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Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes


A guide to using the VIX to forecast and trade markets

Known as the fear index, the VIX provides a snapshot of expectations about future stock market volatility and generally moves inversely to the overall stock market. Trading VIX Derivatives will show you how to use the Chicago Board Options Exchange's S&P 500 volatility index to gauge fear and greed in the market, use market volatility to your advantage, and hedge stock portfolios. Engaging and informative, this book skillfully explains the mechanics and strategies associated with trading VIX options, futures, exchange traded notes, and options on exchange traded notes.

Many market participants look at the VIX to help understand market sentiment and predict turning points. With a slew of VIX index trading products now available, traders can use a variety of strategies to speculate outright on the direction of market volatility, but they can also utilize these products in conjunction with other instruments to create spread trades or hedge their overall risk.

  • Reviews how to use the VIX to forecast market turning points, as well as reveals what it takes to implement trading strategies using VIX options, futures, and ETNs
  • Accessible to active individual traders, but sufficiently sophisticated for professional traders
  • Offers insights on how volatility-based strategies can be used to provide diversification and enhance returns

Written by Russell Rhoads, a top instructor at the CBOE's Options Institute, this book reflects on the wide range of uses associated with the VIX and will interest anyone looking for profitable new forecasting and trading techniques.

Preface xiii

Acknowledgments xv

CHAPTER 1 Understanding Implied Volatility 1

Historical versus Forward-Looking Volatility 1

Put-Call Parity 4

Estimating Price Movement 6

Valuing Options: Pricing Calculators and Other Tools 6

Fluctuations Based on Supply and Demand 9

The Impact on Option Prices 13

Implied Volatility and the VIX 14

CHAPTER 2 About the VIX Index 15

History of the VIX 15

Calculating the VIX 17

The VIX and Put-Call Parity 18

The VIX and Market Movement 22

Equity Market Volatility Indexes 24

CHAPTER 3 VIX Futures 31

Steady Growth of New Products 31

Contract Specifications 33

Mini-VIX Futures 42

Pricing Relationship between VIX Futures and the Index 42

Futures’ Relationship to Each Other 46

VIX Futures Data 47

CHAPTER 4 VIX Options 49

Contract Specifications 51

Relationship to VIX Index 56

Relationship to VIX Futures 57

VIX Binary Options 58

CHAPTER 5 Weekly Options on CBOE Volatility Index Futures 61

Contract Specifications 62

Weekly Options and Index Options 63

Weekly Option Strategy 65

CHAPTER 6 Volatility-Related Exchange-Traded Notes 69

What are Exchange-Traded Notes? 69

iPath S&P 500 VIX Short-Term Futures ETN 70

iPath S&P 500 VIX Mid-Term Futures ETN 73

Comparing the VXX and VXZ Performance 76

Barclays ETN+ Inverse S&P 500 VIX Short-Term

Futures ETN 80

Barclays ETN+ S&P VEQTOR ETN 82

S&P 500 VIX Futures Source ETF 82

CHAPTER 7 Alternate Equity Volatility and Strategy Indexes 83

CBOE S&P 500 3-Month Volatility Index (VXV) 83

VIX Premium Strategy Index (VPD) 88

Capped VIX Premium Strategy Index (VPN) 90

S&P 500 VARB-X Strategy Benchmark 93

S&P 500 Implied Correlation Index 95

CHAPTER 8 Volatility Indexes on Alternative Assets 99

CBOE Gold Volatility Index 100

CBOE Crude Oil Volatility Index 102

CBOE EuroCurrency Volatility Index 104

CBOE/NYMEX Crude Oil (WTI) Volatility Index 107

CBOE/COMEX Gold Volatility Index 107

CBOE/CBOT Grain Volatility Indexes 109

FX Realized Volatility Indexes 109

CHAPTER 9 The VIX as a Stock Market Indicator 113

The Inverse Relationship between the VIX and the S&P 500 114

VIX Index as an Indicator 115

VIX Futures as an Indicator 118

A Modified VIX Futures Contract 121

Combining VIX Futures and the VIX Index 122

VIX Index and Gold Price Indicator 124

VIX Option Put-Call Ratio 127

CHAPTER 10 Hedging with VIX Derivatives 133

Hedging with VIX Options 133

Hedging with VIX Futures 143

University of Massachusetts Study 147

CHAPTER 11 Speculating with VIX Derivatives 149

VIX Futures Trading 150

VIX Option Trading 153

VIX ETN Trading 161

Comparing VIX Trading Instruments 166

CHAPTER 12 Calendar Spreads with VIX Futures 169

Comparing VIX Futures Prices 170

The Mechanics of a Calendar Spread 175

Patterns in the Data 178

Trade Management 189

Other Parameters 193

CHAPTER 13 Calendar Spreads with VIX Options 195

VIX Option Pricing 195

Calendar Spread with Put Options 196

Calendar Spread with Call Options 205

Diagonal Spread with Put Options 209

Diagonal Spread with Call Options 212

CHAPTER 14 Calendar Spreads with VIX Options and Futures 217

Comparing Options and Futures 217

Calendar Spread Examples 219

CHAPTER 15 Vertical Spreads with VIX Options 229

Vertical Spread Examples 229

CHAPTER 16 Iron Condors and Butterflies with VIX Options 251

What is an Iron Condor? 251

Iron Condor with VIX Options 255

What Is an Iron Butterfly? 257

Iron Butterfly with VIX Options 261

About the Author 265

Index 267