Volatility derivatives are
appealing to an increasingly diverse range of investors who are
contributing to the substantial growth of the product, in terms
of both volumes and new offerings.
Known throughout the market as
the fear gauge, CBOE’s Volatility Index (VIX) is
one of the most actively used hedging tools in the
market’s expectations of 30-day volatility linked
to the S&P500, the VIX allows investors to hedge their
stock positions, and is now attracting a range of new
are seeing a significant surge in CBOE VIX options trading due
to increased demand from funds and hedge funds in addition to
an increased usage among general investors, accessing
volatility derivatives products through their brokers," said to
global head of derivatives and structured products,
"We are seeing much
higher usage from the private banking sector and general
investors who are using strategies on the VIX, both for hedging
and yield enhancement - such as the sale of call
For evidence of the
rapid growth you need to look no further than
CBOE’s VIX futures and options volumes over the
past few years.
Trading of VIX
options peaked at 16m in October 2013, double the activity seen
two years earlier, while the futures equivalent has quadrupled
in volumes to 4m in the same amount of time.
chief strategist of TD Ameritrade, believes part of this boost
has been down to an increase in participation from retail
"I think the retail trader has
definitely increased their exposure to volatility related
products, in fact, we have seen our daily average trades in
volatility related products up over 1000% year over year," he
"The reason they have done so
is twofold, the first is because the education on these
products has increased so significantly over the last few
"The other primary reason they
have started to use these products heavily is that they have
learned that volatility itself can be a tradable commodity in
the futures and options markets."
Awareness of volatility
products and their uses as an effective hedging tool has been
growing among investors.
One example of this
is in Europe, where participation in trading US volatility
products has risen over the past three years.
According to research from TABB Group, only 6% of European
investors were using volatility options in their strategies in
2011, compared to 62% in 2014.
are becoming more sophisticated in their use of options, moving
beyond traditional overwriting strategies to enhance returns,"
said TABB’s Andy Nybo.
As a result of the
growing interest in volatility products, the products have also
From June 22, CBOE
will introduce near 24-hour trading on its VIX futures to
capture more business from Europe and Asia.
CBOE has committed
to expanding in Europe by establishing a London hub, while Asia
is widely tipped as the region holding the most potential for
growth in the derivatives markets.
exchange has also launched futures and options with weekly expirations
on the new CBOE short-term volatility index, which
tracks nine-day volatility.
The options sparked immediate interest with over 3,000
contracts changing hands on the first day.
"We expect volumes
to quickly increase, in a similar manner to the volume spike
which occurred during the launch of weeklies on the Standard
and Poor Index (SPX), options listed with one week to
expiration," added Ribas.
Tilly, CEO of CBOE Holdings, said earlier this month the
exchange is planning to launch the
first ever volatility index futures contract on interest rates
by the end of the year, pending regulatory approval.
"Other VIX product
developments in the pipeline for 2014 include futures on the
CBOE/CBOT 10-year US Treasury Note Volatility Index, the first
volatility index based on US government debt," added
"Diversifying our base
product line across asset classes is an area where we see
significant potential for growth."
Elsewhere, CBOE’s rival
International Securities Exchange (ISE) is set to arm itself
with its own measure of volatility, by listing options on
Nations VolDex index later this year.
The launch will pit ISE’s at-the-money offering up
against CBOE’s out-of-the money options, with
index provider NationsShares believing its VolDex will be an
'alternative’ to the CBOE Volatility Index
Volatility products have also been launched in Russia, India
and Hong Kong in recent years.
With new participants and new markets adopting
volatility derivatives as an effective hedging tool, the
products look set for an extended period of growth.