On March 26, 2004, the CBOE transformed the widely followed stock market volatility indicator - the VIX - into a security by introducing the VIX Futures.
VIX futures can be used as an effective tool to diversify portfolios, hedge equity returns and to spread implied vs realized market volatility. VIX futures also enable market speculators to trade volatility independent of the direction or the level of stock prices.
VIX futures are standard futures contracts on forward 30-day implied volatilities of the S&P 500 index. For example, a July futures contract is a forward contract on 30-day implied volatility on July expiration date.
Eg. At a quoted price of $12.1, one VIX futures contract is worth $12,100.
CBOE VIX futures are cash-settled and so, unlike futures on commodities, there's no physical delivery. On settlement date, your account will simply be credited or debited the difference between your purchase (or sale) price and the settlement price.
CBOE VIX futures are settled at the open, always thirty days before a final settlement of S&P 500 options (SPX).
Depending on how the market perceive volatility, the price of a VIX futures contract can be lower, equal or higher than the VIX spot price. Often, due to the mean-reverting nature of the VIX, when the VIX is low, VIX futures trade at a premium and when the VIX is high, VIX futures trade at a discount.
Those of you who are familiar with stock index futures will know that the fair value of the futures is derived from the cost-of-carry relationship between the underlying stock index and the futures. The fair value of the VIX futures cannot be computed using a similar relationship as there is no cost of carry between VIX and a position in the VIX Futures.
The VIX futures fair value is, instead, calculated by pricing the forward 30-day variance which underlies the VIX Futures settlement price. The computation of fair value is fairly complicated. For those of you who wish to delve deeper into the mathematics, more information can be found on the CBOE Futures Exchange website at http://cfe.cboe.com/education/vixprimer/Features.aspx
Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.
Once you start trading for real, all trades done in the first 60 days will be commission-free up to $1000! This is a limited time offer. Act now!Click here to open a trading account at OptionsHouse.com now!
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®.... [Read on...]
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide.com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.