Tuesday, May 15, 2007

VIX Futures Starter Kit

If anyone is wondering why I’m not talking more about VIX futures on this blog, the reason is simple: ignorance. Sure, I know what VIX futures are and I know the central role they play in the calculation of VIX options values, but I can’t say that I’ve ever studied them. The time has come to eradicate that particular blind spot in my investment universe and I’ll do the best I can to pull along anyone else who is interested.

First, it may be useful to back up for a minute and take a look at the VIX as a derivative instrument. Consider that stocks are an underlying asset, options are derived from stocks, options premiums are 'derived' from options prices, volatility indices (like the VIX) are derived from the options premiums, and, to top it off, when you want to trade the VIX, you cannot trade it directly, but have to trade a VIX option, which is a derivative based not on the VIX, but VIX futures! That's a fifth or sixth generation derivative, depending upon how you count...

The way I see it, however, the most important component in the derivative chain is the VIX futures. Unless you understand VIX futures, thinking about and trading the VIX is lot like trying to drive a car with a view of the road from 30 miles back rather than what currently lies beyond the front windshield. Even you are somewhere in the Midwestern United States, drive very slowly, and have auto insurance, I wouldn’t recommend it. The VIX, unfortunately, looks more like the road pictured above.

Fortunately, the CBOE Futures Exchange (CFE) has some excellent information on VIX futures. In fact they have a monthly newsletter, Futures in Volatility, you can sign up for that includes a VIX market summary and analysis by options guru Larry McMillan, as well some trading strategy ideas, also provided by McMillan. In short, it’s the perfect place for the budding VIX futures student to brush up on his or her knowledge. After considerable searching, I have discovered where the CFE archives (hides?) these newsletters, but you may prefer to follow the CFE’s instructions to get the newsletter delivered via e-mail.

Homework is optional at VIX and More, but don’t be surprised if I refer to these newsletters (only three of them so far, about 8 pages each) down the road.

17 comments:

rallymode said...

eh, i thought i was the only one hitting the CFE pages. Welcome to the club. lol

Bill Luby said...

It's long overdue in some respects and I'm looking forward to it, in a way. I've always treated futures, forex and a couple of others as something that I would study up on when I had a rainy day/week/month/year or two to spare.

Heck, I never really studied the VIX until six months ago and that has already dragged me down the options rabbit hole, so why not futures too?

Hey, why is that turtle mocking me?

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