The New Volatility Futures by Larry McMillan
They just might be the stock owner’s delight.
The CBOE has created a new futures exchange
(the CBOE Futures Exchange, or CFE) to trade
volatility products. Its first and only product
at this time is futures on VIX, the CBOE
volatility index, but the CBOE plans to introduce
more volatility-related products soon.
Some traders might dismiss these products as simply an
opportunity for option-crazed investors. But in reality, these
products will find application for a far wider audience than
speculators: stock owners can benefit from the ability to
hedge their portfolios against volatility risk. In many cases,
that translates into a hedge against a falling market. For this
reason, the CBOE expects these products to be quite successful
This article will lay out the basics of the futures, discuss
some strategies, and show how a conservative volatility
hedge would have worked over the last 10 years.
MECHANICS OF THE CONTRACT
Introduced in 1993, the VIX was created to measure implied
volatility of OEX options. In 2003, the CBOE changed the VIX to be the measure of implied volatility of Standard & Poor’s
500 Index (SPX) options. The “old” VIX became VXO, and that
index still measures the implied volatility of OEX options.
To implement the VIX futures, a new volatility index called
the Jumbo CBOE Volatility Index (symbol: VXB) has been
introduced. VXB is equal to 10 times VIX. Futures on the
Jumbo VIX are worth $100 per point of movement of VXB, so
one futures contract will make or lose $1,000 when VIX
moves by one full point (from 15.00 to 16.00, for example).