06.13.2012
By Terry Flanagan

CBOE Sees Further Growth of VIX

The Chicago Board Options Exchange (CBOE), which offers trading on a host of volatility-based products, sees a bright future ahead for the so-called fear index.

“We are early on in the understanding and utilization of VIX [the CBOE Market Volatility Index] by many different investors,” said Bill Brodsky, chief executive of the CBOE on the sidelines of the Sandler O’Neill Global Exchange Conference in New York last week. “We see considerable growth opportunities on the options landscape and volatility space in 2012.”

A barometer Brodsky uses is how many exchange-traded notes (ETNs) there have been over the last few years. There are now 45 different types of ETNs offered by different investment banks based on volatility.

“There is tremendous runway for the growth of VIX going forward, just because it is so unique and has been proven to have such value in understanding the different swings of the stock market,” added Brodsky. “It has great predictive ability. But there is also a tremendous amount of learning going on with how and when to use VIX. We are very active in the educational area both on the retail and institutional side with VIX. There is a lot ahead of us on VIX.”

Trading in VIX futures through the first five months of this year has been up 73% over the prior year, and more than two million contracts changed hands in May, making it the busiest month ever for the product. VIX options were up 13% through May as well. This came despite an industry-wide decline of about 5% in total options trading volume through May.

“There is still a significant growth area for VIX as people are getting more used to it and understanding how it functions and the nuances as well,” Dan Deming, volatility trader and managing director at Stutland Volatility Group, an an options and futures market maker on the CBOE. “There are definitely more opportunities available as VIX continues to mature.”

The VIX has become so popular and widely-used that it has essentially become its own asset class. Hence the launch of the VIX of VIX index by the CBOE earlier this year. Known as the VVIX, it reflects the market’s consensus of expected volatility of the 30-day forward price of the VIX index and provides new information for investors looking to formulate trading strategies based on the relationship between the VIX index and the volatility of the VIX index. The index offers investors a way to gauge the risk premium in VIX index option prices, much like the CBOE’s VIX Index reflects the risk premium in S&P 500 index options prices.

The CBOE is the largest options exchange in the U.S., garnering as much as 30% of total options market share on any given day.

While the CBOE seemingly gears its products and its business toward domestic investors, it reaches out to the global investing community as well.

The exchange has always had a very strong presence outside the U.S., according to Brodsky at the CBOE. Some of the earliest users of VIX were sophisticated traders in Europe, and the company expects to see that continuing. “We don’t need offices or operations all over the world to bring business to Chicago,” said Brodsky. “While most of our products are domestic, the S&P 500 and VIX are products that people all over the world use because of the size and importance of the U.S. market.”

As evidence of the broad, global appeal of volatility, the second most traded volatility product is the VIX of EEM, the iShares MSCI Emerging Markets Index.

The CBOE VIX reached a low of about 14 in March as investors’ fears about a eurozone collapse eased. It has since risen to about 22 as those fears returned and as signs of an economic slowdown increased.

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