VIX Futures in Focus is provided by Michael McCarty. Mr. McCarty is the founding member and chief strategist of Differential Research.

The February VIX Index future

Sources: CFE, Differential Research, LLC

This month’s expiration of the February 2012 CBOE Volatility Index (VIX) future marked the 90th expiration for VIX Index futures contracts. The first daily settlement value for the February 2012 VIX future was 24.95 on June 20, 2011 and the contract traded between a low of 17.90 on February 3, 2012 and a high of 36.85 on October 4, 2011, finally settling at a value of 20.44 on February 15, 2012. During its lifetime, the February 2012 VIX future had a volume high of 34,437 contracts, peak open-interest of 71,478 contracts and expired with 22,153 contracts outstanding.

Sources: CFE, Differential Research, LLC

New Volatility Products Update:
The, CBOE Futures Exchange, LLC (CFE) last year announced plans to launch security futures on volatility indexes calculated using options on a group of exchange-traded funds (ETFs) representing a diverse group of asset classes.

CBOE Extends Its Volatility Franchise: Applies VIX Methodology to Options on Six Actively Traded ETFs

Two new volatility index products, the CBOE Brazil ETF Volatility Index (VXEWZ) security futures (VXEW) and the CBOE Crude Oil ETF Volatility Index (OVX) security futures (OV), joined the recently launched CBOE Emerging Markets ETF Volatility Index (VXEEM) futures (VXEM) and the previously listed CBOE Gold ETF Volatility Index (GVX) security futures (GV), with more products to come. It is worthwhile to look at these offerings in more detail and examine some recently announced changes that are likely to increase the probability of success for these and other volatility products.

Multiplier Change 
Beginning on February 21, 2012, the contract multiplier for all Volatility Index security futures was changed to $100 per contract. See CFE Regulatory Circular RG12-12 (There was no change to the contract multiplier for VIX futures and it remains $1,000 per contract). The reduced contract size will aid investors seeking to maintain exposure to volatility in a portfolio and will likely increase the investor base to include smaller institutional and retail investors. The reduced contract size will also increase the attractiveness of inter-asset class arbitrage opportunities (for example: buying VXEW futures and selling VXEM futures).

As the new multiplier will be equivalent to the multiplier for options on the same volatility indexes, hedging futures positions with security options will be more intuitive, potentially increasing the products’ audience.

CBOE Gold ETF Volatility Index and Security Futures
The CBOE Gold ETF Volatility Index (GVZ) is calculated using CBOE listed options on the SPDRGold Shares ETF (GLD). The GLD ETF holds physical gold. On March 25, 2011, CFE listed security futures on GVZ, which promised to be an interesting product. With gold typically possessing a positive skew, a likely result of its risk to the upside representing the world’s “anti-currency,” gold and GLD volatility has historically differed considerably from equity volatility as shown by GVZ. Since the launch of the GVZ product in March 2011, the SPX Index and the GLD ETF have become more negatively correlated to the US Dollar Index (DXY).

Sources: CFE, Differential Research, LLC

CBOE Emerging Markets ETF Volatility Index and Security Futures
The CBOE Gold ETF Volatility Index (GVZ) is calculated using CBOE listed options on the SPDRThe recent launch of the CBOE Emerging Markets ETF Volatility Index security futures contract (VXEM) has been successful. As we described in last month’s “Futures in Volatility,” the VXEEM Index and consequently the VXEM security futures are highly correlated with the VIX Index and the VIX futures contract, both representing equities that tend to create natural spread and arbitrage opportunities.

Sources: CFE, Differential Research, LLC

The first expiration for the VXEM security futures contract occurred in February 2012. Following its January 9, 2012 launch, the future achieved peak volume of 172 contracts, peak open interest of 127 contracts and expired with 19 contracts outstanding.

Sources: CFE, Differential Research, LLC

CBOE Brazil ETF Volatility Index 
CBOE Brazil ETF Volatility Index security futures (VXEW) began trading on February 21, 2012. This product offers investors a third equity volatility index instrument creating the potential for multiple inter-asset volatility trades.

With greater “vol of vol” VXEW security futures are also likely to appeal to speculators looking to capitalize on a directional view of volatility.

CBOE Crude Oil ETF Volatility Index

With security futures and options slated for recent launches on CFE and CBOE, respectively,CBOE Crude Oil ETF Volatility Index products should appeal in particular to traders seeking volatile volatility products.

data sources: CFE, Trade-Alert LLC, Yahoo Finance and Differential Research LLC

The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.