Trading VIX Derivatives E-Book

Russell Rhoads

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 386

Veröffentlichungsjahr: 2011

Beschreibung

A guide to using the VIX to forecast and trade markets Known as the fear index, the VIX provides a snapshot of expectations about future stock market volatility and generally moves inversely to the overall stock market. Trading VIX Derivatives will show you how to use the Chicago Board Options Exchange's S&P 500 volatility index to gauge fear and greed in the market, use market volatility to your advantage, and hedge stock portfolios. Engaging and informative, this book skillfully explains the mechanics and strategies associated with trading VIX options, futures, exchange traded notes, and options on exchange traded notes. Many market participants look at the VIX to help understand market sentiment and predict turning points. With a slew of VIX index trading products now available, traders can use a variety of strategies to speculate outright on the direction of market volatility, but they can also utilize these products in conjunction with other instruments to create spread trades or hedge their overall risk. * Reviews how to use the VIX to forecast market turning points, as well as reveals what it takes to implement trading strategies using VIX options, futures, and ETNs * Accessible to active individual traders, but sufficiently sophisticated for professional traders * Offers insights on how volatility-based strategies can be used to provide diversification and enhance returns Written by Russell Rhoads, a top instructor at the CBOE's Options Institute, this book reflects on the wide range of uses associated with the VIX and will interest anyone looking for profitable new forecasting and trading techniques.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

Preface

Acknowledgments

Chapter 1: Understanding Implied Volatility

HISTORICAL VERSUS FORWARD-LOOKING VOLATILITY

PUT-CALL PARITY

ESTIMATING PRICE MOVEMENT

VALUING OPTIONS: PRICING CALCULATORS AND OTHER TOOLS

FLUCTUATIONS BASED ON SUPPLY AND DEMAND

THE IMPACT ON OPTION PRICES

IMPLIED VOLATILITY AND THE VIX

Chapter 2: About the VIX Index

HISTORY OF THE VIX

CALCULATING THE VIX

THE VIX AND PUT-CALL PARITY

THE VIX AND MARKET MOVEMENT

EQUITY MARKET VOLATILITY INDEXES

Chapter 3: VIX Futures

STEADY GROWTH OF NEW PRODUCTS

CONTRACT SPECIFICATIONS

MINI-VIX FUTURES

PRICING RELATIONSHIP BETWEEN VIX FUTURES AND THE INDEX

FUTURES’ RELATIONSHIP TO EACH OTHER

VIX FUTURES DATA

Chapter 4: VIX Options

CONTRACT SPECIFICATIONS

RELATIONSHIP TO VIX INDEX

RELATIONSHIP TO VIX FUTURES

VIX BINARY OPTIONS

Chapter 5: Weekly Options on CBOE Volatility Index Futures

CONTRACT SPECIFICATIONS

WEEKLY OPTIONS AND INDEX OPTIONS

WEEKLY OPTION STRATEGY

Chapter 6: Volatility-Related Exchange-Traded Notes

WHAT ARE EXCHANGE-TRADED NOTES?

IPATH S&P 500 VIX SHORT-TERM FUTURES ETN

IPATH S&P 500 VIX MID-TERM FUTURES ETN

COMPARING THE VXX AND VXZ PERFORMANCE

BARCLAYS ETN+ INVERSE S&P 500 VIX SHORT-TERM FUTURES ETN

BARCLAYS ETN+ S&P VEQTOR ETN

S&P 500 VIX FUTURES SOURCE ETF

Chapter 7: Alternate Equity Volatility and Strategy Indexes

CBOE S&P 500 3-MONTH VOLATILITY INDEX (VXV)

VIX PREMIUM STRATEGY INDEX (VPD)

CAPPED VIX PREMIUM STRATEGY INDEX (VPN)

S&P 500 VARB-X STRATEGY BENCHMARK

S&P 500 IMPLIED CORRELATION INDEX

Chapter 8: Volatility Indexes on Alternative Assets

CBOE GOLD VOLATILITY INDEX

CBOE CRUDE OIL VOLATILITY INDEX

CBOE EUROCURRENCY VOLATILITY INDEX

CBOE/NYMEX CRUDE OIL (WTI) VOLATILITY INDEX

CBOE/COMEX GOLD VOLATILITY INDEX

CBOE/CBOT GRAIN VOLATILITY INDEXES

FX REALIZED VOLATILITY INDEXES

Chapter 9: The VIX as a Stock Market Indicator

THE INVERSE RELATIONSHIP BETWEEN THE VIX AND THE S&P 500

VIX INDEX AS AN INDICATOR

VIX FUTURES AS AN INDICATOR

A MODIFIED VIX FUTURES CONTRACT

COMBINING VIX FUTURES AND THE VIX INDEX

VIX INDEX AND GOLD PRICE INDICATOR

VIX OPTION PUT-CALL RATIO

Chapter 10: Hedging with VIX Derivatives

HEDGING WITH VIX OPTIONS

HEDGING WITH VIX FUTURES

UNIVERSITY OF MASSACHUSETTS STUDY

Chapter 11: Speculating with VIX Derivatives

VIX FUTURES TRADING

VIX OPTION TRADING

VIX ETN TRADING

COMPARING VIX TRADING INSTRUMENTS

Chapter 12: Calendar Spreads with VIX Futures

COMPARING VIX FUTURES PRICES

THE MECHANICS OF A CALENDAR SPREAD

PATTERNS IN THE DATA

TRADE MANAGEMENT

OTHER PARAMETERS

Chapter 13: Calendar Spreads with VIX Options

VIX OPTION PRICING

CALENDAR SPREAD WITH PUT OPTIONS

CALENDAR SPREAD WITH CALL OPTIONS

DIAGONAL SPREAD WITH PUT OPTIONS

DIAGONAL SPREAD WITH CALL OPTIONS

Chapter 14: Calendar Spreads with VIX Options and Futures

COMPARING OPTIONS AND FUTURES

CALENDAR SPREAD EXAMPLES

Chapter 15: Vertical Spreads with VIX Options

VERTICAL SPREAD EXAMPLES

Chapter 16: Iron Condors and Butterflies with VIX Options

WHAT IS AN IRON CONDOR?

IRON CONDOR WITH VIX OPTIONS

WHAT IS AN IRON BUTTERFLY?

IRON BUTTERFLY WITH VIX OPTIONS

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market's ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

Copyright © 2011 by Russell Rhoads. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration.

Microsoft and Excel are registered trademarks of Microsoft Corporation. Standard & Poor's®, S&P®, S&P 500®, Standard & Poor's 500 and 500 are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Chicago Board Options Exchange, Incorporated (CBOE). CBOE®, Chicago Board Options Exchange®, CBOE Stock Exchange®, CFE®, CBOE Volatility Index®, OEX®, VIX®, and XEO® are registered trademarks of CBOE.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Rhoads, Russell. Trading VIX derivatives : trading and hedging strategies using VIX futures, options, and exchange-traded notes / Russell Rhoads. p. cm. – (Wiley trading ; 503) Includes bibliographical references and index. ISBN 978-0-470-93308-4 (hardback); ISBN 978-1-118-11846-7 (ebk); ISBN 978-1-118-11847-4 (ebk); ISBN 978-1-118-11848-1 (ebk) 1. Derivative securities. 2. Hedging (Finance) 3. Options (Finance) I. Title. HG6024.A3R523 2011 332.64′57–dc22 2011014331

Dedicated to Merribeth, who holds down the fort.

Preface

The current level of the CBOE Volatility Index, or VIX, is part of the litany of information thrown out at a rapid pace on morning business programs. In times of extreme market moves, the VIX gets a bit more attention and possibly a little explanation. That explanation is often that it is a “fear index.” Needless to say, the VIX is much more than an index of fear in the stock market.

The VIX emerged from academic work in the early 1990s as a method of determining a consistent level of implied volatility of option contracts trading on the S&P 100 (OEX) Index at the Chicago Board Options Exchange. For almost a decade, this measure was a side note of market activity.

Then, in the early part of the 2000s, the formula was updated to encompass more option contracts and the focus shifted from the S&P 100 to the S&P 500 index. This update, to include more contracts and focus on the S&P 500, was in preparation to offer derivative contracts on volatility.

Futures and then option contracts were developed by the CBOE to allow investors the ability to capitalize on an outlook for market volatility. These contracts witnessed steady growth until the second half of 2008, when, with an explosion in implied volatility, the marketplace realized the benefits of volatility as a diversification tool.

Other exchanges have taken notice of the success of VIX futures and options and have developed their own volatility indexes and derivative products. Volatility indexes and derivatives on gold, oil, currencies, and even soybeans are now calculated and traded by a variety of exchanges.

This book is divided into two sections. The first half of the book is a description and overview of the variety of volatility-related indexes and products currently available. The unique features of many of the derivative contracts are based on implied volatility, and these are touched on throughout the first section. Some of the confusion that novice traders encounter when considering trading VIX products is addressed, along with instructions on how to interpret a variety of indexes.

The second half of this book is devoted to the uses of volatility-related indexes and products. Methods for speculating on the direction of the overall market or just volatility are addressed. Using volatility derivatives as a tool for hedging traditional portfolios is discussed. Also, the emergence of volatility indexes and trading products as forecasting tools is discussed.

Volatility as an asset class and trading tool is a rapidly growing area in the markets. While writing this book, dozens of new indexes and derivative products based on implied volatility were introduced. Trying to keep up with all of them is nearly impossible, and if I'd tried, this book may never have made it to your hands.

Acknowledgments

There are many people throughout my life who have allowed me to reach the point where I look forward to going to work and truly enjoy what I get to do professionally day in and day out.

The primary person is my wife, Merribeth Rhoads. Her support and patience have been a key contribution to the completion of this book in a timely manner.

My daughters, Margaret and Emerson, are a constant inspiration to work hard and accomplish as much as I can to set a proper example for them. My first friend and little pal are the driving force behind all I do.

My father, Richard Rhoads, has always been most supportive when I needed it and offered key pieces of advice at critical points in my career. Also, a special thanks to my Aunt Jean, who has been an excellent matriarch of the Rhoads clan for the past decade or so. I would also like to thank Richard Smith and Margie Johnson, who decided what was best for me well before I could decide myself.

Professionally, the staff of The Options Institute at the Chicago Board Options Exchange is probably the best group of people I have worked with in my life. Alphabetically, I want to thank Taja Beane, Laura Johnson, Barbara Kalicki, Michelle Kaufman, Debra Peters, Pam Quintero, and Felecia Tatum. The other three instructors at The Options Institute—Jim Bittman, Marty Kearney, and Peter Lusk—are the best mix of mentors I could have ever hoped for in my career. Also, Michael Mollet of the CBOE Futures Exchange was very helpful in pointing me in the right direction regarding VIX-related products. The professionals at the brokerage firms I work with on a regular basis have allowed me to maintain a constant enthusiasm for my current position. Finally, a portion of my job is focused on educating college students. Their enthusiasm for and interest in the financial markets rubs off on me.

Also, for a second time around, Meg Freeborn and Kevin Commins of Wiley have been wonderful to work with. I hope to collaborate on more projects with them in the future.

In the time I have been at the Options Institute, I have instructed several thousand individuals who are interested in options trading and strategies. Many of you have challenged me with your questions and inspired me with your interest in the derivative markets. Two chapters in this book directly emanated from discussions and questions that I had with students. To all those who watch webinars or attend classes in person, I truly appreciate the time you give me.

Chapter 1

Understanding Implied Volatility

In this book, we will discuss the ins and outs of a popular market indicator, or index, that is based on implied volatility. The indicator is the CBOE Volatility Index®, widely known by its ticker symbol, VIX. It should come as no surprise that a solid understanding of the index must begin with a solid understanding of what implied volatility is and how it works.

Implied volatility is ultimately determined by the price of option contracts. Since option prices are the result of market forces, or increased levels of buying or selling, implied volatility is determined by the market. An index based on implied volatility of option prices is displaying the market's estimation of volatility of the underlying security in the future.

More advanced option traders who feel they have a solid understanding of implied volatility may consider moving to Chapter 2. That chapter introduces the actual method for determining the VIX. However, as implied volatility is one of the more advanced option pricing concepts, a quick review before diving into the VIX and volatility-related trading vehicles would be worthwhile for most traders.

HISTORICAL VERSUS FORWARD-LOOKING VOLATILITY

There are two main types of volatility discussed relative to securities prices. The first is historical volatility, which may be calculated using recent trading activity for a stock or other security. The historical volatility of a stock is factual and known. Also, the historical volatility does not give any indication about the future movement of a stock. The forward-looking volatility is what is referred to as the implied volatility. This type of volatility results from the market price of options that trade on a stock.