“Drought” Options – Implied Vol Up 50% This Month

A recent Reuters news report indicated that “Grain prices pushed to record highs on Thursday as scattered rains in U.S. Midwest did little to douse fears that the worst drought in half a century will not end soon or relieve worries around the world about higher food prices.  Government forecasters did not rule out that the drought in the U.S. heartland could last past October, continuing what has been the hottest half-year on record.”

What can securities investors do about the 2012 drought?  Investment vehicles that investors could explore include options on agriculture-based exchange-traded products (ETPs) (CBOE is not endorsing or soliciting for the products below; please read the applicable prospectus.)

RISE IN IMPLIED VOLATILITY THIS MONTH

According to Bloomberg estimates, the implied volatility for the “110%-moneyness” options on the PowerShares DB Agriculture Fund (DBA) rose from 16.6 at the end of June to 25.2 on July 19th (an increase of 52%). See the chart below for more info on recent implied volatility, and note the recent differences in implied volatility for DBA options based on their moneyness.  Ag Implied Vol

 

PRICES FOR AG-BASED ETPs RISE

As shown in the chart below, over the past seven weeks (May 31st through July 19th) the iPath DJ-UBS Grains Subindex ETN (JJG) rose 45%, and the Teucrium Corn Fund ETF (CORN) rose 35%.

Ag ETF prices

 

OPTIONS ON ETFs

Key Features of U.S-exchange-listed options include:

  • Clearance of transactions is guaranteed by the Options Clearing Corporation
  • Price and Quote Transparency
  • Daily Mark-to-market

Bullish options strategies include: (1) long call, (2) bull spread, (3) call backspread, and many others.

Bearish options strategies include: (1) long put, (2) bear spread, and put backspread, and many others. To learn more about  options strategies, please visit —

http://www.cboe.com/Strategies, and

http://www.cboe.com/LearnCenter

More information on options on Commodity-based ETFs is at —

http://www.cboe.com/commodity

Broad commodity based indexes include the S&P GSCI Index and the S&P World Commodity Index (WCI).

VXEEM Y-T-D Futures Volume Tops 41,000

Some investors have asked us about managing exposure with products based on volatility indexes in addition to the well- known CBOE Volatility Index® (VIX®) www.cboe.com/VIX

Trading volume in CBOE Emerging Markets ETF Volatility Index (VXEEM) security futures totaled 8,870 contracts during June 2012, and is more than 41,000 year-to-date.  The VXEEM Index tracks the implied volatility of the iShares MSCI Emerging Markets Index exchange traded fund (EEM).  VXEEM futures trading was launched on January 9, 2012.   www.cboe.com/VXEEM

The CBOE Crude Oil ETF Volatility Index (OVX) measures the market’s expectation of 30-day volatility of crude oil prices by applying the VIX methodology to United States Oil Fund, LP exchange traded fund (USO) options.  OVX security futures were launched for trading on March 26, 2012.   www.cboe.com/OVX

www.cboe.com/volatility

 

 

 

 

 

 

 

 

 

 

TABB – Buy-side is Expanding Use of VIX-related Options

TABB Group recently issued a buy-side trading study, “US Options Trading 2012: Standing Out in the Crowd,” written by Mr. Andy Nybo. For this year’s 39-page study, TABB noted that it spoke with 54 US-based asset managers, hedge funds and proprietary trading firms, which as a group, manage an aggregate $2.7 trillion in assets under management and trade an average of 517,000 options contracts per day. 

Mr. Nybo said that buy-side firms are –

“ … expanding their product selection to include more VIX-related, ETF/index and listed FLEX options.”

Please visit this link – http://bit.ly/TABB-Opt – for summary of highlights from the report and more information on how to purchase the entire 39-page study.  Please note that CBOE is not soliciting for or endorsing the purchase of the full report written by a third-party.

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 GROWTH IN VIX OPTIONS VOLUME

 CBOE reports that the average daily volume for options on the CBOE Volatility Index®(VIX®) was 428,220 in the first half of 2012 (12% higher than the 381,412 average daily volume in the first half of 2011) www.cboe.com/VIX

VIX listed options began trading in 2006

VIX Futures Volume is Up 67% This Year

Average daily volume for futures on the CBOE Volatility Index® (VIX®) rose in the first half of this year to 79,586 (67% higher than the average daily volume in the year 2011).  www.cboe.com/VIX

79,586 Avg. Daily Volume in 1st Half of 2012

 

VIX OPTIONS

 Average daily volume for VIX options was 428,220 in the first half of 2012.

Avg. Daily Volume of 428,220 in 1st Half of 2012

 

NEW FUTURES ON THE OVX and VXEEM VOLATILITY INDEXES

Trading volume in CBOE Crude Oil ETF Volatility Index (OVX) security futures totaled 3,290 contracts in June 2012, an increase of 65 percent from the 1,994 contracts in May.  The CBOE Crude Oil ETF Volatility Index measures the market’s expectation of 30-day volatility of crude oil prices by applying the VIX methodology to United States Oil Fund, LP exchange traded fund (USO) options.  OVX security futures were launched for trading on March 26, 2012.   www.cboe.com/OVX

Trading volume in CBOE Emerging Markets ETF Volatility Index (VXEM) security futures totaled 8,870 contracts during June 2012.  VXEM tracks the implied volatility of the iShares MSCI Emerging Markets Index exchange traded fund (EEM).  VXEM trading was launched on January 9, 2012.   www.cboe.com/VXEEM

For more information on volatility indexes and risk management, please visit www.cboe.com/volatility

Performance of Selected Tradable Volatility Indices: June 2012

The S&P 500 Index rose 4% in June 2012, and VIX dropped 29% from 24.06 (5/31/2012) to 17.08 (6/29/2012).

The S&P 500 VIX Short Term Futures Index and the S&P 500 VIX Mid Term Futures Index dropped 29.05% and 12.24%, respectively. The S&P 500 Dynamic VIX Futures Index, however, managed to stay nearly flat (-0.58%), due to its algorithm to dynamically reduce volatility exposure in a bull market. The S&P 500 VIX Futures Term Structure Index gained 3.01%.

The S&P 500 Dynamic VEQTOR Index saw a muted growth of 1.74% in June. Its volatility is low at 12.54%, compared to the 20.57% volatility in the 500.

Click the image to see it in full size.

Exhibit: Performance Summary (6/29/2012)

 

 

 

 

 

 

 

S&P Indices General Disclaimer

Is Volatility of Volatility Unusually High?

After reading news reports the past few weeks about the Eurozone crisis, one might get the impression that the volatility of volatility is unusually high. 

 A key measure of volatility of volatility is the CBOE VIX of VIX Index (ticker VVIX, www.cboe.com/VVIX ) which is designed to measure the expected future volatility of the CBOE Volatility Index® (VIX®) www.cboe.com/VIX

 Last Friday the month-end closing values were 89.59 for the VVIX Index and 17.08 for the VIX Index – both of these closing values are below the average values for each index over the past year (see the chart and below). 

 The VVIX Index can serve as a valuable gauge for investors who use the popular VIX options.

LOW VIX OPTIONS PUT/CALL RATIO ON THURSDAY

 On Thursday, June 28, the VIX options put/call ratio was 0.15 (with volume of 35,879 puts and 241,628 calls).  The June 28 put/call ratio was the lowest since January 13, 2012. A spreadsheet with daily volumes and put-call ratios is available at the VIX microsite at www.cboe.com/VIX

LINKS TO ADDITIONAL INFORMATION

VVIX and VIX VOLATILITY INDEXES – ONE-YEAR CHART  (June 30, 2011 – June 29, 2012)

The average daily closing values over the past year were 99 for the VVIX Index and 24.7 for the VIX Index.  www.cboe.com/volatility .

Volatility of Vlatility

Measures of the implied volatility of VIX and SPX options

 

 

 

 

 

 

VIX Futures Record Volume Day, as VIX Options Put/Call Ratio Rises to 1.3

On June 18 the trading volume in futures on the CBOE Volatility Index® (VIX®) established a new single-day record today as 159,744 contracts traded, eclipsing the previous record of 152,067 contracts on August 5, 2011.

Also on June 18 the daily put/call ratio for VIX options rose to 1.3, its highest daily level since May 25th. The average daily put/call ratio for VIX options in 2012 so far is about 0.67.

THE PAST SIX TRADING DAYS

Below are 5 charts relating to the past 6 trading days.

The VIX options daily put/call ratio rose from 0.25 on June 11 to 1.30 on June 18.

On June 18th the closing value of the VIX spot was 18.32, its lowest closing value since May 3, 2012. VIX futures were priced higher; see www.cboe.com/VIX for quotes on VIX futures prices.

 

VOLATILITY TO BE DISCUSSED AT RMC EUROPE

The topics of VIX and volatility will be covered by several speakers at CBOE’s inaugural Risk Management Conference (RMC) in Europe. Now in its 28th year in the U.S., the first RMC Europe will be held on 5 – 7 September 2012 at The Ritz-Carlton Powerscourt, County Wicklow, Ireland. Topics include “Forecasting Volatility and Volatility as an Asset Class” and “Trading Implied Volatility,” and among the scheduled speakers will be —

  • Andrew Harmstone, Morgan Stanley Investment Management, and
  • Pierre de Saab, Portfolio Manager, Doninice & Company Asset Management.

The conference agenda and registration information are at www.cboermc.com/Europe

Tail Risk Protection to be Discussed at 3-Day Conference in Ireland

Tail risk protection will be one of the many topics to be discussed at CBOE’s inaugural Risk Management Conference (RMC) in Europe. Now in its 28th year in the U.S., the first RMC Europe will be held on 5 – 7 September 2012 at The Ritz-Carlton Powerscourt, County Wicklow, Ireland.

The conference agenda and registration information are at www.cboermc.com/Europe Keynote speakers at the conference will be Dr. David M. Blitzer, Managing Director and Director of the Index Committee, Standard & Poor’s, and William J. Brodsky, CBOE Chairman and CEO.

The panel on Tail Risk Protection will discuss:

  • Why and how investors might hedge downside risk
  • The case for hedging as an offensive strategy in today’s market
  • Determining acceptable levels of protection and costs
  • Strategy alternatives for implementing hedges

Moderator: Ryan McRandall, Portfolio Manager, AXA Investment Managers

Panelists:

  • Alex Capez, Portfolio Manager, Occitan Capital Partners
  • Fabio Castaldi, Head of Absolute Return, Amundi Asset Management
  • Sandy Rattray, Head of Man Systematic Strategies, Man Group
  • Chris Rodarte, Portfolio Manager, Pine River Capital Management

INDEXES, TAIL RISK PROTECTION, and DIVERSIFICATION

The two charts below show months in which the S&P 500 Index dropped by 16.8% (October 2008) and 6.0% (May 2012).  The spot gold price and the S&P GSCI commodity index also experienced steep declines during these two months, and some investors have lamented the fact that, as the stock indexes fall, many other indexes tend to go down, and correlations among indexes tend to rise.  However, three of the VIX-based indexes in the charts below actually rose in both months.  Investors might re-think traditional diversification strategies after seeing these charts.

CAUTION: Please read the applicable prospectus and examine at the multi-year performance of these indexes before investing in any investment product related to these indexes. For example, while the S&P 500 VIX Short-term Futures Index might be useful when considering a short-term hedge against catastrophic risk, the index is not viewed as a good long-term holding because of longer-term roll costs involved with contango issues.

Exhibit J of the paper by Asset Consulting Group – “Key Tools for Hedging and Tail Risk Management” (February 2012, available at www.cboe.com/benchmarks) shows the performance of four indexes

  • S&P 500 VIX Mid-term Futures Index (VXMT)
  • S&P 500 Dynamic VIX Futures Index (DyVX)
  • S&P 500 VIX Futures Tail Risk Index – Short Term (VTRsk)
  • S&P 500 Index

 

To learn more about tail risk protection, please consider:

____________________________________________________________________

Please note that indexes are not directly investable.  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, http://www.cboe.com/Resources/Intro.asp  which is available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. The information in the charts above is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Past performance is not a guarantee of future returns.

 

 

The VIX Term Structure and Launch of SPX Extended Weekly

Investors often are interested in risk management and volatility expectations over different time periods.   Below is an overview of the VIX term structure, and an update on the launch of SPX Extended Weekly options.

1. VIX TERM STRUCTURE

The VIX® term structure illustrates, by maturity, expectations of market volatility conveyed by S&P 500 (SPX) stock index option prices.  CBOE calculates these expectations by applying the VIX methodology to standard SPX option maturities.  The items below represent the VIX term structure as of the date and time indicated.  www.cboe.com/VIX

 

2. EXTENSION OF THE LISTINGS OF S&P 500® SPX WEEKLY (SPXW) OPTIONS

On May 31st CBOE began an extension of the listings of S&P 500® SPX Weekly (SPXW) options, and CBOE Holdings now maintains five consecutive expiration weeks available for trading options on the S&P 500. www.cboe.com/SPXW

In the first five trading days of June, the total volume for SPX Weekly options was 876,945, and average daily volume of SPXW options was 175,389.

 

3. SPX OPTIONS EXPIRATION DATES NOW AVAILABLE

Here is a list of SPX options expiration dates over the next five weeks

Expiration        Options Contract                          URL

8-Jun-2012         SPX Weeklys                    www.cboe.com/SPXW

16-Jun-2012       SPXpm options                 www.cboe.com/SPXpm

16-Jun-2012       SPX options (a.m.-settled)  www.cboe.com/SPX

22-Jun-2012       SPX Weeklys                    www.cboe.com/SPXW

29-Jun-2012       SPX Quarterly Options       www.cboe.com/SPXQ

6-Jul-2012          SPX Weeklys                   www.cboe.com/SPXW

13-Jul-2012        SPX Weeklys                   www.cboe.com/SPXW

Please visit www.cboe.com/SPX for information about more SPX expiration dates in future months and years.

4. MORE INFORMATION ON SPX WEEKLY OPTIONS

SPX Weeklys are traded on CBOE and quotes can be found in SPX options chains under root symbol SPXW. SPX Weeklys are PM-settled on the last trading day, typically a Friday.

Key features of SPX Weeklys options —

> LARGE CONTRACT SIZE WITH A $100 MULTIPLIER (ten times larger than SPY options);

> CASH-SETTLEMENT;

> EUROPEAN-STYLE EXERCISE.

www.cboe.com/SPXW

Performance of Selected Tradable Volatility Indices: May 2012

May 2012 was a restless month in the US equity market. The S&P 500 Index declined 6% and VIX rose 40% from 17.15 (4/30/2012) to 24.06 (5/31/2012).

The S&P 500 VIX Short Term Futures Index and the S&P 500 VIX Mid Term Futures Index rose 28.71% and 13.13%, respectively. The S&P 500 Dynamic VIX Futures Index, which offers positive volatility exposure at reduced holding cost, responded positively, but at a muted 2.34%. The S&P 500 VIX Futures Term Structure Index lost 1.50%. Compared with the YTD returns, last month’s performance statistics proves that: 1) the two basic VIX futures indices are more sensitive to market movements; 2) the S&P 500 Dynamic VIX Futures Index provides a less expensive hedge to the equity market.

The S&P 500 Dynamic VEQTOR Index, which simulates the return of an equity portfolio with a built-in volatility hedge, saw a 2.20% decline in May. Its volatility is low at 4.79%, compared to the 12.52% volatility in the 500.

Click the image to see it in full size.

Exhibit: Performance Summary (5/31/2012)

S&P Indices General Disclaimer

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