The concept of trading VIX futures and options seems to have captured the
imaginations ... As a result, despite ongoing low market volatility, we continue to
see ... options strategies in order to capture declining edge amidst low volatility,
Tabb.
Ed Tilly Risk Management Conference Europe Tuesday, October 1, 9:00 a.m.
Thank you, Paul. And I want to thank everyone here for joining us for CBOE’s second Risk Management Conference Europe. We are delighted to be here with you. Our U.S. conference will celebrate its 30th anniversary this March and we are thrilled to be able to establish the tradition in Europe. RMC is known as a content-rich forum for end users, with sessions conducted by and for market participants. I will confine my remarks to areas I hope will be of interest to you: namely new developments in our VIX and SPX product lines. Yesterday, five experts in the field walked us through VIX sessions ranging from Greeks, to skews and term structures. Aside from being humbled by the expertise of our presenters, I was struck again with the realization that we are really at the beginning of the VIX story. The concept of trading VIX futures and options seems to have captured the imaginations of market participants like no other. The trading opportunities that have emerged as a result of a “tradable” VIX continue to expand the volatility space.
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As a result, despite ongoing low market volatility, we continue to see record trading levels and broadening interest in VIX futures and options. Among new users entering the VIX futures arena are hedge funds and prop firms looking to capture vol risk premiums and pricing anomalies between VIX futures and options and related instruments.
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recently, we’ve begun to see calendar spread traders embrace VIX futures as an alternative to the fixed-income market. Trading in VIX options, meanwhile, continues to be driven by increased VIX futures volume, the growing sophistication of the user base, and the ability to use VIX options to fine-tune specific risk exposures. Complex -- and often quite large -- orders account for over half of all VIX options activity and are enabled by the unmatched depth of liquidity that characterizes VIX trading. On a much broader level, we continue to see mainstream adoption of VIX trading. In a recent article entitled “VIX Your Portfolio,” BlackRock, the world's largest asset management firm, broadly endorsed VIX futures as a means of asset allocation and portfolio protection. We’re thrilled to see a diversified customer base that now includes both pros trading sophisticated strategies as well as long-term investors embracing VIX futures for portfolio diversification. Each wave of new users brings additional liquidity and activity to our growing volatility marketplace, a trend we are confident will continue as we expand our VIX product line and extend our global reach. I am pleased to say that we kicked off RMC yesterday with two announcements related to the expansion of VIX trading: the launch of 2
futures and options on the Russell 2000 Volatility Index, or RVX, and the timing of our extended trading-hours initiative. As announced, we will launch RVX futures on Wednesday, October 30, with the options beginning in the weeks that follow. The Russell 2000 Index is the premier measure of the performance of small-cap U.S. stocks and an effective play on the health of the U.S. economy -- 84 percent of the revenues generated by the companies in the index comes from within the U.S. Because U.S. small-cap and large cap indexes are affected by different economic factors, the implied volatility of one does not always closely correlate to the other. Both VIX and RVX have identical multipliers, which facilitates spreads between the two. The rollout of our extended trading hours initiative will launch with an additional 45-minute session of VIX futures trading, beginning Monday, October 21st. The new trading period will begin 15 minutes after the regular close of VIX futures trading and will run from 3:30 to 4:15 Chicago time, or 9:30 to 10:15 p.m. GMT. That initial rollout responds to demand from U.S. customers for a postsettlement trading period.
The second phase of the rollout, which
begins one week later, is decidedly more European friendly. Starting October 28th, we will open VIX futures five hours earlier, so that trading will begin at 2 a.m. Chicago time, or 8:00 a.m. GMT. We are pleased to provide our European customers with the opportunity to trade VIX futures during local trading hours, and we believe our entire global base of VIX users will benefit by extended trading hours. 3
You’ll find copies of both press releases, which provide more detailed information, at the back of the room. We are, of course, happy to personally answer any questions you might have. The number one question I get from analysts regarding the expansion of VIX trading is where I think we are in terms of market penetration, given the tremendous growth we’ve already seen. I like to remind them VIX futures and options are just nine and seven years old, respectively, while SPX options, now 30 years old, are still growing strong. To a great extent, the dramatic growth story of VIX futures and options has overshadowed the tremendous increase in SPX Weeklys trading. CBOE created Weeklys trading with the launch of SPX Weeklys in 2005. Now one of our fastest growing products, SPX Weeklys YTD volume through September is up more than 125 percent over last year’s record pace and shows no signs of abating. A recent study by the Tabb Group, “U.S. Options Trading 2013,” predicts that Weeklys volume will reach 25% of total industry volume by year’s end. Noting that traders are becoming more precise in their options strategies in order to capture declining edge amidst low volatility, Tabb finds that “firms are leveraging the liquidity and structural characteristics of weekly instruments as liquidity builds and as product availability expands.” The Tabb study looks at all Weeklys products across the industry, so I will take a moment to add a little color on what we see regarding SPX Weeklys, in particular. Weeklys trading at CBOE has created a new SPX customer base, which includes both individual retail investors and what we refer to as active semi-professionals. 4
Semi-pros have embraced SPX Weeklys, which like SPY options, provide point-and-click access. SPX Weeklys, however, represent 10 times the notional value of SPY Weeklys. No doubt the trading precision afforded by the shorter time-horizons and lower premiums of Weeklys appeal to both retail investors and semi-pros. Given the tremendous appeal of both SPX Weeklys and VIX futures and options, I am especially pleased today to announce a new CBOE Index that incorporates the dynamics of both. The new Index is called the CBOE S&P 500 Short-Term Volatility Index (ticker symbol: VXSTSM). Like VIX, VXST reflects investors' consensus view of expected stock market volatility and is calculated using CBOE’s proprietary VIX methodology. Where VIX has a 30-day horizon, VXST looks out just nine days, making it particularly responsive to changes in short-term volatility. Our new Short-Term Vol Index is designed to complement VIX. Together the two indexes provide an unrivaled picture of expected market volatility. Our plans also call for VXST Weeklys options and futures. Launch dates for VXST Weeklys are to be determined, pending regulatory approval. Like VIX, our Short-Term Volatility Index is based on real-time prices of SPX options. While VIX is calculated using SPX monthly options, VXST is calculated using S&P 500 options that expire in one week. And we think this shorter time horizon sets the stage for some pretty compelling trading opportunities.
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VXST Weeklys futures and options will enable traders to fine tune the timing of their volatility trades. We envision investors using these products to pinpoint and hedge against event-driven market moves, such as earnings and Fed announcements. Critically, VXST Weeklys will have the same expiration day and a similar settlement process as VIX options and futures, enabling traders to create strategies using VXST and VIX to capture changes in the volatility term structure. I expect some of you may be wondering whether we are also planning for VIX Weeklys. I assure you VXST products do not preclude us from listing weekly expirations on our VIX product.
Given the dynamic
nature of short-term volatility itself, we elected to begin by creating an index calibrated specifically to measure it. As the creator of Weeklys and VIX, we can’t help but be excited about the opportunities for innovation in short-term volatility trading – and we see VXST as our first step. We have copies of the VXST press release as well as one-pager at the back of the room. We’ve started a VXST microsite, which you can link to at CBOE.com. Both our homepage and VXST microsite feature a video interview on short-term volatility with Russell Rhoads, our VIX expert at The Options Institute. Of course, you can also speak directly to Russell right here at the conference. It is especially gratifying to share this news with you here at RMC. We look to our customers as partners in developing the volatility space, and market practitioners who gather at RMC have historically been among the early adopters of cutting-edge new products.
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It was important to us to time these announcements to coincide with this conference. By working closely with customers like you, in forums like this, we can continue to deliver products and services that add value to your trading experience. I hope you will share your thoughts, suggestions or questions with me -or anyone from the CBOE team -- throughout our time here. I sincerely mean that. The ability to connect with you one-on-one, formally or informally, is one of the benefits of a smaller conference like this one. We look forward to getting to know you better in this wonderful setting. Thank you again for being here. Now it’s my pleasure to introduce Bill Brodsky, Executive Chairman of our Board.
Few can rival Bill’s unique experience in the derivatives
world. Fewer still can match his advocacy efforts. Bill is a leading voice in the industry and has worked extensively with policymakers and regulators around the world. He is here this morning to share his insights on the latest developments in Washington. Please join me in welcoming Bill.
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