Volatility Time Horizon Contracts

Terry Flanagan

Since the financial crisis of 2008-2009, trading strategies that have volatility embedded within them have increased usage of CBOE Volatility Index futures. “Proprietary trading groups are attracted to the contract and tick size as a vehicle to gain market leverage,” Jay Cauuwe, managing director of CBOE Futures Exchange, told Markets Media. “Commodity Trading Advisors are now using VIX futures as a short-term overlay strategy.”

Term structure is a keyword for a lot of market participants, because they are aware that VIX futures are in contango. “As volatility manifests itself in the market, the term structure may flatten out around the mid part of the term, and market participants view shifts as an opportunity to explore strategies between the 9-day product, our VXST, and the 30-day product,” said Cauuwe.

When volatility reaches low levels, it could be interpreted as a harbinger for what is often portrayed as complacency in the marketplace. Whether or not that suggests buying insurance with VIX at such low levels depends on the overall exposure and time horizon that is maintained within a portfolio.

“On a daily basis, there are enough geopolitical occurrences that could be the driver for that next event,” Cauuwe said. “One senses that the marketplace is well in tune with those events, and investors are positioning themselves accordingly.”

VIX is now available 24 hours a day, so that when an isolated geopolitical event occurs outside of U.S. boundaries, market participants across the globe are able to use VIX futures to insulate themselves against regional volatility moves.

“We’re at that point in the lifecycle where market participants from all segments not only know why to use volatility, but more importantly, how,” Cauuwe said. “So they’ve taken the time to educate themselves on the nuance of volatility. We see that based on the fact that we are continuing to get new market participants becoming what we call TPHs, or trading privilege holders.”

“Our continued focus is promoting our roster and suite of volatility products through education, client visits, presentations and seminars,” Cauuwe added.

Later this year, CBOE plans to make VIX options and SPX options available on extended hours – not the full virtual 24 like the VIX futures, but still an extended hour platform.

“There’s a lot that we offer here beyond the 30-day product,” Cauuwe said. “We have the nine-day volatility product – on the Short-Term Volatility Index — which is certainly more sensitive to moves in volatility itself. The Russell VIX has been performing well of late, as small cap stocks are seemingly in favor at the moment.”

With its extended trading hours initiative, CBOE Futures Exchange is getting more traction within Europe, and some order flow emanating from Asia as well. There’s also been an ongoing interest for market participants and market data subscribers who need to have VIX information at hand.

Futures are easy to understand and may at times offer the cleanest exposure to moves in VIX itself.

“There’s been a whole generation of products linked or tied to VIX futures or VIX index itself,” said Cauuwe. “Some are quite bespoke, and it’s not one size fits all. Some of the products are aligned closely with the first two months expiration of the futures product, some address the mid part of the term structure, and some have an inverse payoff. That’s where you really need to understand what product it is you’re trading.”

Featured image via Dollar Photo Club

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