On Wednesday at the 31st Annual Risk Management Conference (RMC) in California, Samuel Kadziela, Director of Education at Chicago Trading Company, delivered a presentation entitled Primer on Volatility Analysis and Trading Strategies.

Mr. Kadziela noted that --

  1. Realized volatility is the volatility of the underlying contract over some period of time;
  2. Implied volatility is derived from the prices of options in the marketplace, and reflects the marketplace’s consensus expectation of future volatility.
  3. Traditional approach to trading volatility is to trade an option and dynamically delta hedge it; in theory, the profit/loss from rehedging (Gamma) offsets the loss/profit from the time decay (Theta). This approach results in a mixed exposure to both implied volatility and to realized volatility: implied volatility – through Vega, and realized volatility – through delta hedging until the position is closed out.
  4. While it is “impossible” to trade spot VIX by trading the replicating portfolio because of the excessive cost of rebalancing, there are many other ways of trading implied volatility with VIX-related products. We can gain exposure to implied volatility using VIX futures, VIX options, VIX ETNs and ETFs, and Options on VIX ETNs.
  5. The contract size of a VIX future is $1000 times the VIX Index, VIX options have a $100 multiplier and are European- exercise style. The settlement date for VIX options and futures is the same: 30 days prior to the third Friday of the month immediately following the contract month (always a Wednesday); this “unusual” settlement date is chosen because this is the only day in a month on which VIX value is not interpolated.
  6. VIX futures are contracts on forward starting implied volatility
  7. VIX futures of different maturities are neither tied to each other nor to VIX spot by any hard and fast relationship such as the spot-forward arbitrage based on cost of carry.

2015-03-04-1231-VIX Volume Samuel


Mr. Kadziela noted the big increases in volume for bot VIX futures and VIX options.


Samuel Kadziela received a Ph.D. in Mathematics from the University of Illinois at Urbana-Champaign in 2007, working in the areas of algebraic geometry and number theory.  Following graduation, Samuel became a Visiting Assistant Professor of Mathematics at the University of California in Irvine.  Collaborating with the department faculty, he expanded the scope of his research to include applications of arithmetic geometry in cryptography.  During this time he also developed an interest in financial markets, which eventually led to his present role as a Director in the Education department of Chicago Trading Company, a proprietary option trading and market making firm.  After moving to CTC, Samuel worked on the trading floor of the Chicago Board Options Exchange, and eventually joined Sheldon Natenberg and Tim Weithers in preparing and delivering in-house education classes to CTC’s personnel.  He continues to use his mathematical skills and technical expertise in the development of a wide variety of coursework.  Samuel is a frequent guest lecturer at universities and conferences.  He also supervises student projects at several universities and has served as a Master’s Thesis advisor for the Courant Institute.