Volatility Futures Broaden Appeal


CBOE Futures Exchange has experienced an upturn in the number of TPHs, or trading privilege holders, joining CFE, according to CFE managing director Jay Cauuwe.

As volatility has grown in utility and popularity, there’s been a lot of focus on volatility across asset classes. “You hear about volatility in the FX market and volatility or lack thereof more recently, in the commodity market,” Cauuwe told Markets Media. “Correlations can break down in the commodity markets, which leads to looking increasingly at market volatility in general.”

He added, “It’s grown beyond what would have been termed the regular customer base five years ago, meaning it’s no longer mostly hedge funds. There are a number of proprietary trading groups who are what we’d term ‘crossovers.’”

Some of the crossovers have come from fixed income. “As interest rates have been confined to lower levels, interest-rate traders need to remain engaged and involved, and they need to diversify,” said Cauuwe. “They see similarities in the term structure that VIX futures offer, compared to the forward rate structure in the fixed-income market, so interest-rate traders have embraced trading volatility in the form of interest-rate futures.”

Cauuwe will speak at Markets Media’s Global Markets Summit London on Oct. 16.

Commodity Trading Advisors (CTAs) are active adopters of volatility trading for short-term overlay strategies against their general commodity portfolio. CFE has been pleased with the breadth of market participants as the circle of people involved in using its volatility products has become greater and greater.

“We feel that we have a good suite of volatility products, which is only going to be complemented mid-November when we introduce the Treasury volatility product,” Cauuwe said.

Volatility trading and the various volatility products that are available aren’t one-size-fits-all. CFE offers different products, like the VXST – the Short-term Volatility Index.

“So, for example, if the 30-day exposure to implied volatility doesn’t fit your strategy at that particular moment, you now have a 9-day VIX product to use,” Cauuwe said. “Or perhaps you’re more sensitive to tech stocks, so, for instance, when Apple made the announcement about iPhone 6, maybe that’s the time you’d be looking at Nasdaq volatility, given that Apple is the largest component in the Nasdaq. If an investor is you are focusing on small caps, there’s our Russell volatility product.”

The important point “is that investors are keying in on geopolitical and global risks, and right now, there’s almost a trifecta of things going on, whether it’s Hong Kong, Ebola, or the Ukrainian crisis,” Cauuwe said. “In addition, we’re now entering the earnings season. Investors need to be aware of what’s going on in the marketplace, both here and abroad, so they can make intelligent investment decisions. “

Cauuwe works extensively with CFE customers and TPHs. As a business development executive for CFE futures, he is responsible expansion of its educational efforts.

“We’re continually reaching out not simply to promote the use of our products,” he said, “but to make sure that we help users and potential users develop the necessary acumen so they are comfortable when they put those trades on.”

Featured image via zhu difeng/Dollar Photo Club

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