Contract Design & Trading of VIX and Other Listed Volatility Derivatives

Dominic Salvino from Group One and Bill Speth of CBOE covered a variety of topics this afternoon at CBOE RMC Europe. The presentation titled Contract Design & Trading of VIX and Other Listed Volatility Derivatives covered CBOE Short-Term Volatility Index (VXST), S&P 500 Variance Futures, the change to the VIX calculation that was announced today, the VIX settlement process, and the soon to trade CBOE/CBOT 10-year US Treasury Note Volatility Index Futures (VXTYN).

VXST

Dominic gave a review of VXST price action over the last six months. He notes VXST is different in that short dated volatility is more reactive to the market that longer dated volatility. VXST would be more reactive to an individual event such as an announcement from the Fed or ECB. As we have learned over the past few months VXST tends to have lower lows and higher highs than VIX. When VXST is higher than VIX it is a form of backwardation which we use to only measure with VIX futures relative to the index.

Re-launch of S&P 500 Variance Futures

Bill Speth took over and discussed the status of S&P 500 Variance (VA) futures. These contracts replicate the pay-off profile of an OTC variance swap using a daily-margined future contract. VA futures use the RIVET methodology which was developed by DRW Innovations which aligns the economics between OTC variance swaps and a listed variance future. This allows for direct comparison of pricing and size with OTC contracts. Bill cited several advantages of VA futures relative to OTC swaps such as

VIX Calculation Change

Bill expanded on the change announced this morning with respect to the VIX calculation. Highlights of this change are that it allows for a more precise measurement of 30-day volatility interpolation between 23 and 37 day SPX options. It was emphasized that this is not a change to the VIX formula, just a change to the SPX option series that are used to calculate “cash” or “spot” VIX index values. This is not a change to the pricing of VIX futures and options. The final settlement value for VIX futures and options will continue to use the same VIX formula and the opening prices of standard (third Friday expiration) SPX options series.

VIX Settlement Process

As there is often a lot of confusion around the VIX settlement process Bill spent some time reviewing how VIX settlement is determined along with SPX option trading on VIX settlement dates. On settlement date a special opening quotation of VIX using the opening prices of constitutent SPX options series which are determined through a special auction process. This process is open to customers and broker-dealers. Any strategy orders must be submitted by 8:15 am Chicago time. Even if an option has an opening price, it needs to have a bid price after the opening trade match to be used in the SOQ calculations.

CBOE/CBOT 10-year US Treasury Note Volatility Index Futures

Dominic spent a few minutes talking about VXTYN futures which will be launched on November 13 (pending regulatory approval). VXTYN futures will have a $5000 multiplier with a tick size of 0.01 ($50). The settlement process will be 30 days prior to the expiration of constituent options on the 10-year T-Note futures. This settlement will be based on the closing prices at 2:00 pm in the afternoon which is a slight difference relative to VIX option and futures settlement.