Cboe Global Markets, Inc. · CBOE:CBOE
Cboe Global Markets — CBOE Risk Management Conference – Asia 2015
56 slides from Cboe Global Markets's conference presentation, Nov 30, 2015
Slide 1: Primer on Options and Volatility Strategies
CBOE Risk Management Conference – Asia Primer on Options and Volatility Strategies November 30, 2015 Presented by Russell Rhoads, CFA Director of Education – The Options Institute
Slide 2: Disclosure Statement
Disclosure Statement Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888- OPTIONS, or from The Options Clearin
Slide 3: Outline
Primer on Options / Volatility Strategies Outline Option Pricing Factor Review CBOE Volatility Index Behavior of Implied Volatility VIX Futures Strategies VIX Option Strategies Current Environment for Volatility CBOE OPTIONS INSTITUTE 3
Slide 4: Option Pricing Factors – Quick Review
Implied Volatility Option Pricing Factors – Quick Review Underlying Price Three Factors Option Strike Change* Time to Expiration The ‘VIX Methodology’ Interest Rates is a consistent way to display this Dividends Implied Volatility CBOE OPTIONS INSTITUTE 4
Slide 5: CBOE Volatility Index Calculation
CBOE Volatility Index Calculation VIX is determined through taking pricing from a wide variety of out of the money S&P 500 (SPX) options with two expirations The pricing of these options is time weighted to determine a consistent 30 day measure of implied volatility There are also volatility indexes
Slide 6: History of VIX
History of VIX VIX Index Dr. Robert Whaley authored the paper – “Derivatives on Market Volatility: Hedging Tools Long Overdue” in 1993 This paper was the basis for the original VIX calculation In 2003 the VIX Methodology was updated to incorporate a much wider number of individual option contracts T
Slide 7: History of VIX: Derivatives
History of VIX Derivatives 2004 CBOE launched VIX futures trading at the the CBOE Futures Exchange (CFE) CBOE first listed index options based on VIX in 2006 The first exchange traded product based on a VIX related strategy was created in 2009 (VXX) Short dated VIX futures and options began trading
Slide 8: VIX During the GFC: S&P vs. VIX
VIX During the GFC S&P 500 vs. VIX Weekly Chart – 2008 – 2009 1500 150 130 1250 Down S&P 500 110 1000 ≈ 50% 90 750 70 Up 500 ≈ 380% VIX 50 250 30 0 10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Data Source: Bloomberg CBOE OPTIONS INSTITUTE 8
Slide 9: VIX During the GFC: UMass Study
VIX During the GFC UMass Study VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis By Edward Szado, CFA Explored adding VIX futures or options to a fully diversified portfolio CBOE OPTIONS INSTITUTE 9
Slide 10: UMass Study – VIX Futures
VIX During the GFC UMass Study – VIX Futures August 1, 2008 – December 31, 2008 Performance 100% Diversified 97.5% Diversified + 90% Diversified + Portfolio 2.5% VIX Futures 10% VIX Futures Period Returns -19.68% -15.85% -4.02% Period Std Deviation 25.25% 22.65% 16.33% Maximum Drawdown -32.17% -27.7
Slide 11: UMass Study – ATM VIX Calls
VIX During the GFC UMass Study – ATM VIX Calls August 1, 2008 – December 31, 2008 Performance 100% Diversified 99% Diversified + 97% Diversified + Portfolio 1% ATM VIX Calls 3% ATM VIX Calls Period Returns -19.68% -6.72% 20.78% Period Std Deviation 25.25% 20.48% 21.08% Maximum Drawdown -32.17% -18.8
Slide 12: UMass Study – OTM VIX Calls
VIX During the GFC UMass Study – OTM VIX Calls August 1, 2008 – December 31, 2008 Performance 100% Diversified 99% Diversified + 97% Diversified + Portfolio 1% OTM VIX Calls 3% OTM VIX Calls Period Returns -19.68% 17.70% 97.18% Period Std Deviation 25.25% 28.70% 51.86% Maximum Drawdown -32.17% -24.3
Slide 13: VIX vs S&P
CBOE Volatility Index VIX vs S&P 500 Jan 2000 – Sep 2015 2200 230 185 1650 S&P 500 140 1100 95 550 VIX 50 0 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data Source: Bloomberg and CBOE.COM CBOE OPTIONS INSTITUTE 13
Slide 14: Relationship with S&P
CBOE Volatility Index Relationship with S&P 500 Daily Statistics – Jan 1991 – Sep 2015 Daily Change Correlation = -0.7125 S&P 500 Up – VIX Down 3323 Days – 2617 Days 78.75% S&P 500 Down – VIX Up 2906 Days – 2246 Days 77.29% CBOE OPTIONS INSTITUTE 14
Slide 15: Inverse Relationship
CBOE Volatility Index Inverse Relationship S&P 500 Put – Call Ratio – Jan 2015 – Sep 2015 4 More SPX 3 Puts than Calls 2 1 More SPX Calls than Puts 0 Jan Feb Mar Apr May Jun Jul Aug Sep Data Source: CBOE.COM CBOE OPTIONS INSTITUTE 15
Slide 16: Mean Reversion
CBOE Volatility Index Mean Reversion Implied volatility is a range bound measure At times there may be some extreme moves But generally implied volatility oscillates around a mean In time… A move up in VIX is usually followed by a drop A long period of complacency in VIX is eventually followed by a
Slide 17: VIX Price Behavior
CBOE Volatility Index VIX Price Behavior VIX vs. 10 Day Moving Average 22 20 VIX 18 16 14 12 10 Day Moving Average 10 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: Bloomberg CBOE OPTIONS INSTITUTE 17
Slide 18: Select Global Volatility Indexes
Equity Index Implied Volatility Select Global Volatility Indexes Market Volatility Index Underlying Index Australia S&P/ASX 200 VIX S&P ASX 200 Hong Kong HSI Volatility Index Hang Seng Index India India VIX CNX Nifty Europe VSTOXX Euro Stoxx 50 Germany VDAX DAX Netherlands AEX Volatility Index AEX F
Slide 19: Correlation With Underlying
Equity Index Implied Volatility Correlation With Underlying Volatility Index Underlying Index 5 Year Correlation S&P/ASX 200 VIX S&P ASX 200 -0.6905 HSI Volatility Index Hang Seng Index -0.5839 India VIX CNX Nifty -0.5592 VSTOXX Eurostoxx 50 -0.7814 VDAX DAX -0.7624 AEX Volatility Index AEX -0.7790
Slide 20: Correlation With Subsequent Realized
Equity Index Implied Volatility Correlation With Subsequent Realized (through July 2015) Start Date Volatility Index Correlation R-Squared 1/2/2008 S&P/ASX 200 VIX 0.7568 0.6115 1/2/2001 HSI Volatility Index 0.7942 0.6308 11/1/2007 India VIX 0.7498 0.5622 1/4/1999 VSTOXX 0.7820 0.5783 1/2/1992 VDAX
Slide 21: VIX Versus Realized Volatility
Equity Index Implied Volatility VIX Versus Realized Volatility Monthly VIX versus Realized Volatility 20 VIX Overstates 10 Realized Volatility 0 -10 VIX Understates -20 Realized Volatility -30 -40 2008 2009 2010 2011 2012 2013 2014 2015 CBOE OPTIONS INSTITUTE 21
Slide 22: Equity Implied Volatility Behavior
Equity Implied Volatility Behavior Implied volatility is a forward looking measure of market expectations When some sort of near term catalyst is approaching implied volatility as indicated by option pricing often increases Quickly after the catalyst has come to fruition implied volatility will drop
Slide 23: Behavior of Equity Related Implied Volatility
Equity Implied Volatility Behavior of Equity Related Implied Volatility 6/1/2010 – 9/30/2015 Total Market Volatility Percent Market Volatility Percent Percent Pair Correlation Higher Lower Opposite Lower Higher Opposite Opposite AAPL / VXAPL -0.4500 700 472 67.43% 642 422 65.73% 66.62% AMZN / VXAZN
Slide 24: AMZN Implied Volatility
Equity Implied Volatility Market AMZN Implied Volatility Sell-Off 10/1/2014 – 9/30/2015 55 Earnings Reports 45 35 25 15 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 CBOE OPTIONS INSTITUTE 24
Slide 25: Alternative Implied Volatility Behavior
Alternative Implied Volatility Behavior Different markets have different trading characteristics The option trading on these markets is unique as well Some markets react to price changes while others may be more anticipatory regarding market price changes CBOE OPTIONS INSTITUTE 25
Slide 26: Behavior of Alternative Implied Volatility Indexes
Alternative Implied Volatility Behavior of Alternative Implied Volatility Indexes 4/1/2011 – 9/30/2015 Total Market Volatility Percent Market Volatility Percent Percent Pair Correlation Higher Lower Opposite Lower Higher Opposite Opposite 10 Yr / TYVIX 0.1760 514 231 44.94% 598 258 43.14% 43.97% USO
Slide 27: GLD vs. GVZ
Alternative Implied Volatility GLD vs. GVZ October 2014 – September 2015 130 40 120 35 110 GLD 30 100 25 90 GVZ 20 80 15 70 60 10 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 CBOE OPTIONS INSTITUTE 27
Slide 28: OVX vs. USO
Alternative Implied Volatility OVX vs. USO January 2015 – September 2015 25 100 90 20 80 USO 70 15 60 10 50 OVX 40 5 30 0 20 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Data Sources: CBOE & Bloomberg CBOE OPTIONS INSTITUTE 28
Slide 29: VIX Futures: Fair Value to VIX Index
VIX Futures Fair Value to VIX Index The price behavior of VIX futures contracts is unique when compared to other financial futures It is costly and operationally difficult to replicate the performance of the spot VIX index in a portfolio The result is a lack of a ‘fair value’ relationship between VI
Slide 30: VIX Futures Price Performance
VIX Futures Price Performance Daily Sept 2015 VIX Future vs. Spot VIX 45 40 VIX 35 30 25 VXU5 20 15 10 5 12/22/14 2/5/15 3/20/15 5/4/15 6/16/15 7/29/15 9/10/15 Data Source: Bloomberg CBOE OPTIONS INSTITUTE 30
Slide 31: Contango / Backwardation
VIX Futures Contango / Backwardation Contango 22 20 18 16 14 VIX Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Data Source: Bloomberg CBOE OPTIONS INSTITUTE 31
Slide 32: Contango / Backwardation
VIX Futures Contango / Backwardation Backwardation 28 26 24 22 20 18 VIX Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Data Source: Bloomberg CBOE OPTIONS INSTITUTE 32
Slide 33: History of Contango / Backwardation
VIX Futures History of Contango / Backwardation 2007 – 3Q 2015 VIX Index Month 1 Future VIX - Month 1 - Higher than Higher than Month 2 SPX Year Month 1 Month 2 Backwardation Performance 2007 39.04% 29.48% 21.12% 3.53% 2008 45.45% 48.62% 35.18% -38.49% 2009 23.81% 26.98% 9.92% 23.45% 2010 20.24% 6.3
Slide 34: Futures Price Behavior
VIX Futures Futures Price Behavior September 2015 Futures vs. Spot VIX 45 40 +169% 35 VIX 30 25 September 20 +59% VIX Futures 15 10 8/19/15 8/27/15 9/4/15 9/15/15 CBOE OPTIONS INSTITUTE 34
Slide 35: VIX Weeklys Overview
VIX Weeklys Overview Futures were launched in late July 2015 Short dated options on VIX were launched in October 2015 Traders have quickly found uses for these volatility products Historically VIX futures pricing had closely tracked spot VIX as expiration approached CBOE OPTIONS INSTITUTE 35
Slide 36: VIX Futures Price Action
VIX Futures Price Action Futures Beta http://cfe.cboe.com CBOE OPTIONS INSTITUTE 36
Slide 37: VIX Weeklys Price Action
VIX Weeklys Price Action VIX Weeklys Futures – The First Three Months 55 50 45 40 Near Dated 35 VIX Future 30 25 Spot VIX 20 15 10 7/29 8/3 8/6 8/11 8/14 8/19 8/24 8/28 9/2 9/8 9/11 9/16 9/21 9/24 9/30 10/5 10/8 10/13 10/16 10/21 10/26 Bloomberg CBOE OPTIONS INSTITUTE 37
Slide 38: VIX Weeklys Futures Price Behavior
VIX Weeklys Futures Price Behavior Observed VIX futures pricing into expiration from January 2007 through June 2015 Excluded instances where VIX futures closed at a discount to spot VIX Closing ‘trades’ occurred on the market close the day before settlement CBOE OPTIONS INSTITUTE 38
Slide 39: Futures into Expiration
VIX Weeklys Futures into Expiration Short VIX Futures only if VIX Futures > VIX Index Days Trades Winners Win % Profit Avg Profit Max Loss 9 72 51 70.83% 64.81 0.90 -14.38 8 80 51 63.75% 34.88 0.44 -14.93 7 77 47 61.04% 22.04 0.29 -13.35 6 74 50 67.57% 44.91 0.61 -9.86 5 70 49 70.00% 39.18 0.56 -11.
Slide 40: Futures into Expiration: Weeklys August to November
VIX Weeklys Futures into Expiration Weeklys from August to November Future 4 Days VIX 4 Days Future Day VIX Day Expiration to Exp. to Exp. Before Exp. Before Exp. P/L 5-Aug 12.975 12.130 13.075 13.000 -0.10 12-Aug 14.050 13.770 13.700 13.710 0.35 9-Sep 25.875 25.610 24.825 24.900 1.05 23-Sep 21.475
Slide 41: Long Put Option Trade
VIX Weeklys Long Put Option Trade August 14, 2015 – VIX @ 12.83 – August VIX @ 14.275 Strike Ask Break Even BE - VIX 13.00 0.10 12.90 0.07 13.50 0.20 13.30 0.47 14.00 0.40 13.60 0.77 14.50 0.70 13.80 0.97 15.00 1.10 13.90 1.07 16.00 2.00 14.00 1.17 17.00 2.90 14.10 1.27 18.00 3.90 14.10 1.27 19.00 4
Slide 42: Long Put Option Trade Payoff
VIX Weeklys Long Put Option Trade Long VIX Aug 17 Put @ 2.90 Payoff 5 4 3 VIX @ VXQ5 @ 12.83 14.275 2 1 0 11 12 13 14 15 16 17 18 19 -1 -2 -3 -4 CBOE OPTIONS INSTITUTE 42
Slide 43: VIX Weeklys Trading Examples
VIX Weeklys Trading Examples Tuesday November 17 VIX and Nov 24th Future around 18.05 Sell VIX Nov 24th 17 Call at 1.57 Buy VIX Nov 24th 19 Call at 0.82 Net Credit = 0.75 Sell VIX Nov 24th 18 Call at 1.15 Buy VIX Nov 24th 20 Call at 0.64 Net Credit = 0.51 CBOE OPTIONS INSTITUTE 43
Slide 44: Trading Examples: Payoff Diagram
VIX Weeklys Trading Examples Payoff Diagram 1.00 17 / 19 Call Spread 0.00 13 16 19 22 November 24 18 / 20 Settlement 16.56 Call Spread -1.00 Market ≈ 18.05 -2.00 CBOE OPTIONS INSTITUTE 44
Slide 45: Being Prepared for the 'Spike'
VIX Option Trading Being Prepared for the ‘Spike’ VIX option traders have become more innovative in their methods to be positioned for a quick move higher in volatility Based on VIX futures versus the spot index and VVIX – VIX Call option are often considered expensive When you want to buy an expens
Slide 46: Long Volatility Trade
VIX Option Trading Long Volatility Trade February 14, 2014 – VIX at 13.60 and March VIX Futures at 14.70 A trader came in and sold an out of the money upside straddle then used some of the proceeds to pay of a farther out of the money call option Sell 1 VIX Mar 17 Call @ 0.95 Sell 1 VIX Mar 17 Put @
Slide 47: Long Volatility Trade Payoff
VIX Option Trading Long Volatility Trade Short VIX Mar 17 Straddle + Long VIX Mar 19 Call – 4.00 3.00 VIX @ 2.00 13.60 1.00 0.00 12.00 14.00 16.00 18.00 20.00 22.00 -1.00 -2.00 Mar VIX -3.00 @ 14.70 -4.00 -5.00 CBOE OPTIONS INSTITUTE 47
Slide 48: Long Volatility Trade
VIX Option Trading Long Volatility Trade Thursday February 6th the day before the employment number an interesting spread trade came into the VIX pit VIX was at 12.90 and the February VIX futures contract was at 14.55 With an outlook expecting higher VIX into February (probably based on the employme
Slide 49: Long Volatility Trade Payoff
VIX Option Trading Long Volatility Trade Long 1 VIX Feb 16 / 20 Call Spread + Short 1 VIX Feb 13 Put 5.00 4.00 3.00 VIX @ Feb VIX 2.00 12.90 @ 14.55 1.00 0.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 21.00 -1.00 -2.00 -3.00 -4.00 CBOE OPTIONS INSTITUTE 49
Slide 50: Long Volatility Trade
VIX Option Trading Long Volatility Trade Friday February 21, 2014 – VIX is trading at 14.70 – March VIX futures trading at 15.15 A trade came into the VIX Pit with a bullish outlook for VIX (bearish on equities) focusing on March expiration Buy 1 VIX Mar 17 Call @ 0.75 Sell 2 Mar 22 Calls @ 0.30 (0.
Slide 51: Long Volatility Trade Payoff
VIX Option Trading Long Volatility Trade Long 1 VIX Mar 17 Call + Short 2 VIX March 22 Calls 6.00 5.00 4.00 3.00 VIX @ Mar VIX 2.00 14.70 @ 15.15 1.00 0.00 12.00 14.00 16.00 18.00 20.00 22.00 24.00 26.00 28.00 -1.00 -2.00 -3.00 -4.00 CBOE OPTIONS INSTITUTE 51
Slide 52: Current VIX Environment: VIX Statistics
CBOE Volatility Index Current VIX Environment VIX Statistics – 2004 – 3Q2015 H/L Percent Average High Low H / L Range Range S&P 500 2004 15.48 21.58 11.23 10.35 92.16% 8.99% 2005 12.81 17.74 10.23 7.51 73.41% 3.00% 2006 12.81 23.81 9.90 13.91 140.51% 13.62% 2007 17.54 31.09 9.89 21.20 214.36% 3.53%
Slide 53: Current VIX Environment: 25+ Years of VIX
CBOE Volatility Index Current VIX Environment 25+ Years of VIX 90 80 70 60 50 40 30 20 10 0 1990 1995 2000 2005 2010 2015 Data Source: CBOE.COM CBOE OPTIONS INSTITUTE 53
Slide 54: Current VIX Environment: 2000 – 3Q 2015
CBOE Volatility Index Current VIX Environment 2000 – 3Q 2015 45 40 1 Year 35 30 5 Years 10 Years 25 20 15 10 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data Source: Bloomberg CBOE OPTIONS INSTITUTE 54
Slide 55: Summary
Primer on Options / Volatility Strategies Summary The VIX Methodology has been applied to a variety of markets around the world The implied volatility of options on different instruments will behave differently based on the nature of those markets Listed derivatives based on volatility indexes also
Slide 56: Resources / Contact Info
Resources / Contact Info CBOE Options Hub www.cboeoptionshub.com CBOE Links www.cboe.com/vix www.cboe.com/education www.cfe.cboe.com My Email rhoads@cboe.com CBOE OPTIONS INSTITUTE 56
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