On February 24, 2006, options on the CBOE Volatility Index® (VIX®) began trading on the Chicago Board Options Exchange. The VIX options contract is the first product on market volatility to be listed on an SEC-regulated securities exchange. This new product, which can be traded from an options-approved securities account, follows the introduction of VIX Futures on the CBOE Futures Exchange (CFE). Many investors consider the VIX Index to be the world's premier barometer of investor sentiment and market volatility, and VIX options are very powerful risk management tools.
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Unique Features of VIX Options
VIX options have several features that distinguish them from most equity and index options, including:
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Key Links
What is VIX?
Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. The VIX Index is an implied volatility index that measures the market's expectation of 30-day S&P 500® volatility implicit in the prices of near-term S&P 500 options. VIX is quoted in percentage points, just like the standard deviation of a rate of return. The VIX closing price in 2005 was 12.07. Please see the VIX White Paper for more details.
Unique Pricing and Settlement
The pricing and settlement for VIX options will have some differences from the pricing and settlement for equity and stock index options; please see the contract specifications, VIX White Paper, and the information below for more details.
VIX Prices
Exhibit 1 - Prices for S&P 500 and VIX
Daily Closing Prices - Jan. 1990 - Dec. 2005
High Volatility of Volatility
The historic volatilities of the VIX Index and the near-term VIX futures prices generally have been quite a bit higher than those of the S&P 500 Index and most stocks in the index.
Exhibit 2 - Historic Volatilities Based on Daily Returns in 2005
* refers to the price of the near-term VIX futures
Negative Correlation
As is shown in the three Exhibits below, the price of VIX often moves in the opposite direction of the S&P 500 (e.g, when stock prices drop, implied volatility often rises). Investors might explore whether VIX options could be a "catastrophe hedging" tool for stock portfolios.
Exhibit 3 - Correlation of Daily Returns - S&P 500 and VIX
Exhibit 4 - Avg. Price Change on the 26 Days That The S&P 500 Fell by 3% or More (1990 - 2005)
Exhibit 5 - Avg. Price Change on the 33 Days on Which the S&P 500 Rose by 3% or More (1990 - 2005)
Sample Options Strategies
Investors who are -
Bullish on VIX, and Bearish on stocks** -
Might consider -
Long VIX Call Options
Long VIX Call Spreads
Short VIX Put Credit Spreads
Long VIX Futures
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Investors who are -
Bearish on VIX, and Bullish on stocks** -
Might consider -
Long VIX Put Options
Long VIX Put Spreads
Short VIX Call Credit Spreads
Short VIX Futures
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** Caution - sometimes VIX and stock prices move in the same direction. Please visit these links for more information about:
prices and
strategies.
Exhibit 6 - Profit-and-Loss Diagrams
* In the Protective Put and Buy-write diagrams, the faint grey line represents an equity position, and the colored "hockey-stick-shaped" line represents the combined stock plus options position. For more details, please click on
strategies.
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 (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.
Standard & Poor's, S&P, S&P 100, S&P 500, and S&P SmallCap 600 are registered trademarks of McGraw-Hill Inc. CBOE Volatility Index, FLEX, FLexible EXchange, LEAPS, MNX, OEX, VIX, XEO CBOE, and Chicago Board Options Exchange, are registered trademarks of Chicago Board Options Exchange, Incorporated. VXNSM and SPXSM are trademarks of Chicago Board Options Exchange, Incorporated. The methodology of the CBOE Volatility Index is owned by CBOE and may be covered by one or more patents or pending patent applications.
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