VIX Futures at 2 A.M. Finally a Reality as CBOE Extends

Investors who want to turn on their computers at 2 a.m. to trade volatility futures that have lost value this year are now free to do so.

CBOE Holdings Inc. yesterday extended trading hours on Chicago Board Options Exchange Volatility Index futures, making them available almost around the clock. The VIX (VIX), used by people to protect stock holdings from losses or speculate on market swings, has dropped 21 percent this year to 10.85, less than two points from a record low.

While CBOE is hoping more hours will bring business from Europe and Asia, it will also attract U.S. traders in the middle of the night when major news breaks, according to Dan Deming, who worked on the CBOE floor for 26 years. The securities, based on the price for options on the Standard & Poor’s 500 Index (SPX), have become one of the most common ways for investors to protect stocks from losses because they rise in value when equities tumble.

“There’s just a driving demand for volatility exposure,” Deming, a member of Stutland Volatility Group, said in a June 20 phone interview from Chicago. “In the case of some type of unforeseen event that takes place between Friday and Sunday, you’ll have the opportunity to trade around that instead of waiting until Monday morning.”

Trading Hours

The market for VIX futures will operate from 6 p.m. Sunday to 4:15 p.m. Friday New York time, according to a statement from CBOE this month. On weekdays, trading will be continuous except for 15 minutes after 4:15 p.m.

Before the change, the market open from 3 a.m. to 4:15 p.m. New York time on weekdays, with an additional session from 4:30 p.m. to 5:15 p.m. Monday through Thursday.

In the first five months of the year, about 7.5 percent of the contracts changed hands outside of regular U.S. hours, CBOE said in a press release this month.

“Volatility futures have had phenomenal success,” Robert Whaley, a finance professor at Vanderbilt University in Nashville, Tennessee, said by phone June 18. Whaley designed the VIX, which was introduced in 1993. “People are interested in monitoring things more closely during domestic trading hours in their country.”

Record Volume

Trading of VIX futures has averaged about 180,000 per day in 2014, data compiled by Bloomberg show. That’s the most ever compared with past years and 14 percent more than 2013. There are more than 415,000 futures outstanding.

Even though traders are using more volatility securities, U.S. stock market swings are vanishing. For 45 days, the S&P 500 has failed to post a gain or loss exceeding 1 percent, the longest stretch of calm since 1995, according to data compiled by Bloomberg.

The VIX has fallen 4.8 percent in June, poised for a fifth month of losses. It’s now 45 percent below its five-year average of 19.7, according to data compiled by Bloomberg.

The additional time will make it easier for overseas traders to use a strategy known as a spread trade, according to Ramon Verastegui, head of engineering and strategy at Societe Generale. The technique involves buying one volatility gauge financed by selling contracts on another. For example, a trader could buy VIX futures and sell Europe’s VStoxx Index with the aim of profiting from the difference.

Abnormally Cheap

“It’s a relative value trade between volatilities of different markets,” Verastegui said in an interview from New York. “One volatility can be abnormally cheaper than the other one.”

The VIX jumped 4 percent to 11.28 at 9:41 a.m. in New York. The VStoxx climbed 4.8 percent to 13.39.

CBOE still has room to grow its VIX business, according to Patrick O’Shaughnessy, an analyst at Raymond James Financial Inc. Transaction revenue for VIX futures reached a record $20 million in the first quarter and increased 34 percent over the past year, he wrote in a note May 6.

“The VIX and all related products have been lucrative and profitable to the CBOE, so it doesn’t surprise me that they’re trying this out,” Randy Frederick, managing director of trading and derivatives at Charles Schwab Corp., said by phone from Austin, Texas. The firm oversees about $2.4 trillion in client assets. “The worst case is it’s neutral and the best case is it’s positive.”

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron

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