CBOE's new options volatility toy

Cboe Global Markets, Inc. has announced plans to launch new options on Cboe Volatility Index (VIX) futures, set to begin trading on October 14, pending regulatory review. These new options are designed to offer a new way for market participants to manage market volatility, expanding the existing VIX complex to meet global demand for hedging tools. The options will be based on front-month VIX futures and will be regulated by the Commodity Futures Trading Commission (CFTC), allowing a broader range of market participants to utilize them.

Currently, Cboe offers securities-based VIX Index options, which allow investors to manage or gain exposure to U.S. equity market volatility. The new options on VIX futures will provide similar utility but with the underlying asset being futures. This development aims to attract a diverse group of users, including Commodity Trading Advisors and customers of Futures Commission Merchants, enhancing accessibility and ease of trading within Cboe's existing infrastructure.

Rob Hocking, Head of Product Innovation at Cboe, highlighted the significance of this expansion, noting the increased trading activity in VIX options and the strong demand for hedging tools. With the U.S. election approaching, a period historically associated with increased market volatility, these new options are expected to help market participants manage portfolio risk effectively. Additionally, Cboe plans to relaunch variance futures in late September, further expanding their volatility toolkit.

Catherine Clay, Head of Global Derivatives at Cboe, emphasized that the new options on VIX futures will complement the existing product suite, providing customers with more choices in expiration dates and enabling more granular hedging strategies. These options, being European-style and settling into front-month VIX futures, will join other prominent volatility products on the Cboe Futures Exchange (CFE), such as VIX futures and the upcoming Cboe S&P 500 Variance and Dispersion Index futures. For more information, interested parties can visit Cboe's website.

The new financial products are options on futures for the Cboe Volatility Index (VIX), which is itself based on options tracking the S&P 500. These new contracts come amidst a surge in trading volumes across the derivatives market. Unlike the existing cash-settled VIX options, the new options-on-futures will be physically-settled and can be traded in futures accounts, making them accessible to a broader range of investors restricted by current mandates or regulations.

This launch is part of Cboe's strategy to meet growing demand for derivatives, as investors increasingly use them to enhance returns, make short-term bets, or hedge against market risks. Despite their complexity, Cboe has seen significant success with innovative products, such as the introduction of zero-day options two years ago, which now account for nearly half of the S&P 500’s options volume. However, industry veterans like Dennis Davitt express skepticism, suggesting that the product's complexity might limit its appeal. Nonetheless, Cboe continues to innovate, with plans to start trading revamped Cboe S&P 500 Variance Futures in September.