CBOE Launches Short-Term Volatility Product

Terry Flanagan

Volatility as an asset class continues to resonate, with the upshot being that new products are being launched in order to allow investors to participate.

“There’s been more focus on volatility products in recent years,” said Jay Caauwe, managing director of CBOE Futures Exchange (CFE). “Volatility has become more mainstream, and we’re hearing debate about volatility becoming an asset class. It’s growing in terms of its breadth of market participants, average daily volume ADV, and open interest.”

January trading volume in VIX futures totaled a record 4.40 million contracts, a 52-percent increase from January 2013 and a 38-percent increase from December. The previous monthly volume record for VIX futures was 4.21 million contracts traded in June 2013.

“There’s been an awareness of not only why to trade volatility but how to trade volatility,” Caauwe said. “2008 was a perfect example of why to trade volatility. People really applied themselves and learned more about the nuances of trading VIX, and incorporated it as part of portfolio management or as part of their strategy styles. When you survey the volatility landscape, and see the plethora of products that are out there, like the ETPs that all reference VIX or VIX futures, it means that there’s an appetite for having exposure to volatility.”

In February, CFE launched trading of futures with weekly expirations on the CBOE Short-Term Volatility Index (VSXT).

Like CBOE’s flagship CBOE Volatility Index (VIX), the VSXT reflects investors’ consensus view of expected stock market volatility using CBOE’s proprietary VIX methodology. The VIX Index uses SPX monthly options to measure expectations of 30-day volatility, while the VXST Index uses SPX options that expire every week (including SPX Weeklys) to gauge expectations of nine-day volatility.

VXST’s shorter time horizon makes it particularly responsive to short-term volatility triggered by market events such as corporate earnings, government reports and Fed announcements.

Chicago Board Options Exchange developed the VSXT Index last fall in response to demand for Weeklys options generally, and volatility contracts that measure a shorter time period in particular.

“The weekly option landscape has proven quite popular, so there’s an appetite to trade not only weekly products in general, but shorter-dated volatility products in particular,” said Caauwe. “That was the feedback we received from our market participants, and they asked whether we could bring to market a futures product that was akin to the Weeklys that they were trading in the security options world.”

“We can’t help but be excited about launching Short-Term VIX futures, which combine the best features of our SPX Weeklys options and VIX futures. Traders will have at least four weekly expirations available at one time, providing tremendous flexibility to hedge around event-driven and unexpected market moves,” said CBOE CEO Edward Tilly, in a statement. “We also expect professional traders to create strategies to take advantage of price differences between VIX and VXST products.”

“Given the extraordinary appeal and record-setting volume of SPX Weeklys options and VIX futures, we expect futures traders who haven’t had the benefit of weekly expirations to embrace Short-Term VIX futures similar to options traders’ acceptance of Weeklys options,” Tilly said.

In 2013, SPX Weeklys accounted for approximately 24 percent of all SPX options trading. Average daily volume for SPX Weeklys during 2013 reached an all-time high of 197,126 contracts, a 98-percent increase from 2012.

The 30-day VIX Index and the nine-day VXST Index are highly correlated, but the VXST Index is generally more volatile than the VIX Index. As an example, when Standard & Poor’s downgraded U.S. debt in August 2011, VXST Index values rose 81 percent, while the VIX Index rose 50 percent.

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