The Short Duration Craze
Short-duration contracts are all-the-rage in the options market these days. Glance at the ADV on any given options exchange and you’ll find a substantial portion of weekly options lurking in the mix. Even old-school institutional products like SPX have embraced the short-duration craze. SPX Weeklys acounted for approximately 32% of overall SPX contract volume in 2014, up from approximately 23% the previous year.?
A Volatility No-Brainier
When the CBOE launched a short-duration volatility product (ticker: VXST) in early 2014 its success was deemed?a foregone conclusion. After all, everyone loves Weeklys and everyone loves the VIX. So a Weekly version of the VIX was, to borrow liberally from Hershey’s, “two great tastes that taste great together.” However, as we roll into 2015, it’s becoming increasingly clear that VXST is failing to resonate with any of the core constituencies of?VIX, SPX or even Weeklys.?
A Mystery Product
VXST options launched on 4/10/14 with a great deal of fanfare. Surprisingly, that fanfare translated into little actual trading activity with only 71 contracts changing hands on the day. But VXST options soon appeared to hit their stride. The product quickly accelerated to a record volume of 4577 contracts on 4/28/14. It seemed as though the product was actually living up to the pre-launch hype. The only wrinkle was the fact that VXST set a volume record on a rather unusual day. While the S&P 500 had an impressive 27 point range on 4/28/14, it didn’t translate into substantial trading volume in either VIX or SPX options. SPX only traded 506,00 contracts, roughly half of its average-daily-volume. VIX managed only 304,000 contracts that day, less than two-thirds of its average-daily-volume. The fact that a new product set a volume record on a day when its progenitors barely moved the needle left more than a few observers scratching their heads. Perhaps it signaled the fact that VXST was attracting a new customer base to the volatility world?
Six-month chart?of VXST (image from LiveVol Pro)
VXST continued to generate more questions than answers throughout 2014. To the surprise of many, the contract never managed to surpass the early record of 4577 contracts set on 4/28. Smaller surges in volume would follow, often during sessions where SPX options and VIX options failed to follow suit. Even more troubling, VXST volume frequently stalled on days when the flagship indices were setting volume records. VXST even failed to catch fire during the “volatility of volatility” resurgence in late 2014, an otherwise ideal scenario for a short-term volatility product.?
The Mystery Continues
Many hoped that the new year would bring renewed interest in short-term volatility. But 2015 has not been kind to VXST. As of this writing (1/14/15) VXST options volume remains anemic while open interest has fallen to a paltry 197 contracts. Even the recent volatility spikes have failed to generate any appreciable response from VXST. The 1/7/15 trading session had all the hallmarks of a record day for short-term volatility. The S&P 500 had a twenty-four point range, pushing SPX options precariously close to the 1 million contract mark. VIX options also had a strong showing with nearly 500,000 contracts changing hands. Yet, with so much excitement and activity lighting up the volatility marketplace, VXST options failed to attract a single customer. It was yet another surprise in the short but baffling history of VXST.?
What To Do?
Even the creators of VXST appear to be a little mystified by VXST trading activity (or the lack thereof). “I’ve given up trying to predict the success of a new product” said Edward Provost, CBOE President & COO at a recent media luncheon in Chicago. “Sometimes you launch a product that you are certain is going to be a home run, only to be surprised by the response from the marketplace.”
The CBOE also suggested that liquidity issues may be at the root of VXST’s problems. “We’ve added market makers to VXST recently to provide deeper liquidity in the product” said James Lubin, Senior Managing Director of the CBOE Futures Exchange. “Hopefully that will resolve some of the volume issues going forward.”
A lack of liquidity providers can certainly spell the end of a new product. The recent high-profile death of mini-options is a prime example of that fact. However, it is certainly curious that SPX Weeklies continue to set new volume records while VXST options attract little-to-no volume during the same periods. It may speak to a larger issue and, perhaps, a divergence in the customer base of the two products. “The discrepancy between SPX Weeklys and VXST options is something of a surprise” agreed Lubin. “It may very well indicate that the players in SPX Weeklys are very different from the players in VXST.”
Of course, VXST launched in an extremely hostile environment for a new volatility product, a fact raised by CBOE CEO Edward Tilly. “I would like to see how VXST does in a little more normal volatility environment. We launched the product in an environment with realized volatility of the S&P in the single digits. So the use case for VXST wasn’t readily apparent to many customers. If we see VIX rise into the twenties, and realized volatility rise into the teens, I’d imagine that will have a beneficial impact on VXST volume.”
Going Forward
It remains to be seen whether the addition of liquidity providers and the current increase in realized volatility can breathe new life into VXST. The concept of trading short-term volatility, particularly against other short-duration positions in equity and index options, is certainly compelling. However, that hasn’t stopped some market participants from already dismissing VXST as a failed product.?Noted volatility author Euan Sinclair didn’t hold out much hope for the chances of VXST on a recent episode of Volatility Views (note: the VXST discussion starts at the 30:40 mark):?
“VIX volume really started taking off when there were ETNs listed on it” Sinclair stated on the program. “As far as I know there’s no VXST ETN right now…Also, the really short-term vol is almost just at the level of noise. I don’t think there’s much in the way of real signal to it….The CBOE threw it out there because they hoped it would work but it doesn’t look like it’s going to.The genuine users of volatility. The institutional customers who really set the market. Were any of them asking for this? Does anyone really want this?”