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Trading SP500-IPC Options- VIX-VIMEX _July 13th_ _2_

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					Volatility Trading Opportunities:

MexDer IPC vs. CMEG E-mini




             July, 2011.
Background & fundamentals
Volatility Trading

The objective of this type of arbitrage is to take advantage of differences
between the implied volatility of the option, and a forecast of future realized
volatility of the option's underlier.
In volatility arbitrage, volatility rather than price is used as the unit of relative
measure, i.e. traders attempt to buy volatility when it is low and sell volatility
when it is high.

Why should you trade volatility?

•        Stabilizing effect in a portfolio
•        Reduce risk
Background & fundamentals
Volatility Trading:

Several opportunities available within IPC Equity Index
•        IPC versus S&P 500 E-mini
•        IPC versus NASDAQ E-mini
•        IPC versus E-mini Dow
•        IPC versus Nikkei 225



•        And other combinations using these contracts.
IPC Equity Index Options
IPC Options

Underlying asset is the Future on the Index calculated by Bolsa Mexicana
(Mexican Exchange).
The index is known as the IPC and is market capitalization weighted from
stocks selected from different sectors of the Mexican economy.
Quoted in index points, e.g. 38,500
Notional (Face) Value is the index multiplied by MXN $10.00
Trades in quarterly maturity months (Mar, Jun, Sep, Dec)
Cash settled.
VIMEX
VIMEX, Mexican Volatility Index.

This indicator measures the expected volatility for the Mexican Stock Market in
a short term.
The VIMEX® is calculated with the Implied Volatilities of the IPC (of the Mexican
Exchange) Options prices listed in MexDer, for this reason, the Derivatives
Exchange is the one who calculates and publishes it for the public domain.
                                                                               VIMEX®                     VIX®
  45
  40
  35
  30
  25
  20
  15
  10
                         Aug-09




                                                                               Apr-10


                                                                                        May-10




                                                                                                          Aug-10




                                                                                                                                                                Apr-11


                                                                                                                                                                         May-11
                Jul-09




                                  Sep-09


                                           Nov-09




                                                                                                 Jul-10




                                                                                                                   Sep-10


                                                                                                                            Nov-10
                                                    Dec-09




                                                                                                                                     Dec-10
       Jun-09




                                                             Jan-10


                                                                      Mar-10




                                                                                                                                              Jan-11


                                                                                                                                                       Mar-11
Comparing different Equity Index Strike Options

Compare apples to apples

When trading two contracts of different underlying it is important to trade in
common terms.
With Equity Index Options the common denominator is the strike price notional
value.
To calculate an strike price notional value is easy:
Option’s strike price x contract multiplier = Strike price Notional Value (NV)
Note: The contract multiplier is fixed but the strike price is not.
Therefore the NV will change with another strike price.
Comparing different Equity Index Strike Options

Compare apples to apples

               Option’s strike price x multiplier = strike price NV
Let’s calculate the strike price NV for S&P E-mini options when:
Options Strike Price = 1,280
Multiplier = $50.00
                   1,280 x 50.00 = $64,000 per contract

Now will calculate the strike price NV of the IPC options when:
Options Strike Price = 38,000
Multiplier = $10.00 MXN
                   38,000 x 10.00 = $380,000 MXN per contract
Comparing different Equity Index Strike Options

Compare apples to apples

Convert IPC strike price NV to equivalent $USD terms.
On January 14th USD/MXN rate was 0.08262 or 12.1028 Pesos per Dollar:
        IPC strike price NV x exchange rate = IPC USD strike price NV
                 380,000 MXN x 0.08262 = $31,395 USD
Now we can compare that to the NV of S&P E-mini’s and calculate the proper
hedge ratio.
                 Hedge Ratio = NV (E-mini) / NV (IPC)
                 HR = 64,000 / 31,395

                     = 2.03, or rounded to 2:1 IPC to E-mini
E-mini Futures – IPC Futures


                  June S&P500 / June IPC
         1,380                                      40,000
                 E-mini Futures
                 IPC Futures
         1,360
                                                    39,000

         1,340

                                                    38,000
         1,320


                                                    37,000
         1,300
S&P500




                                                             IPC
         1,280
                                                    36,000


         1,260
                                                    35,000

         1,240

                        Correlated price activity   34,000
         1,220          between the individual
                        contracts
         1,200                                      33,000
Selling IPC ATM Volatility
                                     Implied Volatility Indices VIMEX-VIX
             23.00



             22.00
                                           1/14/11: Sell ISM1C
                                                     Buy ESM1C           VIMEX          VIX
             21.00



             20.00
Volatility




                                                                  2/15/11: Buy ISM1C
             19.00                                                         Sell ESM1C
                                                                  Spread = 0.10

             18.00



             17.00


                     1/14/11:
             16.00   Spread = 4.95


             15.00
  Selling IPC ATM Volatility

  Strategy: Betting on narrowing spread

  Assuming on 1/14/2011 we:
          Bought 10 ATM ESM1C 1,280 at 60.50 [VIX=15.46]
          Sold 20 ATM ISM1C 38,000 at 192.84 [VIMEX=20.41]
          Spread = 4.95
  On 2/15/2011 we:
          Sold 10 ATM ESM1C 1,280 at 74.75 [VIX=16.37]
          Bought 20 ATM ISM1C 38,000 at 84.66 [VIMEX=16.47]
          Spread = 0.10


MXN/USD:
2,334 MXN * 0.08262 = $192.84
1,020 MXN * 0.083 = $84.66
Selling IPC ATM Volatility

                       P&L
1/14/11        Bot 10 ESM1C 1,280 at 60.50
               Sold 20 ISM1C 38,000 at 192.84

2/15/11        Sold 10 ESM1C 1,280 at 74.75 = Gain of $14.25
               Bot 20 ISM1C 38,000 at 84.66 = Gain of $108.18

E-mini: $14.25 x 10 contracts = $142.50
IPC:    $108.18 x 20 contracts = $2,163.60
Net gain = $2,306.10



Total gain of $2,306.10 versus a naked long ESM1C gain of $142.5.
Volatility Trading Opportunities:

MexDer IPC vs. CMEG E-mini




             July, 2011.

				
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