Buyside Embraces Volatility Products

Terry Flanagan

For those that make bets on volatility, these rocky markets have been kind.

The volume on the CBOE Volatility Index (VIX) is high and that means high times for short-term traders who want make quick buck amid the market downturn. Such news has also been positive for those interested in replicating the index.

Since last week, $13.4 billion in VIX exchange traded products have changed hands. Last Monday’s trading volume alone represented a 200 percent turnover of the VIX complex, amounting to $5.7 billion in. It was equal to more than 7.5 times the average daily volume for the first half of 2011.

“Volatility exchanged traded products are levered products that enable traders to take short term views on the market,” said Will Lloyd, managing director at VelocityShares, a provider of volatility exchange traded products, with over $550 million in assets as of July 2011.

One week of an equity market sell-off has brought a renewed vitality to numerous products that market participants may have found quiet in normal times. Now contributing to the increasing volume of volatility exchange traded products are traditional buyside asset managers, according to Lloyd.

“We’ve seen an increasing use of volatility products for hedging purposes,” Lloyd said. “They’re used for their negative correlations to the market, and managing portfolio tail risk.”

Since last Thursday, the VIX has surged 105 percent. VIX futures have shown the largest increase in activity since they began trading in 2005, at which time VIX ETPs were few and far in between. Typical daily trading volume in VIX futures was less than $50 million.

“Volatility is becoming more and more accepted as a standalone asset class,” Lloyd said, citing that the increase in trading volume of volatility products is further solidifying volatility’s place in a portfolio.

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