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by Normxxx
Introduced in 1993, the CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
Introduction to VIX Futures and Options
First posted here
http://www.cboe.com/micro/vix/introducti...
The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.
Here is a timeline of some key events in the history of the VIX Index:
- 1993 The VIX Index is introduced in a paper by Professor Robert E. Whaley of Duke University.
- 2003 Revised, more robust methodology for the VIX Index is introduced.
- 2004 On March 26, 2004, the first-ever trading in futures on the VIX Index began on the CBOE Futures Exchange (CFE).
- 2006 VIX options were launched in February 2006. Click here for additional VIX options releases.
Normxxx (Click to read Normxxx's forum)
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
The copyright of the article VIX: The CBOE Volatility Index® in Investment is owned by Kirk Lindstrom. Permission to republish VIX: The CBOE Volatility Index® in print or online must be granted by the author in writing.
Comments
Feb 17, 2007 5:06 AM
Steve Thompson :
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By STEVEN M. SEARS
WHEN MOST INVESTORS LOOK at the stock market, they see a market of stocks -- not a stock market.
Options strategists see neither.
Instead, they see lines of implied and realized volatility stretching across calendar graphs that tell them how various securities have behaved in the past, and how they may behave in the future.
Like tea-leaf readers, strategists interpret volatility data to reveal options that are trading at premiums or discounts to their historic prices. Sometimes, the analysis finds an index at odds with its components. That is currently true of the Nasdaq 100 Index (ticker: NDX) and its components.
The index's three-month implied volatility is about 16%, compared with a historic volatility of about 13%. The average three-month implied volatility of an NDX component stock is about 27%, compared with a historical average of about 25%.
To options strategists, this discrepancy tells a story about the future stock-price movement for the Nasdaq 100 -- and suggests a trade.
"The individual stock-volatility markets are saying low volatility is here to stay, but the index-volatility market is saying the low volatility is a temporary phenomenon," says Leon Gross, Citigroup's global head of equity-derivatives strategy.
The reason for the disagreement between stock and index volatility are not readily apparent, and does not matter to traders who are attracted to "dispersion trades," as these volatility anomalies are called. These traders, known as volatility arbitragers, believe volatility behaves like a rubber band, and that when it is stretched out, as with the NDX, it ultimately reverts to the historical norm.
To profit from this anomaly, Citigroup advised clients to sell NDX "straddles" -- puts and calls with the same strike price -- that expire in June. This strategy is profitable if NDX volatility remains low, as it has for much of the past year, or if the index continues the sideways trend of the past few months.
"The index has remained richly priced to realized volatility for the past two months," Gross says. "In percentage terms, you're looking at a premium of almost 25%."
The classic dispersion trade is buying straddles on the index's component stocks and selling a straddle on the index. This strategy benefits from low index volatility relative to the volatilities of its components stocks, which occurs if the actual correlation between the stocks is lower than that priced into the options
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