CBOE Variance Futures

[sle]

Quote from sellindexvol66:

Jun 13 is quoted 827.44 sept 13 is 828.94 ..in 2 months time they will quote differently in relation to each other...if implied vols are higher in 2 months would u model a wider difference or inversion ( jun higher than sept)?

You can't just look at the two settlement values, you have to back the closing implied variance from the settlement value using realized variance to date and initial implied variance strike. It's simply a matter of inverting the formulas that I described for calculating the settlement values.

So, the actual variance strikes are as follows:
date.........variance
01/18/13 18.99
02/15/13 19.15
03/15/13 19.47
06/21/13 20.49
09/20/13 21.73
12/20/13 22.28
06/20/14 23.82
12/19/14 24.92
Looks pretty smooth to me - i will post the spreadsheet in a sec

 

[sle]

Quote from heech:

My understanding is that they are not related to each other in that way. Remember these are futures prices, and not the implied volatility number. Thus, 1000 in Jun 13 has nothing to do with 1000 in Sept 13. The June 13 1000 was determined by whatever implied was in June 2012 when it was listed, and similarly for Sep 13.

However, their *moves* should be very closely correlated... and I have to admit I don't understand why the Jun 13 moved up 6 pts yesterday, while the Sep 13 moved up 21. Why would that have happened?

Not sure what you mean - here are the implied closing variances for the past 3 days (19th, 20th and 21st):
date 12/21/12 12/20/12 12/19/12
18-Jan-13 18.99 19.14 17.83
15-Feb-13 19.15 18.59 17.77
15-Mar-13 19.47 18.83 18.29
21-Jun-13 20.49 19.82 19.35
20-Sep-13 21.73 21.05 21.09
20-Dec-13 22.28 21.59 21.68
20-Jun-14 23.82 23.13 23.17
19-Dec-14 24.92 24.12 24.17

 

[sle]

Here is a spreadsheet that calculates implied variance strikes from the futures settlement levels. To use it, get the settlement data from http://cfe.cboe.com/products/VACData.aspx, paste it over to the "inputs from CFE" worksheet and calculate. The "variance curve" will calculate the implied variance strikes for that settlement date. Very simple, I sort-of wish CME would provide a tool like that on their own

 

[sellindexvol66]

Quote from sle:

You can't just look at the two settlement values, you have to back the closing implied variance from the settlement value using realized variance to date and initial implied variance strike. It's simply a matter of inverting the formulas that I described for calculating the settlement values.

So, the actual variance strikes are as follows:
date.........variance
01/18/13 18.99
02/15/13 19.15
03/15/13 19.47
06/21/13 20.49
09/20/13 21.73
12/20/13 22.28
06/20/14 23.82
12/19/14 24.92
Looks pretty smooth to me - i will post the spreadsheet in a sec

OK, I see. No question its smooth. My inclination is to find inconsistencies in the curve.. not too many there, lol

 

[heech]

Quote from sle:

Not sure what you mean - here are the implied closing variances for the past 3 days (19th, 20th and 21st):
date 12/21/12 12/20/12 12/19/12
21-Jun-13 20.49 19.82 19.35
20-Sep-13 21.73 21.05 21.09

The implied variance for both Jun 13/Sep 13 moved up a similar amount, and I'm sure realized is the same across both...

... so why is it that CFE table shows Jun-13 futures changing +6.33 (settling at 827.44), while Sep-13 changed +20.99 (settling at 828.99) yesterday?

It's probably not that important. I'm guessing their data is wrong, as in they're calculating "changed" from last traded rather than settled values... but just want to make sure I'm not missing anything.

sle, still would love to hear you're explanation of what a sample trade in this thing would look like, and how it will probably look in my equity run!

 

[atticus]

66 wants to know how what's the best switch for the short vola degens, at the moment.

 

[sle]

Quote from heech:
The implied variance for both Jun 13/Sep 13 moved up a similar amount, and I'm sure realized is the same across both...

... so why is it that CFE table shows Jun-13 futures changing +6.33 (settling at 827.44), while Sep-13 changed +20.99 (settling at 828.99) yesterday?

Ok, now I see - this is because Jun13 was "listed" earlier then Sep13. CBOE decided to back-calculate realized volatilities from the listing dates for the options, so while Jun13 starts accruing realized variance from the summer of 2011, Sep13 only start accruing it from this past Sep. So, the impact of changes on the futures settlement values is different. I know, it's somewhat confusing, they could have done a better job designing the product.

Quote from heech:
sle, still would love to hear you're explanation of what a sample trade in this thing would look like, and how it will probably look in my equity run!

Well, a simple trade would be buying or selling variance futures. I can describe how the P&L going to look day over day, but not sure what you mean by "equity run"?

 

[heech]

Quote from sle:

Ok, now I see - this is because Jun13 was "listed" earlier then Sep13. CBOE decided to back-calculate realized volatilities from the listing dates for the options, so while Jun13 starts accruing realized variance from the summer of 2011, Sep13 only start accruing it from this past Sep. So, the impact of changes on the futures settlement values is different. I know, it's somewhat confusing, they could have done a better job designing the product.

That explanation doesn't make sense to me... I'm probably missing something obvious here.

But if we assume that CFE table is correct, it's saying:

- as of Dec 20th, Jun 13 = 821.11, Sep 13= 807.95
- as of Dec 21st, Jun 13 = 827.44, Sep 13 = 828.94

The other factors you refer to....in terms of different listing dates, would have applied on Dec 20th as well. Why did Sep 13 move so much more on Dec 21st?

Well, a simple trade would be buying or selling variance futures. I can describe how the P&L going to look day over day, but not sure what you mean by "equity run"?

My question was just trying to understand what the futures would look like on my account statement...

For example:

- If I went and used my trading front-end to "buy 25000 VAF3 @ 19.50"
- CBOE calculator tells me this = 3543 variance units with futures price of 782.54.
- does this mean my EOD account statement from the FCM would show, I am long 3543 VAF3 futures with a price of 782.54?

 

[heech]

Quote from heech:

For example:

- If I went and used my trading front-end to "buy 25000 VAF3 @ 19.50"
- CBOE calculator tells me this = 3543 variance units with futures price of 782.54.
- does this mean my EOD account statement from the FCM would show, I am long 3543 VAF3 futures with a price of 782.54?

This makes sense to me. I just did this little thought experiment using the calculator...

- say I placed the order above, buying 25000 vega notional.
- and immediately afterwards (no change in date), let's say implied goes up 1 full point to 20.50.
- CBOE calculator tells me futures price would now be 789.78.

So, if I was long 3543 VAF3 futures, each of which has now gone up 789.78 - 782.54 = 7.24 points... that translates to paper gains of $25651.32.

So, there you go. Buying 25000 vega notional, and having vega go up by 1, nets you $25000. (This is the kind of simple 'duh' transaction I really needed to understand this contract.)

 

[heech]

Continuing with this thought experiment (which I'll probably test out with some orders tomorrow):

- I fill an order to "buy 25000 VAF3 @ 19.5", which gives me long 3543 futures at 782.54 each.

- Same day, implied goes up enough that I fill an order to "sell 25000 VAF3 @ 20.5". According to the calculator, this is equivalent to selling 3370 futures at 789.78 each.

Net result: realized gains of $24399, but I'm still net long 173 futures.

So... what's interesting is that this doesn't actually leave you with a flat position. Selling 25000 vega notional at 20.50 is not the same thing as buying 25000 vega notional at 19.50. If I want to fully flatten my full 3543 futures, I should have sold vega notional of 26,263 @ 20.50.

I mean, you can see why retail guys are going to have a hard time with this... you can't flatten by selling the same "quantity" you bought earlier. You literally HAVE to pull out the calculator and figure out the correct numbers.