CBOE Holdings Inc. (CBOE) already runs the dominant gauge of U.S. options prices. Amid record trading of volatility products, the exchange operator is expanding the franchise with a version tracking shorter-term contracts.
The owner of the biggest U.S. options market today introduced the CBOE S&P 500 Short-Term Volatility Index that tracks nine-day options on the Standard & Poor’s 500 Index. The company’s most famous gauge, the CBOE Volatility Index, or VIX, measures 30-day options on the S&P 500.
CBOE controls exclusive rights to the VIX and leverages that position by offering options and futures on the benchmark gauge of U.S. equity derivatives. The Chicago-based company plans to do likewise with the latest product, which was announced a day after CBOE said it will expand VIX futures trading hours to help lure more investors from outside America.
“These things cater to a wide array of investors,” Scott Maidel, who helps oversee more than $237 billion as an equity-derivatives money manager at Russell Investments in Seattle, said in an interview from Sintra, Portugal, referring to the surge in trading for volatility products. “By having a variety of expiration dates available, investors can customize their trades to hedge or speculate around a certain event. That’s why they’re so popular.”
Starting this month, VIX futures will be available for trading from 3 a.m. to 4:15 p.m. New York time every weekday, with an additional session from 4:30 p.m. to 5:15 p.m. on Monday through Thursday, CBOE said yesterday. A software update to prepare for the shift caused a malfunction that shut CBOE’s main market for 3 1/2 hours in April, prompting the company to delay the trading-time changes.
The price of the short-term index announced today will be revealed once daily at 4:15 p.m. New York time, with updates every 15 seconds beginning later this year, CBOE said.
The company created the nine-day VIX, based on weekly S&P 500 options that expire every Friday, amid surging demand for volatility products as U.S. stocks climb to record highs. Once options and futures linked to the index are made available, traders will gain another way to speculate on -- or hedge their assets in advance of -- short-term events.
The new gauge “will enable traders to fine tune the timing of their volatility trades,” Edward Tilly, chief executive officer of CBOE, told investors at the exchange’s Risk Management Conference in Sintra today. “We envision investors using these products to pinpoint and hedge against event-driven market moves, such as earnings and Fed announcements.”
Trading of VIX futures has averaged nearly 160,000 per day this year, data compiled by Bloomberg show. That’s the most ever and 68 percent more than the average volume in 2012. There are 367,365 futures outstanding, and the open interest reached a record high of 481,794 in March, the data show.
The volume of S&P 500 weekly options has more than doubled this year and one-week contracts will account for 25 percent of total trading by the end of 2013, Tilly said, citing forecasts from Tabb Group LLC. CBOE introduced S&P 500 weekly options in 2005, and one-week contracts on individual equities started in June 2010.
Shares outstanding on the iPath S&P 500 VIX Short-Term Futures ETN more than tripled this year to 100 million as of Sept. 27 and reached a record 107 million on Sept. 16, data compiled by Bloomberg show. Its 30-day average trading volume is the fourth-highest among U.S. exchange-traded funds and notes, data compiled by Bloomberg show.
Options volume in the U.S. has surged fivefold in the last decade to an average of 16.4 million contracts a day this year as demand grew for securities that protect against losses and speculate on the direction of stocks, according to data compiled by the Chicago-based Options Clearing Corp.
The VIX rose 7.4 percent to a one-month high of 16.60 yesterday amid concern that a stalemate over the U.S. federal budget would shut the government. Today, the index declined 5 percent to 15.77 at 11:18 a.m. New York time as the U.S. began its first partial shutdown in 17 years, idling as many as 800,000 employees.
“The main driver in the growth of VIX futures has been associated with the 2008 crisis and the search as well as need for tail-risk hedges,” Ramon Verastegui, head of engineering and strategy at Societe Generale SA in New York, said yesterday during an interview. “Weekly options are efficient in expressing any short views. Investors are using those more and more due to the large amount of macro news.”
To contact the reporters on this story: Nandini Sukumar in London at firstname.lastname@example.org; Cecile Vannucci in London at email@example.com; Nikolaj Gammeltoft in New York at firstname.lastname@example.org