CBOE Variance Futures

[trickyname]

Quote from sle:

Oh, so here is my rant. So far, I see 0.75-0.5 wide 1-2k vega notional per side.

Don't the quotes have a 1000x multiplier? I see the front month is 25k up (although further dated liquidity looks thin today).

PS. I think variance swaps are unique in that most people are not really worried about transparency or liquidity. Approximate levels for variance swaps can be easily imputed from the strips (or from vix futures) and the only thing you need to worry about is the basis.

I think the VIX futures actually throw a curveball into the mix, as end users who don't look at VIX relative value might be confused why the strips are implying a different value from where the var is actually trading when VIX is rich/cheap.

 

[sle]

Quote from trickyname:
I think the VIX futures actually throw a curveball into the mix, as end users who don't look at VIX relative value might be confused why the strips are implying a different value from where the var is actually trading when VIX is rich/cheap.

Well, an average "end user" should not care about 1/4 vol deviation from VIX-implied fair, especially considering that variance basis (or, in case of these things, b/o) is larger anyway. Most funds care about 2-3 vol edge vs realised var or term structure.

Quote from trickyname:
Don't the quotes have a 1000x multiplier? I see the front month is 25k up (although further dated liquidity looks thin today).

It's in thousands of vega notional. Five by five (even 25 by 25) is pretty pathetic given that social size for variance is a 100k in the IDB. I think overall picture (attached) is pretty telling, especially the open interest.

 

[trickyname]

Quote from sle:

It's in thousands of vega notional. Five by five (even 25 by 25) is pretty pathetic given that social size for variance is a 100k in the IDB.

Fair point.

Quote from sle:

I think overall picture (attached) is pretty telling, especially the open interest.

What units are the open interest in? The weird CBOE future quantity? It can't be notional vega since I remember seeing 200k August trade last Thursday.

 

[sle]

Quote from trickyname:
What units are the open interest in? The weird CBOE future quantity? It can't be notional vega since I remember seeing 200k August trade last Thursday.

It's their own flavor of variance units. Someone at DRW must have read this thread cause today the market is 25x25 up all the way to Dec14

 

[sle]

An interesting question is - if someone would issue an ETF that rolls variance futures (lets say keeps shorting quaterly expirations), would it be a sucess with retail?

 

[trickyname]

Retail customers seem to love negative roll yield, so I don't see why not.

I think you'd have to get a lot more liquidity in the variance futures first, though. I'm guessing it would be easier to create an ETN based on an index derived from the listed var settles (similar to VXX and SPVIXSTR) as opposed to an ETF that holds the actual swaps in inventory, but having only the LMM quoting it .50 wide leaves plenty of room for manipulation.

 

[trickyname]

Quote from sle:

It's their own flavor of variance units. Someone at DRW must have read this thread cause today the market is 25x25 up all the way to Dec14

Seems you really hurt their feelings -- 100 up today :eek:

 

[sle]

Quote from trickyname:

Seems you really hurt their feelings -- 100 up today :eek:

still zero volume... they should paint the tape a little to attract traders

 

[blueplayer]

Still no volume on this instrument, what a shame.

So while we wait for this product to take off, I have a question about margins here. Using the latest (Aug 12) margin requirements from the CFE, we can see that the margin for Sept VA futures is 143 (per variance unit I assume).

Also, using the calculator with the latest price for Sep (13.95) and 1K of notional vega I get:

Futures Price: 586.68
Variance units: 309

So the margin to go long here (1K notional vega) for Sept is: $44187.

That seems a bit too high for 1K of vega and it also seems that the margin is higher than the risk taken, after all we bought at 13.95 so I assume (and here is my question) that the max loss of this position is only $13950 (being long 1K notional vega). I'm sure that something is wrong here (most likely me), but how come the margin seems to be higher than the max loss?

 

[trickyname]

You're correct in saying that margins can exceed max loss for long positions. The problem arises from margining these like a traditional future, where long and short positions are treated identically, instead of margining them like the replicating options portfolio they represent, where max loss is defined on a long position and potentially unlimited on shorts.