Trading VIX Derivatives

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.

• Preface xiiiAcknowledgments xvChapter 1 Understanding Implied Volatility 1Historical versus Forward-Looking Volatility 1Put-Call Parity 4Estimating Price Movement 6Valuing Options: Pricing Calculators and Other Tools 6Fluctuations Based on Supply and Demand 9The Impact on Option Prices 13Implied Volatility and the VIX 14Chapter 2 About the VIX Index 15History of the VIX 15Calculating the VIX 17The VIX and Put-Call Parity 18The VIX and Market Movement 22Equity Market Volatility Indexes 24Chapter 3 VIX Futures 31Steady Growth of New Products 31Contract Specifications 33Mini-VIX Futures 42Pricing Relationship between VIX Futures and the Index 42Futures’ Relationship to Each Other 46VIX Futures Data 47Chapter 4 VIX Options 49Contract Specifications 51Relationship to VIX Index 56Relationship to VIX Futures 57VIX Binary Options 58Chapter 5 Weekly Options on CBOE Volatility Index Futures 61Contract Specifications 62Weekly Options and Index Options 63Weekly Option Strategy 65Chapter 6 Volatility-Related Exchange-Traded Notes 69What are Exchange-Traded Notes? 69iPath S&P 500 VIX Short-Term Futures ETN 70iPath S&P 500 VIX Mid-Term Futures ETN 73Comparing the VXX and VXZ Performance 76Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN 80Barclays ETN+ S&P VEQTOR ETN 82S&P 500 VIX Futures Source ETF 82Chapter 7 Alternate Equity Volatility and Strategy Indexes 83CBOE S&P 500 3-Month Volatility Index (VXV) 83VIX Premium Strategy Index (VPD) 88Capped VIX Premium Strategy Index (VPN) 90S&P 500 VARB-X Strategy Benchmark 93S&P 500 Implied Correlation Index 95Chapter 8 Volatility Indexes on Alternative Assets 99CBOE Gold Volatility Index 100CBOE Crude Oil Volatility Index 102CBOE EuroCurrency Volatility Index 104CBOE/NYMEX Crude Oil (WTI) Volatility Index 107CBOE/COMEX Gold Volatility Index 107CBOE/CBOT Grain Volatility Indexes 109FX Realized Volatility Indexes 109Chapter 9 The VIX as a Stock Market Indicator 113The Inverse Relationship between the VIX and the S&P 500 114VIX Index as an Indicator 115VIX Futures as an Indicator 118A Modified VIX Futures Contract 121Combining VIX Futures and the VIX Index 122VIX Index and Gold Price Indicator 124VIX Option Put-Call Ratio 127Chapter 10 Hedging with VIX Derivatives 133Hedging with VIX Options 133Hedging with VIX Futures 143University of Massachusetts Study 147Chapter 11 Speculating with VIX Derivatives 149VIX Futures Trading 150VIX Option Trading 153VIX ETN Trading 161Comparing VIX Trading Instruments 166Chapter 12 Calendar Spreads with VIX Futures 169Comparing VIX Futures Prices 170The Mechanics of a Calendar Spread 175Patterns in the Data 178Trade Management 189Other Parameters 193Chapter 13 Calendar Spreads with VIX Options 195VIX Option Pricing 195Calendar Spread with Put Options 196Calendar Spread with Call Options 205Diagonal Spread with Put Options 209Diagonal Spread with Call Options 212Chapter 14 Calendar Spreads with VIX Options and Futures 217Comparing Options and Futures 217Calendar Spread Examples 219Chapter 15 Vertical Spreads with VIX Options 229Vertical Spread Examples 229Chapter 16 Iron Condors and Butterflies with VIX Options 251What is an Iron Condor? 251Iron Condor with VIX Options 255What Is an Iron Butterfly? 257Iron Butterfly with VIX Options 261About the Author 265Index 267

"For those wanting to take the next step in learning or portfolio modeling, Trading VIX Derivatives will be a logical step in progression. For investors considering trading the VIX in any of many products available I recommend getting a copy of Trading VIX Derivatives with the great return on investment this book offers." (SeekingAlpha, April 2012)