Transcript No Slide Title

Trading and Managing
Equity Market Volatility
Mexico Risk Management 2006
Four Seasons Hotel, Mexico City, October 12-13, 2006
Paul B. Stephens
CBOE
1-312-786-7495
[email protected]
CBOE Introduction

The Chicago Board Options Exchange, founded in 1973, is the creator
of listed options and the world’s largest options marketplace. CBOE is
the industry leader in product innovation, having created equity
options, index options, LEAPS, and, more recently, “WeeklysSM”
options and Options on VIX® – CBOE’s widely followed investor
“fear gauge.”

Currently, CBOE trades options on 1,766 individual equities, 56 broadand sector- based indexes, 61 exchange-traded funds and 4 interest rate
products. CBOE’s wholly-owned subsidiary, the CBOE Futures
Exchange (CFE), lists 26 futures contracts including its flagship
product, VIX Futures.

In Sep 2006 CBOE traded an average of 2.6 million contracts per day
– 33% higher than Sep 2005.
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Managing Volatility
Latest Trends



Options-based Indexes
-
Volatility indexes
-
BuyWrite (covered call) indexes
Volatility-based products and trading
-
Index and ETF options
-
Volatility-based futures and options
Electronic trading
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Select Volatility Indexes

VIX – CBOE Volatility Index (S&P 500)

VXN – CBOE NASDAQ Volatility Index

VXD – CBOE DJIA Volatility Index

RVX – CBOE Russell 2000 Volatility Index
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CBOE Volatility

Index

(VIX

Since 1993 VIX has been the premier barometer of investor
sentiment and market volatility

In Sept. 2003 the VIX methodology was revised

VIX Futures were introduced in March 2004

VIX Options launched February 2006

See http://www.cboe.com/vix
)
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VIX: The Fear Gauge
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Volatility Index Methodology

In September 2003, CBOE revised VIX:
1. Moved from using S&P 100 to S&P 500 Index options
2. Continued to use nearby and next-to-nearby expiration
months for constant, 30-day volatility measure
3. Old VIX (now ticker VXO) was an average of implied
volatilities and was a measure of ATM volatility. New
methodology for VIX and all other CBOE volatility
indexes is an average of options prices and covers the
entire range of strike prices.
(i.e., volatility skew)
– A robust measure of expected volatility
– A better index for offering volatility-based products
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Select BuyWrite Indexes
BXM – CBOE S&P 500 BuyWrite Index
 BXY – CBOE S&P 500 2% OTM BuyWrite
Index

BXN – CBOE NASDAQ BuyWrite Index
 BXD – CBOE DJIA BuyWrite Index
 BXR – CBOE Russell 2000 BuyWrite Index

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CBOE S&P 500 BuyWrite Index (BXM)

The BXM is based on
buying an S&P 500 Index
stock portfolio and
“writing” (or selling) the
near-term S&P 500 Index
(SPX) “covered” call
option.

In October 2004, Ibbotson Associates found
that CBOE’s BXM had the best riskadjusted performance of major domestic
and international equity-based indexes over
the last 16 years.

At least 8 licenses have been granted, and
there is now more than $20 billion in over
30 BuyWrite funds.
% Change In Year-End Prices,
Select Stock Indexes
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Stocks, Bonds, T-Bills and BuyWrite Indexes
Total Return Indexes from June 1988* – Mar. 2006
Month-end prices (scaled so that all = $100
on inception date of June 1, 1988)
$900
BXY $824
BXM $735
S&P 500 $726
$600
30-yr TBonds $419
$300
3-mo.T-Bills $222
$0
Jun-04
Jun-02
Jun-00
Jun-98
Jun-96
Jun-94
Jun-92
Jun-90
Jun-88
* June 1988 is the first month for daily prices for the SPTR and BXM indexes. Sources: CBOE & Bloomberg. The BXM Index is designed to represent
a hypothetical buy-write strategy. Like many passive indexes, the BXM Index does not take into account significant factors such as transaction costs and
taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. T-Bills and T-Bonds are
represented by Citigroup indexes. See Risk Disclosure at www.cboe.com/BXM for more information.
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Return Comparisons
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Risk Comparisons
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Negative Skew
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CBOE Leading Indexes & ETFs
Average Daily Volumes (ADV), 2006 Year through April
Cash Settled
ETF Settled

SPX 346,000 + 42%

QQQQ 119,000 + 19%

OEX 66,600 - 10%

SPY 100,000 + 133%

DJX 30,200 – 4%

IWM 90,000 + 112%

NDX 28,300 + 43%

DIA 37,000 + 48%

MNX 22,300 – 9%

XLE 17,600 + 242%

VIX 13,800 (new)

OIH 13,000 + 1270%

XEO 10,000 + 41%

SMH 10,000 + 45%

MVR 8,300 + 521%
ADV
for CBOE 2.48 Million contacts April 2006
– New Record
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CBOE Leading Indexes & ETFs
Average Daily Volumes (ADV), May 2006
Cash Settled
ETF Settled

SPX 505,361 + 94% vs. May ‘05

OEX 87,089 + 24%

VIX 46,368 (new)

DJX 42,297 + 75%

IWM 296,971 + 464%

QQQQ 152,511 + 45%

SPY 121,409 + 123%

DIA 47,825 + 62%

XLE 39,799 + 307%

OIH 17,576 + 1214%

NDX 38,077 + 43%

MNX 34,707 + 93%

XEO 18,165 + 153%

RUT 10,078 + 160%

SMH 8,591 + 72%

MVR 8,676 + 214%

EEM 6,581 (new)

XSP 5,282 (new)
All CBOE 3.2 Million contacts ADV
– New Record
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Select New Product Introductions
CBOE
 Mini-SPX (XSP)
CFE
• Volatility-Based Futures
• VIX and VXD
• VT (3-month realized
variance)
• VA (12- month realized
variance)
 Weeklys
 SPX, XSP
 OEX, XEO
 VIX Options

BXM Futures
(launched Oct 2006)
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VIX Futures

Trade on CBOE Futures Exchange (CFE)

Settle to implied volatility
• May 2006 average daily volume (ADV) was
2,294 contracts
• Open interest on May 31 was 33,346 contracts
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VIX Futures: “VXB <Index> CT <Go>”
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Volatility of Volatility

Historic Volatilities Based on Daily Returns
in 2005
* refers to the price of the near-term VIX futures
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VT and VA Futures

Trade on CBOE Futures Exchange (CFE)

Settle to realized variance
• VT Futures – 3 month variance
• VA Futures – 12 month variance
The typical quote for $250,000 vega
on one-year variance has been about ½ vol point wide.
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VT Futures: “VTA <Index> CT <Go>”
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VA Futures: “VAA <Index> CT <Go>”
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VIX Options

Cash-settled index options trade on
CBOE (SEC-regulated)
02/06/2004
01/31/02
01/20/00
01/14/98
01/11/96
0
01/06/94
Average
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01/06/92
Settle to Special Opening Quotation
(SOQ) of VIX
• $100 multiplier
• Settle on Wednesdays, 30 days
prior to SPX monthly expirations
VIX Since 1990
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01/02/90

Launched Friday, February 24, 2006
VIX Daily Closing Prices

(Jan. 2, 1990 - Dec. 30, 2005).
Sources: CBOE, Bloomberg and S&P
daily volume for April 2006: 15,052 contracts.
Open
interest on April 28 was 351,146 contracts.
More
than 60,000 contracts traded on Monday, May 1.
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VIX Options: “VIX <Index> OMON <Go>”
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VIX Futures & Options
Possible Uses Include –

To take advantage of a market view on volatility

To manage options positions

To hedge equity portfolios or credit default swap
(CDS) exposures
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The Hybrid Market Model

Provides a choice of screen-based trading or open
outcry. Roll-out began in June 2003. All equity
options and major ETF options traded under
hybrid system. Remote Market Makers added in
April 2005.
Executed electronically:
 94% of orders (up from prior year 88%)
 67% of contracts (up from prior year 46%)
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AQWA/Size & % of Time on NBBO
All CBOE Options
January 2004 – March 13, 2006
94.1%
100%
300
90.2%
80%
70%
200
63.4%
150
60%
100
50%
49.0%
0
00
p.
2
Se
20
06
30%
20
05
50
4
40%
Average Quoted Size
250
80.1%
20
04
Aqwa Score / NBBO %
90%
Size
CBOE Aqwa
NBBO %
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New Technologies

Electronic FLEX
• Agreement with Cinnober to provide trading
system set to launch late 2006, early 2007

Market Data Service
• Web-based access to CBOE and OPRA options
data (including tick data, volume by series,…)
• Historical data to go back to 1990, in some
cases to 1973
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Resources

Index-Related Products:
• www.cboe.com/VIX
• www.cboe.com/BuyWrite
• www.cboe.com/Weeklys

Trading:
• www.cboe.com/Hybrid
• www.cboe.com/FLEX

Spanish Website:
• www.cboe.com/Spanish
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CBOE Presentation
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must
receive a copy of Characteristics and Risks of Standardized Options, which is available from your broker, by calling
1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606.
The information in these slides is provided solely for general education and information purposes and therefore
should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules,
regulations, and statutory provisions which should be referred to for additional detail and are subject to changes
that may not be reflected in these materials. No statement within these materials should be construed as a
recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including
examples, do not include commissions, dividends, margin, taxes, and other transaction costs. However, these costs
will affect the outcome of transactions and should be considered. For further information regarding the tax effects
of transactions, consult your tax advisor. These slides have been prepared solely for informational purposes, based
upon information generally available to the public from sources believed to be reliable, but no representation or
warranty is given with respect to its accuracy or completeness. Supporting documentation for any claims,
comparisons, statistics or other technical data is available by calling 1-888-OPTIONS, sending an e-mail to
[email protected], or by visiting www.cboe.com.
Past performance is not indicative of future results.
S&P 100 ® and S&P 500 ® are registered trademarks of McGraw Hill, Inc. and are licensed for use by the Chicago
Board Options Exchange, Inc. CBOE ®, Chicago Board Options Exchange®, OEX® , XEO® , MNX® , VIX ®, CBOEdirect
®, CBOE Volatility Index®, and HyTS® are registered trademarks of the Chicago Board Options Exchange, Inc. SPX SM
and BXMSM are servicemarks of the Chicago Board Options Exchange, Inc. Nasdaq 100 ® is a registered trademark
of the Nasdaq Stock Market Inc.
Copyright 2006, Chicago Board Options Exchange®, Incorporated. All rights reserved.
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