11.18 Launch Date for New Diversification Tool – Futures on RVX Index

Futures on the CBOE Russell 2000® Volatility Index (index ticker is RVX, and futures ticker is VU) are scheduled to launch on CFE on Monday, November 18, and CBOE plans to introduce trading in RVX options on Monday, December 2.

The RVX Index is an up-to-the-minute market estimate of the expected 30-day volatility of the Russell 2000® Index (RUT), calculated using real-time bid/ask quotes of RUT options that are listed on CBOE. The Russell 2000 Index is the premier measure of the performance of small-capitalization U.S. stocks.

 WHY USE THE RVX INDEX?

As shown in the three charts below, the RVX Index has had some very interesting properties that can appeal to certain investors.  In the year 2008, many investors expressed concern that the many “traditional” investment indexes experienced steep double-digit declines and rising correlations with each other, and some observers questioned whether the traditional principles of diversification and modern portfolio theory applied in 2008 and thereafter.

Here are the % price changes for five indexes in year 2008

Down 37.6% — Russell 1000® Index

  • Down 33.8% — Russell 2000 Index
  • Down 46.5% — S&P GSCI Index (commodities)
  • Down 43.4% — MSCI EAFE Index (In US$)
  • Up 67.7%      — CBOE Russell 2000 Volatility Index (RVX)

The all-time high daily closing value for the RVX Index was 87.62 on November 20, 2008 (see Chart 1 below).

mm1 rvx

Since 2006 the Russell 2000 Index has dropped more than 10 percent in five different weeks.  In all five of those weeks, the Russell 1000 Index and crude oil spot prices also experienced sharp declines, and thus persons trying to diversify could have had challenges trying to minimize portfolio losses during those time periods.  However, during each of those five weeks the RVX had sharp rises between 11.5% and 41.6% (see Chart 2 below).

mm 2 rvx

The correlations of weekly returns vs. the RVX Index since April 2006 were negative 0.72 for the Russell 2000 Index and negative 0.23 for crude oil spot prices.   These negative correlations show that the RVX Index could have potential as a diversification tool, although one cautionary note for investors in the fact that futures and options on a volatility index can have movements that are different than the movements of the spot volatility index.

mm 3 rvx

FUTURES AND OPTIONS STRATEGIES

VU futures and RVX options are designed to enable investors to hedge volatility of a portfolio of small-cap stocks and to spread the volatility level of the Russell 2000 against large-cap index volatility to take advantage of differences between small- and large-cap company dynamics. Russell 2000 Volatility Index products will allow customers to hedge, diversify or take a directional view on volatility in the small-cap market sector.

Investors who are bullish on RVX, and bearish on small-cap stocks, could consider these strategies –

Long RVX Call Options

  • Long RVX Call Spreads
  • Short RVX Put Credit Spreads
  • Long RVX Futures

Investors who are bearish on RVX, and bullish on small-cap stocks, could consider —

Long RVX Put Options

  • Long RVX Put Spreads
  • Short RVX Call Credit Spreads
  • Short RVX Futures

For price history and more information and updates re: futures and options on the RVX Index, please visit www.cboe.com/RVX.

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Matt Moran

Matt Moran is vice president of business development for Chicago Board Options Exchange (CBOE), where he communicates with pension funds, mutual funds, and financial advisors. He has delivered more than 200 presentations worldwide on the topics of managing volatility and adding income with option-writing strategies. Previously,…

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