Ten Takeaways from CBOE RMC Europe

There was so much I had trouble narrowing the list down to 10, but here goes –

Change in VIX Calculation

The change that is scheduled to go into effect on October 6th in the VIX calculation is an improvement on measuring 30 day expectations of volatility in the market.   In reality this is not a change in the calculation, but a change to the inputs or option series that will be used to determine VIX.  The two closest expiration series to the 30 day time frame will be used to determine the consistent 30 day measure that is VIX.  There are still two option series being used, but with SPX options expiring each Friday the nearest expiring series that is closest to 30 days and the first expiring series just after the 30 day time frame will be combined to calculate what we see quoted as VIX.  It has been emphasized several times, but it is worth repeating that this will have no impact on VIX futures, VIX options, or the VIX settlement process.

The Carry Trade is Alive and Well

Despite VIX being so low, relative to historical levels, there are still plenty of traders willing to take advantage of the premium in VIX futures relative to the index. Carry trades were discussed in more than one session, although with a note of caution.  Probably my favorite quote related to the current environment was that traders are still picking up nickels in front of a steamroller.  However, the nickels are getting small and the steamroller is getting bigger.

The dollar cost of a VIX hedge can be very low

A term I hear thrown around, but do not use much myself is “VIX Tourist”. This can be someone that watches VIX, but doesn’t really understand the intricacies of trading VIX options or futures.  Something that VIX Tourists are apt to say is that anyone hedging tail risk using VIX options has paid up over the last three years and seen no benefits.  At CBOE’s RMC conference there are no VIX Tourists in attendance and you do not hear comments such as this.  It is very possible to get long VIX exposure with no capital outlay, however there is risk to the trade.

One of my favorite trades to get long exposure to volatility involves selling an out of the money VIX put and buying an out of the money VIX call spread. Both will share an expiration date.  Through selling two options and buying one this trade is often executable at a low price or may even be put on for a small credit.   At RMC one speaker demonstrated this trade where a 12 strike put was sold for 0.30 and a 17 – 23 call spread was purchased for 0.30.  The result of this spread is a transaction executed at no cost.  The risk to the trade is if VIX is below 12.  It was noted that VIX futures have settled under 12 only four times since 2008, although it has become more likely in the current market environment.  The upside is six points with VIX settlement above 23.00.

VIX in the teens can be rich

Another misstatement that plagues VIX is that it is low, or more specifically too low. VIX is the market’s expectation of realized volatility over the next thirty days.  To be honest, if someone is certain that VIX is too low that means they have knowledge of what is going to happen in the equity markets over the next 30 days.  We don’t know if VIX was too low or too high until 30 days have passed.  Again, if someone states that VIX is too low or too high with certainty they are in possession of some very valuable information.  ‘Knowing’ that VIX is mispriced should be kept to oneself and the individual with this information should place trades based on what they know.

Combining RUT and SPX options is a great way to spread long versus small cap stocks

One of the strategies demonstrated for taking advantage of a relative view of large cap versus small cap stocks involved combining options on the Russell 2000 (RUT) and S&P 500 (SPX) into a single strategy or position. In 2013 RUT outperformed SPX by almost 10%.  This year the tables have been turned with SPX beating RUT by almost 10%.  Bullish SPX spreads in 2014 combined with bearish spreads in RUT were demonstrated as an effective way to benefit from the different performance of large cap versus small cap stocks.

European demand for US Option trading is growing

One of the sessions at CBOE RMC featured a study discussing different trends in the US option market. Something that really stood out for me was the growing use of the US option market by all levels of European traders.  Apparently brokerage platforms in Europe have opened up to giving retail traders enhanced access to the US markets.  The result is increased interest and trading volume coming from that part of the world into the US option markets.

VIX is a global risk measure

VIX is considered a global measure of risk. We often say this at CBOE, but being in Europe and hearing this from the European derivatives community just reinforces this belief.  A trading idea that was floated by one presenter involved being long volatility in a region where there may be higher volatility while being short VIX at the same time.  The idea is to take advantage of the carry in VIX options or futures while having a long position in a derivative based on a volatility index that would react more to a regional volatility event.

VIX is about market risk, not just tail risk

We often think of a long VIX option or futures trade to be a position that will benefit from some sort of ‘tail event’ or black swan. Historically VIX rises when the S&P 500 falls, but VIX also moves higher in front of potential market moving events.  If an important economic event happens to result in the S&P 500 dropping around one percent, that would not be considered a tail event, but would benefit traders that are long VIX options or futures.

VXTYN futures may be a game changer

I mentioned VIX as a global risk indicator. The interest rate market could be considered more of a global market than the stocks represented in the S&P 500.   US debt is held by investors around the globe and macroeconomic events tend to have more of an impact on interest rates than stocks.  VXTYN futures, due out in early November, will give investors and traders focused on interest rates a new tool to hedge their exposure to volatility.

March 4 – 6, 2015 should be circled on your calendar

The next version of CBOE’s Risk Management Conference is scheduled from March 4 – 6 in Carlsbad, CA. I have been lucky enough to attend four RMC conferences and each one seems to top the previous edition.  I can’t wait to head to southern California in early March to spend three more days immersed in discussions centered on option and volatility trading.  More info on the next Risk Management conference can be found at www.cboe.com/rmc

For more extensive daily recaps from this year’s CBOE RMC Europe conference can be found at –

Day 1 – http://www.cboeoptionshub.com/2014/09/03/day-one-cboe-rmc-europe-recap/

Day 2 – http://www.cboeoptionshub.com/2014/09/04/cboe-rmc-europe-day-two-recap/

Day 3 – http://www.cboeoptionshub.com/2014/09/06/day-3-cboe-rmc-europe-recap/