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September 23, 2008 Issue 20 |
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For more information on the CBOE Volatility Index® ("VIX"), volatility and variance futures including brokers, ISVs, symbols and product specifications, visit www.cboe.com/cfe. For VIX market information including current quotes and historical data, please visit www.cboe.com/cfe. To contact the CFE, please click here. |
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Welcome to Futures in Volatility!Futures in Volatility is a monthly CFE publication focused on volatility and variance futures, featuring volatility market reports, trading strategies and feature articles from contributors such as Larry McMillan. CFE is the home of volatility futures, featuring CBOE Volatility Index (VIX) futures, DJIA® Volatility Index futures, Three and Twelve-month S&P 500® Variance futures and S&P 500 BuyWrite Index futures. CFE makes trading volatility easier than ever. Futures in Volatility includes several sections: Market Summary and Analysis, Trading Strategy Ideas, and Events. Market Summary and Analysis includes commentary related to VIX, VIX futures and other volatility products, as well as charts and data related to these markets. Trading Strategy Ideas features strategies focused on trading volatility products. And, Events features upcoming CFE and Chicago Board Options Exchange (CBOE®) conferences, seminars and webinar presentations. |
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Contact Information
VIX Futures Last Trade Dates
Announcements |
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Historic Discounts on VIX Futures
As the broad stock market S&P 500 Index® (SPX) went into a volatile tailspin, volatility derivatives proved to be useful as hedges and as market predictors. In the course of these developments, CBOE Volatility Index® (VIX®) futures traded at a historically large discount to the VIX itself and, acted as a harbinger of the large rally that occurred during the third week in September.
What is interesting is the premium on the front month October VIX futures over this time period. Table 2 shows certain dates, comparing the VIX and the October futures on those dates. You can see you the discount widened to its eventual historically deep discount, with a 9.61 discount close on Wednesday, September 17th. Prior to this recent period, the deepest closing discount on a front-month VIX futures contract had been 3.62, in November, 2007.
Intraday, the discounts were even bigger when the VIX reached 42 during trading on Thursday, September 18th. At that time, the October VIX futures only managed to rise to about 28, so the intraday discount was a significant 14 points.
On the chart, there is a vertical line with arrows at each end, indicating the market interpretation of changes in the term structure. If the market is rising, the term structure will be downward. That is why the bullish arrow points down. Conversely, if the market is falling, the term structure will rise, and hence the bearish arrow points up. Let's see how this worked in actual practice this month.
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![]() About CBOE Futures Exchange CBOE Futures Exchange (CFE®) is an all-electronic open access exchange, which utilizes the CBOE’s® state-of-the-art trading system, CBOEdirect®. CFE is the leader in providing innovative volatility risk management futures products, including VIX® and variance futures, which enable market participants to manage volatility risk, as well as trade volatility directly. Access to CFE is available through numerous brokers, ISVs or directly via the CBOEdirect API or CBOE’s HyTS® terminals. CFE trades are cleared by the AAA-rated Options Clearing Corporation (OCC). To contact the CFE, please click here. About Larry McMillan and McMillan Analysis Corporation Professional trader Lawrence G. McMillan is perhaps best known as the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies, which has sold over 200,000 copies. An active trader of his own account, he also manages option-oriented accounts for certain individuals and in addition, he is the Portfolio Manager of The Hardel Volatility Arbitrage Fund (a hedge fund). In a research capacity, he edits and contributes to his firm’s publications: Daily Volume Alerts, The Option Strategist and The Daily Strategist—derivative products newsletters covering equity, index, and futures options. Finally, he speaks on option strategies at many seminars and colloquia in the United States, Canada, and Europe. He is quoted in publications such as The Wall Street Journal, Barron’s, Technical Analysis of Stocks and Commodities, Data Broadcasting’s Exchange magazine, Futures Magazine, theStreet.com, and Active Trader Magazine. In these capacities, he is the President of McMillan Analysis Corporation, which he founded in 1991. Prior to founding his own firm, Mr. McMillan was a proprietary trader at two major brokerage firms—primarily Thomson McKinnon Securities, where he ran the Equity Arbitrage Department for nine years. * This is a paid advertisement. The inclusion of these advertisements should not be construed as an endorsement of any product, service, or Web site or as an indication of the value of any claims, recommendations or other information contained therein. Copyright © 2008 CBOE Futures Exchange, LLC. All rights reserved. CFE®, CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index®, VIX® are registered trademarks of Chicago Board Options Exchange, Incorporated. The information in this newsletter is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions that should be referred to for additional detail and are subject to changes that may not be reflected in this newsletter. The strategy discussions contained in this newsletter are designed to assist individuals in learning how volatility and variance futures as well as other volatility-based derivatives work and understanding various volatility derivatives strategies. The strategies discussed are for educational and illustrative purposes only and should be not be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Additionally, commissions and other transaction costs have not been included in the example strategies and will impact the outcome of security and futures transactions and must be considered prior to entering into any transactions. Investors considering volatility-based derivatives should consult a professional tax advisor as to how taxes affect the outcome of contemplated transactions in volatility-based derivatives. The charts and/or graphs contained herein are intended for reference purposes only. Past performance is not indicative of future results. The views of third party contributors to this newsletter are their own and do not necessarily represent the views of CFE or its affiliates. Third party contributors are not affiliated with CFE. This newsletter should not be construed as an endorsement or an indication by CFE of the value of any third party product or service described in this newsletter. 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. The methodologies of the CBOE Volatility Index (VIX) and the CBOE DJIA Volatility Index (VXD) are owned by CBOE and may be covered by one or more patents or pending patent applications. |
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