Volume in Options based on various volatility indices has become huge. It's time for me to cover more of that story!
Volatility was part of the theme that I wrote about relative to the S&P 500 (SPX) monthly chart in my December/Year-end 2014 analysis as quoted from my Trader's Corner of 12/31/14:
"Volatility is recently rising again and periods of increased and more frequent volatility can be common in periods of high Relative Strength Index (RSI) readings such as seen below with one utilizing 21-months prior data."
The monthly SPX chart here reflects the 12/31/14 Close:
Per this take on the long-term SPX chart picture, we've seen HIGH volatility of late as you know!
From mid-September into mid-October there was a major run up in the VIX Index. Then from early-December on extreme volatility swings have occurred. VIX can be charted and analyzed much like charting a stock Index like the S&P and such 'overbought/oversold' technical indicators applied to generate trading ideas in the VIX options per some of the highlights on the daily VIX chart below. As there can be many sharp intraday swings in the VIX index, I tend to use Close-only 'line' charts with the VIX in order to smooth out some of extremes in intraday swings.
The VIX also happens to lend itself to the use of hourly charts also to help in assessing the shorter-term trends in the VIX volatility index. Use of an RSI 'length' setting of 21 on an hourly chart basis can help judge the shorter-term VIX trends.
The foregoing is by way of lead in to trading volatility by use of VIX options. Average daily volume as can be seen in the graph below has become huge.
Today (1/15/15), VIX trading volume was 734,000 (rounded to nearest thousand) and the underlying S&P 500 options traded on the CBOE amounted to 1,115,000. It's become apparent to me that I should also feature VIX in my weekly Index commentary. Stay tuned.
Part 1 of this Trader's Corner article continues with some basic facts on the volatility indices, especially VIX and to include the option specifications related to strike prices, quotes, margins, etc. for those who would be interested in a primer on the Chicago Board of Trade VIX options:
The Chicago Board Options Exchange (CBOE) volatility indexes are measures of market expectations of near-term volatility conveyed by option prices.
The best known of these is the S&P 500's volatility index, symbol VIX. Also well known now is the Nasdaq 100's volatility index, symbol VXN. These can be charted on intraday charts (e.g., 30 minute, hourly charts) and of course on a daily chart basis.
These volatility indexes measure the market's expectation of 30-day volatility implicit in the prices of near-term index options. The indexes are quoted in percentage points, just like the standard deviation of a rate of return, e.g. 19.36.
CBOE disseminates the index values continuously during trading hours. The indexes are considered barometers of investor sentiment and market volatility relating to listed options.
VIX HISTORY AND CONTRACT SPECIFICATIONS:
On February 24, 2006, options on the CBOE Volatility Index (VIX) began trading on the CBOE. The VIX options contract followed the introduction of VIX Futures on the CBOE Futures Exchange (CFE).
The CBOE S&P 500 Volatility Index, commonly referred to as "VIX" is a minute by minute market estimate of expected volatility that is calculated by using real-time S&P 500 Index (SPX) option bid/ask quotes. The VIX Index uses SPX options with more than 23 days and less than 37 days to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
Strike (Exercise) Prices: Generally, minimum strike price intervals are: (1) $0.50 where the strike price is less than $15, (2) $1 where the strike price is less than $200, and (3) $5 where the strike price is greater than $200.
Premium Quotation: Stated in points and fractions, one point equals $100. Minimum tick for series trading below $3 is 0.05 ($5.00); above $3 is 0.10 ($10.00).
Expiration: The Wednesday that is thirty days prior to the third Friday of the calendar month immediately following the expiring month.
Expiration Months: Up to six contract months may be listed, provided that the time to expiration is no greater than 12 months.
Exercise Style: European; VIX options generally may be exercised only on the Expiration Date.
Last Trading Day: The Tuesday prior to the Expiration Date of each month.
Margin requirements: Purchases of puts or calls (with 9 months or less until expiration) must be paid for in full. Writers of uncovered puts or calls must deposit/maintain 100% of the option proceeds plus 20% of the aggregate contract value [current (spot or cash) index value x $100] minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds plus 10% of the aggregate contract value; a minimum for puts are the option proceeds plus 10% of the aggregate exercise price amount. (For calculating maintenance margin, use option current market value instead of option proceeds.) (*Additional margin may be required in some cases; i.e., related to CBOE Exchange Rules 12.3(h) and 12.10.)
Part 2 of 'Trading Volatility' will continue with "How to Trade the VIX; Profit From Volatility"
GOOD TRADING SUCCESS!