VIX®) futures, DJIA® Volatility Index futures, Russell Volatility Index (RVX) futures, and Three and Twelve-month S&P 500® Variance 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 |
|---|---|
| July 2009 | 07/21/09 |
| August 2009 | 08/18/09 |
| September 2009 | 09/15/09 |
| October 2009 | 10/20/09 |
| November 2009 | 11/17/09 |
| December 2009 | 12/16/09 |
| January 2010 | 01/19/10 |
Announcements
CFE will be launching event binary contracts, pending final regulatory approval. The CFE Purchase-Only House Price Index (HPI) Binary Option contract and the CFE U.S. Consumer Price Index for All Urban Consumers (CPI-U) Binary Option contract will be the first two contracts introduced. Watch this space for more details or contact the CFE helpdesk.
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® Futures Refuse To Break Down
The settlement price for June CBOE Volatility Index® ("VIX"®) futures was 31.03. That is higher than the settlement price in May of 27.04, and is reflective of the fact that volatility has worked its way a bit higher since the S&P 500® Index failed to sustain recent upside breakout levels near 950. This is the first month-over-month increase in the VIX settlement price since last November. That was quite a long spell of declining settlement prices, but that trend appears to have been broken.
On a short-term term basis, the VIX Index appears to have broken its downtrend line as well. Figure 1 shows a chart of VIX. One can see that it moved above its declining 20-day moving average last week, breaking the downtrend line in the process. By the end of the week, however, VIX had again fallen back sharply. In one sense, the VIX might be considered to be in a trading range between 27 and 33.
It is very interesting to note that the VIX futures have not fallen back as much as the VIX Index did in the last few days. The futures remain at higher levels, and that can be perceived to be a bearish sign for the market in general. In fact, VIX futures have been trading at a premium to VIX, off and on, for much of the time in the last few weeks.
Figure 1 Source: McMillan Analysis Corp.
Table 1 shows the recent premium on the VIX futures. As you can see, all of the futures are trading at a significantly higher price than VIX. This is an indication that the futures market feels that volatility will pick up in the next few months. Often, the situation is resolved by VIX rising to meet the futures price. And when VIX rises, the S&P 500 Index often falls. Hence, the premium on the VIX futures tends to be a bearish signal.
There have been many other cases in the past two years, during this bull market, in which VIX futures have moved to a significant premium level during a counter-trend rally. During many of those times, the S&P 500 Index fell by a considerable amount. These include late December 2007 (S&P 500 Index dropped 250 points), May 2008 (S&P 500 Index fell 240 points), August 2008 (S&P 500 Index fell 450 points), and January 2009 (S&P 500 Index fell 230 points). Of course, there is no guarantee that a similar VIX futures premium at this time will produce similar results, but it certainly may be taken as a sign for caution.
Term Structure
The term structure, or the relationship between the various futures contracts, is currently quite flat. From table 1, the various futures, from July to October, are trading at almost the same price. There is a very slight slope upward as one looks at the longer-term futures, but the slope is so slight as to be almost insignificant. Figure 2 shows the history of the term structure over the last 15 months, and one can see the tightness of the current structure on the right-hand side of the chart.
Figure 2 Source: McMillan Analysis Corp. A Potential Trading Strategy
In the past, there is a strategy that we have noted as potentially attractive in times of high futures premiums:
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 © 2009 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.
This is a neutral pattern, being neither overbought nor oversold. If the S&P 500 Index breaks down below chart support at 880, one could expect more negative technical indicators to start to elevate. In particular, the term structure could see a clearly downward slope from the front month futures on out through the longer-term ones. For example, in the market sell-off of last fall, the front month futures traded at nearly double-digit premiums to longer-term futures (see Figure 2). This may be construed as a sign of an oversold market. But the current flat picture means there could be quite a bit of room on the downside before such an oversold condition occurs.
Buy VIX puts
And Buy SPX puts
Typically, one buys 2 VIX puts for each SPX put purchased.
This is a hedged strategy to the extent that one index rises when the other falls. The edge is that the VIX futures are trading at a substantial premium to VIX. Thus, and if all other things are equal, VIX may rise to meet the futures, which could result in a profit on the SPX puts (SPX may fall as VIX rises), while the VIX puts may remain relatively unchanged.
There are other possible outcomes, of course. Perhaps the most important is that if both indices move by a large amount, the spread will likely profit since there is limited loss on one side of the spread while the other side could make considerable money. That is somewhat similar to owning a straddle, where one side of the straddle has limited loss while the other side could show substantial gains.
