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augieboo

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Sunday, 07/14/2002 2:58:43 AM

Sunday, July 14, 2002 2:58:43 AM

Post# of 241
CBOE STUFF ON VOLATILITY, VIX, VXN, & QQQ
http://www.cboe.com/LearnCenter/workbench/index.htm

With regard to stock prices and stock index levels, volatility is a measure of changes in price expressed in percentage terms without regard to direction. This means that a rise from 200 to 202 in one index is equal in volatility terms to a rise from 100 to 101 in another index, because both changes are one percent. Also, a one percent price rise is equal in volatility terms to a one percent price decline. While volatility simply means movement, there are four ways to describe this movement:

1. Historic Volatility
Historic volatility is a measure of actual price changes during a specific time period in the past. Mathematically, historic volatility is the annualized standard deviation of daily returns during a specific period.

2. Future Volatility
Future volatility means the annualized standard deviation of daily returns during some future period, typically between now and an option expiration. And it is future volatility that option pricing formulas need as an input in order to calculate the theoretical value of an option. Unfortunately, future volatility is only known when it has become historic volatility. Consequently, the volatility numbers used in option pricing formulas are only estimates of future volatility. This might be a shock to those who place their faith in theoretical values, because it raises a question about those values. Theoretical values are only estimates, and as with any estimate, they must be interpreted carefully.

3. Expected Volatility
Expected volatility is a trader's forecast of volatility used in an option pricing formula to estimate the theoretical value of an option. Many option traders study market conditions and historical price action to forecast volatility. Since forecasts vary, there is no specific number that everyone can agree on for expected volatility.

4. Implied Volatility
Implied volatility is the volatility percentage that explains the current market price of an option; it is the common denominator of option prices. Just as p/e ratios allow comparisons of stock prices over a range of variables such as total earnings and number of shares outstanding, implied volatility enables comparison of options on different underlying instruments and comparison of the same option at different times. Theoretical value of an option is a statistical concept, and traders should focus on relative value, not absolute value. The terms "overvalued" and "undervalued" describe a relationship between implied volatility and expected volatility. Two traders could differ in their opinion of the relative value of the same option if they have different market forecasts and trading styles.

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Scholarly Article on the VIX:
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For more information on VIX, see this article by Duke University Professor Robert Whaley: "Derivatives on Market Volatility: Hedging Tools Long Overdue," Journal of Derivatives, 1994, pp. 71-84 or visit http://faculty.fuqua.duke.edu/~whaley/vix/.

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INFO ON VXN:
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Nasdaq-100 Volatility Index (VXN)

The CBOE Nasdaq Volatility Index (ticker symbol: VXN) is the benchmark of "tech stock" volatility based on the implied volatility of Nasdaq-100 Index (NDX) options. Calculated using the same methodology as the CBOE Market Volatility Index VIX Index, VXN is constructed so that, at any given time, it represents the implied volatility of a hypothetical at-the-money NDX option with thirty calendar days to expiration. The CBOE Nasdaq Volatility Index is calculated and disseminated every 60 seconds throughout the trading day beginning at 8:45 a.m. (Chicago time) and ending at 3:00 p.m. Historical index levels are available from January 1995.

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INFO ON QQQ
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Nasdaq-100 Index Tracking Stock (QQQ)

The introduction of the Nasdaq-100 Index Tracking Stock (QQQ) allows investors to purchase a share of stock in order to invest in the largest and most actively traded companies on The Nasdaq Stock Market-the companies of the Nasdaq-100 Index. Nasdaq-100 Index Tracking Stock trades under the ticker symbol "QQQ." QQQ average daily volume was an impressive 73.5 million shares in March - May 2001. With Nasdaq-100 Index Tracking Stock, you can buy or sell shares in the collective performance of the Nasdaq-100 Index in a single transaction - just as you buy or sell shares of individual stocks. It's a one-investment portfolio that gives you ownership in the 100 stocks of the Nasdaq-100 Index. And because Nasdaq-100 Index Tracking Stock trades like stock, you can buy them on margin, sell short or hold your shares for the long term. When you purchase Nasdaq-100 Index Tracking Stock, you're investing in the Nasdaq-100 Trust, a unit investment trust that holds shares of the companies in the Nasdaq-100 Index. The Trust is designed to closely track the price and yield performance of the Index - so you can expect your Nasdaq-100 Index Tracking Stock to move up or down in value when the Index moves up or down.

The initial market value of QQQ generally approximates 1/40 the value of the underlying Nasdaq-100 (NDX) Index. So for example, if the NDX price level is 1400, the QQQs generally would be expected to be priced around $35. QQQs may be bought and sold at intraday prices throughout the trading day - something you can't do with conventional index mutual funds that are generally purchased or redeemed only at an end-of-day closing price related to net asset value. The pricing of Nasdaq-100 Index Tracking Stock is continuous, subject to any trading halts, during exchange trading hours. The portfolio of Nasdaq-100 Index stocks held by the Nasdaq-100 Trust is passively (not actively) managed, which means the Trust does not try to outperform the Nasdaq-100 Index, just track it closely. And because this tracking requires less costly trading and less portfolio turnover than actively managed portfolios, costs on Nasdaq-100 Index Tracking Stock should be lower than on conventional funds that are actively managed.

Because the Nasdaq-100 Trust portfolio is designed to closely track the Nasdaq-100 Index, it is less likely than actively managed portfolios to experience the trading of securities, which can create potentially high capital gains distributions. The Nasdaq-100 Trust will generally only sell securities to reflect changes in the composition of the Index and to pay Trust expenses. In addition, since Nasdaq-100 Index Tracking Stock is sold through exchange trading, they also will generally not require the sale of stocks and generation of capital gains that is required by
conventional index funds in effecting cash redemptions.

An investment in QQQs should be made with an understanding that the Nasdaq-100 Trust will not be able to replicate exactly the performance of the Index because the total return generated by the securities held in the Trust will be reduced by transaction costs incurred in adjusting the actual balance of the securities and other Trust expenses, whereas such transaction costs and expenses are not included in the calculation of the Index. It is also possible that for short periods of time, the Trust may not fully replicate the performance of the Index due to the temporary unavailability of certain Index securities in the secondary market or due to other extraordinary circumstances. Such events are unlikely to continue for an extended period of time because the trustee of the Trust is required to correct such imbalances by means of adjusting the composition of the Trust.

http://www.cboe.com/LearnCenter/workbench/index.htm







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