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Recent Increased Interest in Risk Management with VIX-based Products by Matt Moran

by Administrator on 02-24-2012 01:32 PM - last edited on 02-24-2012 03:45 PM

While the VIX® Index has been below 24 so far in 2012, and the VIX closed at 16.80 yesterday (Feb. 23), the trends in trading volumes in VIX-related products indicate that there could be more recent interest in using VIX-related products for purposes of risk management for investor portfolios. 

 

The average daily volume for the VIX call options, VIX futures, and some of the VIX-based exchanged-traded products (ETPs) is more than 55% higher this month than it was in the previous four months (see table below)

 

 

This month the VelocityShares Daily 2X VIX Short-Term ETN (TVIX) had an average daily volume of around 21,887,000, but in the past week Credit Suisse announced that it had temporarily suspended creations of shares of the TVIX ETN.

 

TABB GROUP REPORT ON VIX TRADING

 

The Tabb Group recently issued a 20-page paper “VIX Trading: The Structure of Uncertainty” (available for purchase).   Tabb summaries of the paper on the CBOE Volatility Index® (VIX) noted that --

 

“ …VIX trading quite literally exploded over the past few years. The notional value traded of VIX products grew at an ear-piercing 5-year compound annual growth rate of 131% from 2006. …  the S&P 500 volatility market reached an estimated 202 million average daily notional Vega (gross): SPX Options (75 million); VIX futures (48 million); VIX Options (39 million); VIX ETPs (30 million); and SPX Variance Swaps (10 million).  … ”

 

http://bit.ly/Tabb-VIX-2012-1      http://bit.ly/Tabb-VIX-2012-2

 

 

WHAT ARE EXPECTATIONS FOR FUTURE LEVELS OF VOLATILITY?

 

A February 22 news story at www.wsj.com noted:

 

“… current VIX levels also show that traders expect stocks to dart around far more in the future than they have over the last month. The realized volatility of the S&P 500 over the last 30 days stands at about 8%, its lowest level since May, according to data from Livevol. That means traders are paying more for portfolio protection despite the placid markets. …”

 

The chart below shows a large spread of 9.3 points on February 23rd between the VIX Index spot value (16.80) and VIX June ’12 Futures price (26.10)

 

 

The webpage www.cboe.com/VIX provides a table delayed quotes with updates on the VIX and VIX futures values.  Here is the table at mid-day on Feb. 24 --

 

 

UMASS STUDY ON VIX FUTURES AND OPTIONS AND DIVERSIFICATION

 

The paper "VIX Futures and Options--A Case Study of Portfolio Diversification During the 2008 Financial Crisis" was published in 2009 by an author from the University of Massachusetts.The paper found that, for a traditional portfolio of stocks, bonds and alternatives during the five-month time period from August through December 2008, if an investor made a 10% allocation to CBOE VIX futures--

- Total returns were improved by 15.7 percentage points (improvement to -4.0% from -19.7%)

- Standard deviation was reduced by about one-third (to 16.3% from 25.3%)

 

 

Please visit the VIX microwebsite www.cboe.com/VIX for the UMass study on use of both VIX futures and options.

 

 

 

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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.
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