More Precision with SPX and VIX Weeklys – Discussion at RMC Europe

During the first three decades of listed options trading (1973 – 2003) most exchange-listed options in the US (except FLEX options) had expirations on or near the third Friday of the month.

In the past decade S&P 500® Weekly options (SPXW) offered near-term expirations on Fridays other than the third Friday standard expirations. In 2015 new Weekly futures and options on the CBOE Volatility Index® (VIX®) are being introduced.

On Tuesday, September 29, at the Fourth Annual CBOE Risk Management Conference (RMC) Europe, two experts — (1) Spencer Cross, Head Index Volatility Trading, Deutsche Bank Securities Inc., and (2) Dominic Salvino, VIX Specialist, Group One, LLC, — engaged in a discussion of –

Weeklys – Options and Futures that Expire on a Weekly Basis
o   Dynamics of how Weeklys differ from regular products
o   Special characteristics of VIX Weeklys
o   Utility of Weeklys for just-in-time hedging or roll-down trades

RECORD VOLUME MONTH IN AUGUST FOR S&P 500 WEEKLY OPTIONS

Here are some key developments last month –

(1)   On August 24 the VIX Index hit an intraday high of 53.29, the first time it rose above 50 since March 2009;
(2)    The S&P 500 Weekly options had strong volumes of 1,440,201 contracts on August 21 and 1,203,799 contracts on August 24, and
(3)   The S&P 500 Weekly options had an all-time high of average daily volume in a month with an average of 586,907 contracts per day.

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VIX WEEKLY FUTURES AND OPTIONS

*   VIX Weeklys futures began trading at CBOE Futures Exchange on July 23, 2015;
*   VIX Weeklys options are expected to begin trading at CBOE on October 8, 2015;
*   New weekly expirations for VIX futures and options will be listed on Thursdays (excluding holidays) and expire on Wednesdays. CBOE and CFE may list up to six consecutive weekly expirations for VIX futures and options. The addition of VIX weekly expirations to standard monthly futures and options expirations offers volatility exposures that more precisely track the performance of the VIX Index. The closer VIX futures and options are to expiration, the more closely they generally track the VIX Index. By ‘filling the gaps’ between monthly expirations, investors may obtain new opportunities to establish short-term VIX positions, and fine-tune the timing of their hedging and trading activities.

CHART SHOWING MORE RESPONSIVENESS FOR VIX WEEKLY FUTURES

The chart below shows daily values on key August dates for (1) the VIX Index, (2) the VIX Weekly futures (Week 34, with expiration on August 26th), and (3) two VIX futures with standard expirations on Sept. 16 and Oct. 21.

Note that over the three trading days ending Aug. 24, the S&P 500 Index fell 9%, the VIX Index rose 167%, and the VIX Weekly futures (expiring on Aug. 26) rose 147%. Note that the price movements of the standard expiration VIX futures (with expirations on Sept. 16 and Oct. 21) did not move nearly as much as the VIX Weekly futures. For investors who desire a VIX-based tradable product with the potential for explosive upside moves when the stock indexes drop, VIX Weeklys have potential to be attractive.

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BENCHMARK INDEXES THAT WRITE SPX WEEKLY OPTIONS

CBOE recently introduced two benchmark indexes that write S&P 500 Weekly options –

The CBOE S&P 500 Multi-Week BuyWrite Index (BXMW) is designed to track the performance of a weekly covered call strategy with staggered short positions in call options expiring in consecutive four week options. The BXMW Index is constructed as a combined portfolio of four mini BuyWrite indexes.  Expirations are staggered so that the BXMW Index sells four-week options on a rolling weekly basis. www.cboe.com/BXMW

The CBOE S&P 500 One-Week PutWrite Index (WPUT)  is designed to track the performance of a strategy that sells an at-the-money (ATM) S&P 500 Index (SPX) put option on a weekly basis. The maturity of the written SPX put option is always one week to expiry. The written SPX put option is fully collateralized by a money market account. Data history for the WPUT Index begins in January 2006. www.cboe.com/WPUT

An intriguing feature of both of these two new indexes is the fact that they can generate a substantial amount of gross options premium by selling the SPXW Weekly options, and the fact that there is more theta, or time decay, that can be favorable to writers of short-dated options.

WPUT INDEX ROSE 69%, WITH LESS VOLATILITY

The chart below shows that, in the period from January 31, 2006 through August 31, 2015, the CBOE S&P 500 One-Week PutWrite Index (WPUT) rose 69%, with less volatility than the other three indexes shown.

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MORE INFORMATION

For more information about SPX and VIX weeklys, please visit www.cboe.com/SPXW and www.cboe.com/VIXWeeklys