CBOE Variance Futures
- Thread starter sle
- Start date
I reached out to a former colleague and he said they'd cross with me on the exchange, if I quote in sufficient size (at least 100k vega notional, I'd guess). On the other hand, he felt that it would be unlikely that serious liquidity develops there unless retail/non-funds traders will get involved, which he felt was improbable "to confusing and mathematical for them, they would only care if it was packaged into an ETF". I am very hopeful, but not holding my breath,
Spreads are reasonable, 0.25 vol is on average what you would get in the OTC broker markets. It's the lack of volume that is bothering me.
PS. Btw, I promised to post a history of OTC variance swap quotes, will do that later today.
sle,
Thanks first of all for putting this thread together. I'm hugely interested, and look forward to catching up to the terminology / parameters.
Question about the above... 0.25 vol spread? I have the Jan futures quoted as 18.50/20.20, for example. I don't know my odds of getting hit anywhere between that, but... that seems like a rather wide range. Are those typical OTC quotes as well?
Actually looking earlier in this thread, looks like someone else said the market was being quoted at 16.15/16.45 previously. I guess I'm out of luck today, thanks to the fiscal cliff.
They are drastically different animals, variance swap is realized minus implied, the other is simply changes in implied volatility. Also, VIX futures are forward volatility, while these are spot-starting variance swaps (so, March 13 includes realized variance from now to Mar 13, while Mar13 VIX is a forward volatility swap from Mar to Apr). Even ignoring the convexity considerations, these are very different risk premia.
We are getting there. As I said, given the nature of these things, it is very easy to do term structure trades (e.g. realized vs forward implied), also there is a bunch of stuff to do against the other parts of the SPX volatility complex.
I am involved with these in the OTC markets a fair amount but I really would love for these to be liquid in the listed space. Hopefully, as people get educated, they will pick it up.
Yeah, on a day like today, especially in short-dated variance, you are not going to find liquidity in OTC either. Right now I see one of the brokers quoting Dec 13 1 vol wide. Don't forget that there is a fair amount of delta to S&P on these things because of the skew, so they move, just like VIX futures.
Apologies while I ask dumb questions while I muddle through this...
Could we work on some numbers... where let's say today's move happened to follow your example from 12-18 (skipping the 3 days in between).
The volatility for today is roughly 1%. So, realized portion is now 29.575 + 1 = 30.575?
But since the market is now quoting roughly 19.5 as the mid point... is the implied portion = (19.5^2)*(106-1-69)/252 = 54.32?
Kt = (realized + implied) * 252/(106-1) = 203.75?
And futures value = 203.75 - 396.41 + 1000 = 807.34?
So... what does that mean for my PNL? If I sold yesterday, is my PNL for *today* only determined by the higher than expected 1-day realized vola? Or is the PNL also determined by the higher implied portion for today?
I would imagine it must include the higher implied portion for today. The PNL number you give in the first post on this thread is about holding until expiration, and realized vola from now until then?
In other words, if I were to today buy back the VA contract I sold yesterday (and happened to get filled at the mid-point of 19.5)... what would I net on this traction?
I mean, I guess I'd just like to know what this thing would look like on my equity run. If I wanted to sell 25k vega notional with volatility price at 16.5, the CBOE calculator tells me that's = 4187 variance units.
So, I would go on my trading front end.. and hit an order to sell quantity = 25,000 @ 16.5. But at the end of the day, my equity run would show, what, I'm short 4187 contracts of the VA 01-13 futures? And each contract settled at 768? (Using your prices from 12/18.)
And what happens when futures price go from 768 to 788... ? If I had 4187 futures contracts, so my net loss would be $20 * 4187 contracts = -$83k?
So, I would go on my trading front end.. and hit an order to sell quantity = 25,000 @ 16.5. But at the end of the day, my equity run would show, what, I'm short 4187 contracts of the VA 01-13 futures? And each contract settled at 768? (Using your prices from 12/18.)
And what happens when futures price go from 768 to 788... ? If I had 4187 futures contracts, so my net loss would be $20 * 4187 contracts = -$83k?