July 16, 2015 / 7:55 PM / 2 years ago

Weekly VIX options the newest way to trade volatility

NEW YORK, July 16 (Reuters) - Traders will have a new way to trade short-term volatility next week, when CBOE Holdings Inc plans to launch weekly expirations for one of its most heavily traded index options products.

CBOE, the operator of the largest U.S. stock options market, plans to list weekly expirations for futures and options on the CBOE Volatility Index, the market’s favored barometer of volatility. The futures are expected to list on July 23, with the options to follow soon.

The index tracks the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 index options.

VIX options, which on average trade about 679,000 contracts a day according to Trade Alert, are the second-most heavily traded of CBOE’s index option products, second only to options on the S&P 500. They are widely used by large institutions to hedge their portfolios.

The proposed listing of the weekly options has already started to garner interest.

“Responses have ranged from ‘When do we start?’ to ‘What took them so long?'” said Jared Woodard, equity derivatives strategist at BGC Partners in New York.

“Everyone already knows the product, and the success of weekly options has been proven in equity and index options,” Woodard said.

Weekly options on individual issues and indexes were first launched in 2005. S&P weekly options currently account for about a third of that index’s options volume.

Like the VIX monthlys, VIX weeklys will expire on Wednesdays, setting them apart from other weekly options that expire on Fridays, and possibly boosting their appeal to traders looking to place short-term bets around specific events like an employment report, strategists said.

The launch comes at a time when VIX trading volume has dipped. Trading volume for the first half of this year has dropped to about 117 million contracts, down nearly a third from the same period last year, according to options clearinghouse OCC data.

“I don’t know if it can get back the volume that they have lost, but it certainly can’t hurt,” said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas.

The dip in VIX options trading is partly linked to the growing popularity of newer volatility-linked products, including various Exchange Traded Notes and Exchange Traded Funds, strategists say.

A number of these, including iPath S&P 500 VIX Short-Term Futures ETN, VelocityShares Daily Inverse VIX Short-Term ETN and ProShares Ultra VIX Short Term Futures ETF , were launched in recent years, building on the popularity of the VIX.

The VIX weeklys will compete primarily with weekly options on the S&P index, SPDR S&P 500 ETF and the VXX.

A previous attempt at a short-term volatility product fell short. Options on the CBOE Short-Term Volatility Index, a gauge of 9-day volatility, failed to attract enough volume and the CBOE recently stopped adding new VXST futures and options. (Reporting by Saqib Iqbal Ahmed; Editing by Dan Grebler)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below