CBOE Emerging Market Volatility Feature for Options Profits
This complimentary article from Options Profits was originally published on January 25 at 8:18am EST. Don't risk missing over 40 options trade ideas every week and exclusive commentary from over 10 experts. Click here for more information and a 14-Day Free Trial.
Russell Rhoads is an instructor with The Options Institute at the Chicago Board Options Exchange. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council.
Russell: Next Tuesday, January 31, the CBOE is going to roll out a second method of taking a position based on an outlook for the market's expectation of volatility for emerging markets. Options on the CBOE Emerging Markets ETF Volatility Index (VXEEM) will commence trading as a compliment to VXEEM futures. VXEEM futures began trading earlier this month at the CBOE Futures Exchange.
As a brief overview, the VXEEM is an index that uses the same method of determining market volatility as the CBOE Volatility Index (VIX). The VIX is a measure of 30 day implied volatility of the US stock market and is calculated based on S&P 500 index option pricing. The VXEEM is calculated using options that trade on the iShares MSCI Emerging Market Index Fund (EEM). I discussed the VXEEM in depth at few weeks ago in this space.
Options on the VXEEM will trade with a multiplier of $100 and have a minimum tick of $0.05 for options priced below $3.00 and $0.10 for options priced above $3.00. The minimum strike interval will be 1.00 which may results in a wide variety of potential spread opportunities. Expiration for the next three continuous months plus farther expirations based on the February cycle may be listed. Next week the front month will be March as February options will not be listed. Also, LEAPS may be listed. Finally, like most index options, VXEEM options are European style options that may only be exercised on the expiration date.
VXEEM options (and futures) will expire on Wednesday morning that is 30 days prior to standard option expiration the following month. This is the same date that VIX options and futures expiration. This settlement price is based on opening trades in all relevant EEM option contracts. Once calculated, the settlement price will be disseminated using the ticker VXEST.
Pricing of the VXEEM options may have a twist that already exists with VIX options. That is the best underlying pricing vehicle for these contracts would be the futures contracts that share an expiration date with the option contracts. A brief example using April VIX option pricing from yesterday is below. At this time the VIX Index was quoted at 19.40.
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