Trading VIX Derivatives

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