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Have you ever had a forecast for the CBOE Volatility Index, VIX? Not for the direction of a stock or of the market, but for the direction of the implied volatility level? If your answer is, "Yes," then you may be interested in trading futures contracts on the VIX. Just like a stock, futures contracts on the VIX (symbol VX) have an Opening price, a High price, a Low price, and Closing price (see Table

Have you ever had a forecast for the CBOE Volatility Index, VIX? Not for the direction of a stock or of the market, but for the direction of the implied volatility level? If your answer is, "Yes," then you may be interested in trading futures contracts on the VIX.

Just like a stock, futures contracts on the VIX (symbol VX) have an Opening price, a High price, a Low price, and Closing price (see Table 1). VX futures will track the level of the Jumbo Volatility Index, VXB which is 10 times the value of the VIX index.

DATE VXB Open VXB High VXB Low VXB Close

02/17/04

156.3

159.6

153.2

154.0

02/18/04

155.1

157.6

153.0

155.9

02/19/04

153.3

159.7

152.0

158.0

02/20/04

158.5

165.5

158.2

160.4

02/23/04

165.0

167.8

162.5

162.9

02/24/04

163.8

167.6

157.7

159.0

02/25/04

155.8

160.5

149.3

149.3

02/26/04

153.2

153.3

146.9

148.3

02/27/04

138.0

147.7

138.0

145.5

Pending regulatory approval, futures contracts on the CBOE Volatility Index (VIX) begin trading on March 26, 2004. With that in mind, let's look at a simple strategy.

Assume that the Board of the Federal Reserve will be meeting in late April and that your client is expecting the Board to make an announcement on interest rates. Also assume that, given this expectation, your client has a bullish opinion on the VXB. If your client believes that VXB could rise from the February 27th close of 145.5 to approximately 165.0 by the date of the Board meeting, then buying a VX May futures contract based on the VXB is a logical strategy.

The minimum price-change interval for VX futures is 0.10, or $10.00 per contract. Therefore, if your client buys one contract at 145.5, the estimated profit on a futures price rise to 165.0 is $1,950 [(165.0 – 145.5) x $100], not including commissions.

The strategy of purchasing a VX Futures contract involves two steps. First, your client must deposit cash equal to the initial margin requirement, which is currently $3,750 per contract or marginable securities with a value equal to the initial margin requirement after a required deduction or "haircut". Note: The initial customer margin requirement is set by the Chicago Futures Exchange, LLC and may fluctuate due to changes in the underlying level of the index or perceived risk. Second, your client can enter either a market or limit-price order to purchase a futures contract. If the buy is filled, then your client will be "long one VX futures."

Since the last trading day for May futures is the Tuesday prior to the third Friday of the expiration month (May 18, 2004), your client's forecast should have sufficient time to work out. Your client, however, should have a plan for a negative outcome, i.e., futures fall instead of rise.

What happens if the market's response to the Federal Reserve meeting is different than your client expects, and VX futures decline? If VX futures decline to 139.0, for example, your client will have an unrealized loss of 6.50 futures points, or $650 per contract. Profits or Losses should be disclosed on a daily basis as a credit or debit daily in cash. If the loss causes the initial margin requirement to fall below the maintenance margin requirement of the VX futures contract ($3,000), then your client will be required to either deposit additional funds or close the position. Note: It is possible for losses to greatly exceed the initial margin deposit.

If your client re-examines the forecast and decides that the VXB Index is more likely to decline from this point than to rise, then your client can sell the owned contract and realize the $650 loss. At that point, cash or marginable securities in your client's account are no longer required for margin deposit purposes.

Had your client been bearish on the level of implied volatility ahead of the meeting of the Federal Reserve Board, then a logical strategy would have been to sell a VX Futures short. A $3,750 margin deposit is also required for this strategy. A short VX Futures position profits with a decline in the futures price and loses, unlimited on the upside, with a futures price rise. Clients should have both profit targets and stop-loss points when trading futures.

Futures contracts on the Jumbo CBOE Volatility Index, VX Futures, make it possible to speculate on rises or falls in the VXB. For investors as well as for traders of futures and options, it is the dawning of a new day.


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