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Al i V l ili I dAlternative Volatility Indexes
Russell Rhoads, CFARussell Rhoads, CFAInstructor – The Options Institute
2011 Chicago Board Options Exchange, Incorporated. All rights reserved.
CBOE Disclaimer
Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, y y g p g pSuite 500, Chicago, Illinois 60606. 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. Investors should consult their tax advisor about any potential tax consequences. The information in this presentation, including any strategies discussed is strictly for illustrative and educational purposes only and is not to be construed asany strategies discussed, is strictly for illustrative and educational purposes only and is not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Supporting documentation for any claims, statistics or other technical data in this presentation is available by calling 1-888-OPTIONS, or contacting CBOE at www.cboe.com/Contact.
Past performance is not a guarantee of future results. CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index® CFE® and VIX®, are registered trademarks and CBOE Futures Exchange, EVZ, GVZ, ICJ, JCJ, KCJ, RVX, SKEW, OVX, VXD, VXN, VXO, VXV, VPD, VPN, VTY and Weeklys are service marks of Chicago Board Options Exchange, Incorporated (CBOE). All other trademarks and service marks are the property of their respective ownerstheir respective owners.
CBOE and CFE are not affiliated with Interactive Brokers.
Copyright© 2011 CBOE. All rights reserved.
CHICAGO BOARD OPTIONS EXCHANGE2
Outline
• VIX® Review• Alternative Volatility Indexes• Alternative Volatility Indexes
– Euro CurrencyOil– Oil
– Gold• Equity Specific• Equity Specific
– StocksExchange Traded Funds– Exchange Traded Funds
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Outline
• Equity Market IndexesOther Market Indexes– Other Market Indexes
– 3-Month Volatility IndexSKEW– SKEW
• Strategy Indexes• Uses as an Indicator• Uses as an Indicator• VIX Network
S / Q&A C t t• Summary / Q&A Contact
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VIX Review
The VIX –CBOE Volatility Index®CBOE Volatility Index®.Measures S&P 500® implied volatility.B d S&P 500 O ti bid/ k tBased on S&P 500 Option bid/ask quotes.Uses the nearby options with at least 8 days until expirationuntil expiration.Has been promoted as a ‘fear index’ by the business mediabusiness media.
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VIX Review
Trading Products –VIX FuturesVIX FuturesVIX OptionsW kl O ti VIX F tWeekly Options on VIX FuturesOver a Dozen Exchange Traded Fund / Note productsproducts
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Alternative Volatility Indexes
Euro Currency (EVZ) –• CBOE EuroCurrency Volatility Index• CBOE EuroCurrency Volatility Index• Measures market expectation of volatility of the
$US / Euro exchange rate$US / Euro exchange rate• Based on option prices on FXE exchange traded
fundfund
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Alternative Volatility Indexes
175 50
FXE - EVZ
125
150
175
40
50
75
100
125
30
25
50
75
10
20
0
25
Jan-08 May-08 Sep-08 Jan-09 Jun-09 Oct-09 Feb-10 Jul-10 Nov-10 Mar-110
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Alternative Volatility Indexes
Oil (OVX) –• CBOE Crude Oil Volatility Index• CBOE Crude Oil Volatility Index• Measures market expectations of volatility of the
crude oil marketcrude oil market• Based on option pricing of USO exchange
traded fundtraded fund• CBOE filed for approval to trade options on this
indexindex
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Alternative Volatility Indexes
USO - OVX
125 200
100
125
150
200
75
100
150
25
50
50
0May-07 Oct-07 Mar-08 Aug-08 Feb-09 Jul-09 Dec-09 Jun-10 Nov-10
0
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Alternative Volatility Indexes
USO – WTI Oil125 200
100
125
150
200
75
100
150
25
50
50
0May-07 Oct-07 Mar-08 Aug-08 Feb-09 Jul-09 Dec-09 Jun-10 Nov-10
0
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Alternative Volatility Indexes
Gold (GVZ) –CBOE Gold ETF Volatility IndexCBOE Gold ETF Volatility Index Measures market expectations of volatility of the
price of goldp gBased on option pricing of GLD ETF
Futures and options available on this Index
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Alternative Volatility Indexes
GLD - GVZ150 100
125
150
80
90
100
75
100
50
60
70
25
50
20
30
40
0
25
Jun-08 Nov-08 Apr-09 Sep-09 Mar-10 Aug-10 Jan-110
10
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Equity Specific Volatility
Stocks –Amazon AMZN VXAZNAmazon AMZN VXAZNApple AAPL VXAPLG ld S h GS VXGSGoldman Sachs GS VXGSGoogle GOOG VXGOGIBM IBM VXIBMIBM IBM VXIBM
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Equity Specific Volatility
AMZN – VXAZN
200 75
150
200
60
75
100
150
45
5015
30
0Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
0
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Equity Specific Volatility
AAPL – VXAPL
400 75
300
350
400 75
200
250
30050
100
15025
0
50
Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-110
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Equity Specific Volatility
GS – VXGS
200 75
150
200
60
75
100
150
45
5015
30
0Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
0
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Equity Specific Volatility
GOOG – VXGOG
200 75
150
200
60
75
100
150
45
5015
30
0Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
0
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Equity Specific Volatility
IBM – VXIBM
200 75
150
200
60
75
100
150
45
5015
30
0Jun-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
0
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Equity Specific Volatility
Stocks –30 day implied volatility indicated by option pricing30 day implied volatility indicated by option pricingPlans to add more names over timeCBOE h fil d f l t t d tiCBOE has filed for approval to trade options on
these indexes
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Equity Specific Volatility
Exchange Traded –• 30 day implied volatility indicated by option• 30 day implied volatility indicated by option
pricing• Plans to add more names over time• Plans to add more names over time• Number of instruments with derivative trading to
expand over timeexpand over time
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Equity Specific Volatility
Exchange Traded Funds –
EuroCurrency XLF EVZGold GLD GVZGold GLD GVZ Crude Oil USO OVXEmerging Markets EEM VXEEMe g g a etsSilver SLV VXSLVChina Equity Market FXI VXFXIq yGold Miners GDX VXGDXBrazilian Equity Market EWZ VXEWZ
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Equity Market Volatility
Market Indexes –
CBOE DJIA® Volatility Index – VXDCBOE N d 100® V l tilit I d VXNCBOE Nasdaq-100® Volatility Index – VXNCBOE S&P 100® Volatility Index – VXOCBOE R ll 2000® V l ili I d RVXCBOE Russell 2000® Volatility Index – RVX
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Equity Specific Volatility
DJIA – VXD
16000 160
12000
16000
120
160
8000
12000
80
120
4000 40
0Oct-97 Nov-98 Nov-99 Dec-00 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Jul-09 Aug-10
0
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Equity Specific Volatility
NDX – VXN
2500 175
2000
2500
125
150
175
1500 100
125
500
1000
50
75
0Feb-01 Mar-02 Apr-03 Apr-04 May-05 Jun-06 Jul-07 Aug-08 Sep-09 Oct-10
0
25
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Equity Specific Volatility
OEX – VXO
1000 250
750
1000
200
250
500
50
150
25050
100
0Jan-86 Oct-87 Jul-89 May-91 Feb-93 Nov-94 Sep-96 Jun-98 Mar-00 Jan-02 Oct-03 Aug-05 May-07 Mar-09 Dec-10
0
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Equity Specific Volatility
RUT – RVX
1000 250
750
1000
200
250
500
150
25050
100
0Jan-04 Oct-05 Aug-07 May-09 Feb-11
0
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Equity Market Volatility
CBOE S&P 500 3-Month Volatility Index – VXV• Measure of 3 month implied volatility as• Measure of 3 month implied volatility as
indicated by S&P 500 index options• Similar to VIX with longer time frame• Similar to VIX with longer time frame• May be compared to VIX to be used as a market
indicatorindicator
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Equity Specific Volatility
VXV – SPX
1750 150
1250
1500
1750 150
750
1000
1250100
500
750
50
0
250
Dec-07 Mar-08 Jul-08 Oct-08 Feb-09 Jun-09 Sep-09 Jan-10 Apr-10 Aug-10 Nov-10 Mar-110
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Equity Market Volatility
CBOE S&P 500 SKEW Index – SKEW• Introduced in February 2011• Introduced in February 2011• Sort of a black swan index
M th l ti i li d l tilit f t f• Measures the relative implied volatility of out of the money options
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Strategy Based Indexes
SKEW – SPX
1750
1250
1500
1750
275
1000
1250
175
225
500
750
125
175
0
250
Jan-90 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep-00 Jun-02 Apr-04 Jan-06 Nov-07 Aug-0975
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Strategy Based Indexes
SKEW
150150
125
100
75Jan-90 Oct-91 Jul-93 May-95 Feb-97 Nov-98 Sep-00 Jun-02 Apr-04 Jan-06 Nov-07 Aug-09
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Strategy Based Indexes
CBOE VIX Premium Strategy Index – VPD• Tracks performance of consistent short position• Tracks performance of consistent short position
in front month VIX future contract• The portfolio consists of a money market• The portfolio consists of a money market
investment and short VIX futures• As a risk control measure a 25 point VIX rally is• As a risk control measure a 25 point VIX rally is
assumed as a worst case scenario• The capital committed assumes a 25 point rallyThe capital committed assumes a 25 point rally
would result in a 25% loss to the portfolio
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Strategy Based Indexes
VPD – SPX
1750 250
1250
1500
1750
200
250
1000
1250
150
500
750
50
100
0
250
Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-100
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Strategy Based Indexes
CBOE Capped VIX Premium Strategy Index – VPN• Tracks performance of consistent short position in• Tracks performance of consistent short position in
front month VIX future contract• The portfolio consists of a money market• The portfolio consists of a money market
investment and short VIX futures• As a risk control measure out of the money call• As a risk control measure out of the money call
options are purchased against the short future positionp
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Strategy Based Indexes
VPN – SPX
1750 250
1250
1500
1750
200
250
750
1000
1250
150
500
750
50
100
0
250
Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-100
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Strategy Based Indexes
CBOE S&P 500 VARB-X – VTY• Tracks the performance of a hypothetical• Tracks the performance of a hypothetical
volatility arbitrage trading strategy• Strategy involves capitalizing on the historical• Strategy involves capitalizing on the historical
difference between SPX implied and realized volatilityo at ty
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Equity Specific Volatility
VTY – SPX
1750 250
1250
1500
1750
200
250
750
1000
1250
150
500
750
50
100
0
250
Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-100
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Strategy Based Indexes
CBOE S&P 500 Implied Correlation Indexes –ICJ JCJ KCJICJ, JCJ, KCJ• Strategy index that compares individual equity
and S&P 500 index option volatilityand S&P 500 index option volatility• Implied volatility of S&P 500 index options and
that of largest 50 stocks in the indexthat of largest 50 stocks in the index• Current – JCJ 2011 / KCJ 2012 / ICJ 2013
CHICAGO BOARD OPTIONS EXCHANGE39
Strategy Based Indexes
JCJ 2011 - SPX1500 200
1250
1500
150
200
750
1000
100
250
50050
0
250
Nov-08 Jul-09 Feb-10 Sep-100
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Strategy Based Indexes
KCJ 2012 - SPX1500 200
1250
1500
150
200
750
1000
100
150
250
50050
0
250
Nov-09 Mar-10 Jun-10 Oct-10 Feb-110
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Strategy Based Indexes
ICJ 2013 - SPX1500 100
1250
1500
75
100
1000
1250
50
75
750 25
500Nov-10 Dec-10 Feb-11 Mar-11
0
CHICAGO BOARD OPTIONS EXCHANGE42
VIX as a Market Indicator
• VIX Futures are 100% anticipatory• There is an inverse relationship between the S&P• There is an inverse relationship between the S&P
500 Index and the VIX• Futures prices are based on the direction the• Futures prices are based on the direction the
market expects the VIX Index to settle at expiratione p at o
• Since futures anticipate the VIX, they also indicate the market’s S&P 500 expectationsp
CHICAGO BOARD OPTIONS EXCHANGE43
VIX as a Market Indicator
VIX Futures vs. VIX Index• VIX Futures anticipate the direction of the VIX• VIX Futures anticipate the direction of the VIX
Index• The Index moves in an inverse direction to the• The Index moves in an inverse direction to the
S&P 500 • A forecasting tool may consist of comparing the• A forecasting tool may consist of comparing the
VIX Future price to that of the VIX Index• Different VIX Futures prices may also beDifferent VIX Futures prices may also be
compared to each other
CHICAGO BOARD OPTIONS EXCHANGE44
VIX as a Market Indicator
S&P 500 vs. VIX Index & VIX Future
60
70 1250
40
50 1050
VIX IndexVIX Future
30
40
850
S&P 500
10
20
Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10650
CHICAGO BOARD OPTIONS EXCHANGE
Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10
45
VIX Network
• Venture created by Standard and Poor’s and CBOECBOE
• Created in March 2011• Partnership to provide information sharing• Partnership to provide information sharing
regarding VIX methodology• Goal to promote VIX as global standard of• Goal to promote VIX as global standard of
measuring market volatility
CHICAGO BOARD OPTIONS EXCHANGE46
VIX Network
VIX agreements in place –• Australian Securities ExchangeAustralian Securities Exchange• CME Group• Deutsche BorseDeutsche Borse• Hang Seng Indexes• National Stock Exchange of Indiaat o a Stoc c a ge o d a• Euronext LIFFE• Taiwan Futures Exchangeg• TMX Group
CHICAGO BOARD OPTIONS EXCHANGE47
Summary
Q i / C ?Questions / [email protected]
www.cboe.com/learncenterwww cboe com/vixwww.cboe.com/vix
CHICAGO BOARD OPTIONS EXCHANGE48