March 27, 2014 – A panel discussion yesterday at CBOE marked the tenth anniversary of the launch of futures on the CBOE Volatility Index® (VIX®).
Four experts surveyed the development and promise of volatility products:
- Mike Edleson, Ph.D., CFA, Chief Risk Officer, Office of Investments, University of Chicago,
- Joanne Hill, Ph.D., Head of Investment Strategy, ProShare Advisors,
- Jamie Tyrell, VIX Options Market-maker, Group One Trading, and
- Krag “Buzz” Gregory, Ph.D., Managing Director, Goldman Sachs.
An audience of about 120 financial professionals was in attendance, and I received quite a bit of good feedback.
Buzz Gregory delivered a presentation on VIX Futures: The First Ten Years, and noted that –
- VIX spot is not directly tradable.
- Access to the VIX market comes from trading listed VIX products. The performance of VIX ETFs, ETNs, and VIX options is dependent on the listed VIX futures market, so understanding the dynamics of VIX futures is crucial for successful trading.
- VIX futures began trading in March 2004 and have now been tested in both low and high volatility regimes.
- The relationship between spot VIX and VIX futures levels is highly correlated to the term structure of S&P 500 implied volatility.
- If the term structure is steeply upward sloping the VIX future will typically be trading above VIX spot.
- The steeper the term structure, the higher the basis ( Basis = future – spot ).
- High-basis environments have tended to be profitable for shorts, bad for longs.
Joanne Hill noted that –
- Adding cash-equivalent exposure is the typical way U.S. equity managers reduce beta and risk;
- Smaller amounts of VIX Short-Term and Mid-Term Futures can produce similar amounts of reduction in risk as measured by standard deviation;
- Rolled positions in VIX Mid-Term Futures also resulted in higher returns than using cash or VIX Short-Term Futures for the period studied.
Mike Edleson delivered remarks on long volatility strategies and diversification.
Jamie Tyrell discussed strategies, liquidity and expirations for VIX futures and options.
Over the past decade the total trading volume for VIX futures has surpassed 95 million contracts, and the VIX futures average daily volume rose from 4,543 in 2009 to 213,024 in the first two months of 2014.