Navigating Market Volatility: Cboe Launches Options On VIX Futures
Detroit, Michigan
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October 29, 2024 08:30 AM Eastern Daylight Time
By CBOE
Cboe Global Markets, Inc. (CBOE: CBOE) is taking the world of options trading by storm. Not only did they recently launch options on Cboe Volatility Index Futures (VX Options), a new solution that offers more choices for expressing directional views and managing equity market volatility exposure, they also just announced at the HOOD Summit in Miami, FL on Oct. 17, that Robinhood customers would be able to trade index options – including Cboe's flagship S&P 500 Index (SPX®) options, Cboe Volatility Index (VIX®) options, Russell 2000 Index (RUT®) options, and Mini SPX (XSP®) options – on the brokerage firm's platform. This expands their trading capabilities while also potentially meeting the rising investor demand for options trading.
Demand for options trading has risen among retail and institutional investors seeking tools to manage risk and capture market opportunities. As reported by the Options Clearing Corporation, in 2023, total U.S. options volumes exceeded 11 billion contracts, marking the fourth consecutive year of record volumes and a 126% increase since 2019. The average daily volume this year through the third quarter of 2024 was 47 million contracts, an 8% increase compared to the same period last year.
Against this backdrop, the launch of Options on Cboe Volatility Index Futures expands Cboe’s ecosystem of tradable volatility products, potentially enabling investors to better understand the volatility in which the market is pricing.
Options On Cboe Volatility Index Futures Explained
Options on futures are contracts that represent the right, not the obligation, to either buy (go long) or sell (go short) a particular underlying futures contract at a specified price on or before a specified date, the expiration date. Regarding Cboe’s recently launched product, VX Options are options on VX futures. VX futures are cash-settled futures on the Cboe Volatility Index (VIX® Index) listed for trading on the Cboe Futures Exchange, LLC (CFE).
VX Options have European-style exercise, are physically settled, and have PM settlement; most options on futures expire at the close of the market on the last trading day. The VX futures contract that underlies a VX Options contract is the front-month VX futures contract relative to the expiration date of the VX Options contract.
The Value Proposition Of Options On Cboe Volatility Index Futures
The creation of this new Cboe product provides increased optionality for investors. A primary benefit of this new solution is that it could provide more “mid-curve style” exposure, facilitating a new and different payout profile than what is currently available in the exchange-traded derivatives space. The mid-curve style exposure of VX options will also allow investors to take short-term views on the movement of forward volatility, resulting in a secondary benefit - increased liquidity. This is because VX Options will provide shorter-dated VIX exposure, for which the underlying is the front month VX future, generally the most liquid VX future.
In-the-money options are settled into the front-month VIX futures contract which enables more precise delta management. Finally, trading data from VX Options should yield new insights into the volatility-of-volatility term structure, which measures how uncertain the future volatility of an asset's price is expected to be. Having this information thereby enhances risk management efficiency across the entire market.
Enhancing The Marketplace With Innovation
The launch of Options on Cboe Volatility Index Futures appears to demonstrate innovation within the VIX ecosystem, particularly in enhancing the diversity and efficiency of trading strategies. In speaking about the launch of this new product offering, Catherine Clay, Global Head of Derivatives at Cboe, has stated, “Investors have long utilized VIX options and VIX futures to help hedge and manage volatility exposure, and Cboe is proud to expand our volatility product suite at such a critical time. With its options-on-futures structure, the new Options on VIX Futures will look to meet growing customer demand as Cboe works to provide an efficient and seamless experience to both existing and new CFE market participants. The launch will complement our existing volatility offerings, including the recently launched Cboe S&P 500 Variance futures, and enable more investors with the ability to help manage volatility and risk through the election season and beyond.”
As investors become more knowledgeable and sophisticated in using derivative instruments, their demand for products, like Options on Cboe Volatility Index Futures, could continue to increase.
To accompany their product innovations, Cboe also has the Cboe Options Institute, which has been a leader in options education for more than 35 years. It has a vast library of resources, including free online courses, webinars, interactive tutorials and insights from top market experts and academics, all tailored to help retail traders – whether beginners or seasoned investors – enhance their understanding of index options and build the knowledge they need to trade confidently.
Featured photo by Tyler Prahm on Unsplash
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