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

by Rhoads, Russell

• ISBN13: 9780470933084
• ISBN10: 0470933089
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-08-09
• Publisher: Wiley

Summary

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 Exchanges 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 CBOEs 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.

Author Biography

RUSSELL RHOADS, CFA, is an instructor for the Options Institute at the Chicago Board Options Exchange. He teaches about ninety classes a year and conducts webinars on behalf of the CBOE and a variety of brokerage firms. Rhoads's twenty-year trading career has included positions at a variety of trading firms and hedge funds. His background includes trading and analysis, and he is the author of the Wiley titles Candlestick Charting For Dummies and Option Spread Trading. Rhoads graduated from the University of Memphis with an MS in finance and has a master's certificate in financial engineering from the Illinois Institute of Technology.

Table of Contents

Preface	p. xiii
Acknowledgments	p. xv
Understanding Implied Volatility	p. 1
Historical versus Forward-Looking Volatility	p. 1
Put-Call Parity	p. 4
Estimating Price Movement	p. 6
Valuing Options: Pricing Calculators and Other Tools	p. 6
Fluctuations Based on Supply and Demand	p. 9
The Impact on Option Prices	p. 13
Implied Volatility and the VIX	p. 14
About the VIX Index	p. 15
History of the VIX	p. 15
Calculating the VIX	p. 17
The VIX and Put-Call Parity	p. 18
The VIX and Market Movement	p. 22
Equity Market Volatility Indexes	p. 24
VIX Futures	p. 31
Steady Growth of New Products	p. 31
Contract Specifications	p. 33
Mini-VIX Futures	p. 42
Pricing Relationship between VIX Futures and the Index	p. 42
Futures' Relationship to Each Other	p. 46
VIX Futures Data	p. 47
VIX Options	p. 49
Contract Specifications	p. 51
Relationship to VIX Index	p. 56
Relationship to VIX Futures	p. 57
VIX Binary Options	p. 58
Weekly Options on CBOC Volatility Index Futures	p. 61
Contract Specifications	p. 62
Weekly Options and Index Options	p. 63
Weekly Option Strategy	p. 65
Volatility-Related Exchange-Traded Notes	p. 69
What are Exchange-Traded Notes?	p. 69
iPath S&P 500 VIX Short-Term Futures ETN	p. 70
iPath S&P 500 VIX Mid-Term Futures ETN	p. 73
Comparing the VXX and VXZ Performance	p. 76
Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN	p. 80
Barclays ETN+ S&P VEQTOR ETN	p. 82
S&P 500 VIX Futures Source ETF	p. 82
Alternate Equity Volatility and Strategy Indexes	p. 83
CBOE S&P 500 3-Month Volatility Index (VXV)	p. 83
VIX Premium Strategy Index (VPD)	p. 88
Capped VIX Premium Strategy Index (VPN)	p. 90
S&P 500 VARB-X Strategy Benchmark	p. 93
S&P 500 Implied Correlation Index	p. 95
Volatility Indexes on Alternative Assets	p. 99
CBOE Gold Volatility Index	p. 100
CBOE Crude Oil Volatility Index	p. 102
CBOE EuroCurrency Volatility Index	p. 104
CBOE/NYMEX Crude Oil (WTI) Volatility Index	p. 107
CBOE/COMEX Gold Volatility Index	p. 107
CBOE/CBOT Grain Volatility Indexes	p. 109
FX Realized Volatility Indexes	p. 109
The VIX as a Stock Market Indicator	p. 113
The Inverse Relationship between the VIX and the S&P 500	p. 114
VIX Index as an Indicator	p. 115
VIX Futures as an Indicator	p. 118
A Modified VIX Futures Contract	p. 121
Combining VIX Futures and the VIX Index	p. 122
VIX Index and Gold Price Indicator	p. 124
VIX Option Put-Call Ratio	p. 127
Hedging with VIX Derivatives	p. 133
Hedging with VIX Options	p. 133
Hedging with VIX Futures	p. 143
University of Massachusetts Study	p. 147
Speculating with VIX Derivatives	p. 149
VIX Futures Trading	p. 150
VIX Option Trading	p. 153
VIX ETN Trading	p. 161
Comparing VIX Trading Instruments	p. 166
Calendar Spreads with VIX Futures	p. 169
Comparing VIX Futures Prices	p. 170
The Mechanics of a Calender Spreads	p. 175
Patterns in the Data	p. 178
Trade Management	p. 189
Other Parameters	p. 193
Calendar Spreads with VIX Options	p. 195
VIX Option Pricing	p. 195
Calendar Spread with Put Options	p. 196
Calendar Spread with Call Options	p. 205
Diagonal Spread with Put Options	p. 209
Diagonal Spread with Call Options	p. 212
Calendar Spreads with VIX Options and Futures	p. 217
Comparing Options and Futures	p. 217
Calendar Spread Examples	p. 219
Vertical Spreads with VIX Options	p. 229
Vertical Spread Examples	p. 229
Iron Condors and Butterflies with VIX Options	p. 251
What is an Iron Condor?	p. 251
Iron Condor with VIX Options	p. 255
What Is an Iron Butterfly?	p. 257
Iron Butterfly with VIX Options	p. 261
About the Author	p. 265
Index	p. 267
Table of Contents provided by Ingram. All Rights Reserved.