CBOE Communities

What's On Our Minds...

Article Options

Managing Brazilian Volatility with Futures and Options on the VXEWZ Index by Matt Moran

by Administrator on 02-17-2012 12:33 PM

 

Over the next five years, some projections indicate that the annual GDP of Brazil could surpass that of both France and the United Kingdom, and that Brazil could rise to become the fifth largest economy in the world.

 

More investors now are concerned with the issue of managing Brazilian volatility.

 

Today CBOE Holdings announced today that the following products will be launched in the coming weeks:

 

•     CBOE Brazil ETF Volatility Index security futures (VXEW) - Tuesday, February 21 on CFE

 

•     CBOE Brazil ETF Volatility Index options (VXEWZ) - Tuesday, March 6 on CBOE  www.cboe.com/VXEWZ

 

STOCK INDEX PRICES SINCE 2000

 

 

 

30-DAY HISTORIC VOLATILITY

 

Since February 2001, the average 30-day historic volatility has been about 25.6 for the MSCI Brazil Index and 18.9 for the S&P 500 Index.

 

 

30-DAY IMPLIED VOLATILITY

 

Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

 

CBOE calculates and disseminates the CBOE Brazil ETF Volatility Index (ticker VXEWZ), which reflects the implied volatility of the EWZ ETF. www.cboe.com/vxewz

 

The price history for the VXEWZ Index begins in March 2011.  The peak daily closing value for the VXEWZ Index was 63.49 on Oct. 3, 2011.

 

 

 

At mid-day today (Feb. 17), the VXEWZ Index was at 30.89 and the VIX was at 18.14.

 


 

Delayed quotes table is updated at www.cboe.com/VXEWZ

 

CORRELATIONS

 

As noted in the table below, the daily changes in the VXEWZ Index had a negative 0.85 correlation to those of the EWZ ETF during the time period covered.

 

 

In light of the negative correlations in the above table, some investors are exploring the possibility of using volatility products as diversification tools.

 

TRADABILITY AND FUTURES AND OPTIONS

 

If you believe that the VXEWZ Index is mean-reverting, and you believe that there is a good chance that VXEWZ might rise significantly in upcoming weeks or months, four strategies that you might consider in the future include –

 

  1. Long VXEWZ call options
  2. Long VXEWZ call spreads
  3. Short VXEWZ put credit spreads
  4. Long VXEWZ futures.

 

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products.  You can visit www.cboe.com/VIX for some information regarding pricing, and www.cboe.com/VXEWZ for more information on the VXEWZ Index.

Labels:
0
About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
Announcements
Hello...