Options Trading & Analysis

Bloomberg: VIX Weekly Options


Bored Volatility Traders Given Another Option With VIX Weeklies

By Callie Bost

(Bloomberg) -- This summer, investors are getting another
tool to bet on stock turmoil in a market where U.S. equities
have been anything but turbulent.
CBOE Holdings Inc. plans to roll out futures and options on
the Chicago Board Options Exchange Volatility Index starting in
July that expire weekly, augmenting its regular monthly
contracts. The exchange operator is introducing shorter-duration
options at a time when the VIX could use some attention. The
gauge of trader anxiety has languished for the better part of
three years as American equities have avoided protracted
selloffs.
The exchange is betting the new contracts will entice
investors to seek short-term protection ahead of catalysts
ranging from Federal Reserve policy meetings to brinkmanship in
the Greek debt crisis.
“It’s certainly more customizable to the time horizon,”
said Joseph Leska, a trading strategist at Conshohocken,
Pennsylvania-based Arin Risk Advisors LLC, an options strategies
advisory firm. “If we were in a situation where potentially
volatile news comes up short-term, we don’t necessarily want to
buy VIX options, say, three weeks out.”
Traders use VIX contracts as a tool to protect stock
holdings from losses or to speculate on increases in market
stress. The VIX, derived from options costs on the Standard &
Poor’s 500 Index, moves in the opposite direction of the
equities benchmark about 80 percent of the time.

Most Responsive

CBOE announced plans for the five-day contracts earlier
this month. The exchange operator last year introduced options
on its S&P 500 Short-Term Volatility Index, a measure of nine-
day S&P 500 hedging costs, as a way for investors to speculate
on near-term volatility. Those haven’t caught on with traders,
who held 70 contracts at Wednesday’s close, compared with 7.6
million in VIX options open interest.
“The one-week time frame is when the VIX is most
responsive to market moves,” said Bill Speth, vice president of
research and product development at CBOE. “For us, it’s about
giving our market participants more opportunities to hedge and
at different prices, filing in the gaps between monthly
expirations.”
While VIX options have recently shown signs of life,
ownership is still down dramatically. Open interest of VIX puts
and calls has averaged 5.2 million contracts this year, 37
percent lower than the 8.2 million options traders held in 2014,
Bloomberg data show. Total trading volume has dropped 31
percent.

Resilient Equities

The VIX was little changed at 12.81 at 11:41 a.m. in New
York, as the S&P 500 fluctuated near an all-time high. The
volatility measure has dropped 33 percent in 2015, averaging
15.56 for the year.
The equity index’s trajectory has echoed patterns seen in
2014, when stocks swooned in January only to rally 11 percent in
the year, squashing the VIX to a seven-year low last summer.
The resilience of the market has kept the VIX under its
all-time average of 20 for all but 18 days since the start of
2014. If volatility returns, the weekly contracts should gain
favor, said Mark Shepherd, president of Chicago-based Derivative
Strategy Consultants.
“From a volume standpoint, I think they’ll be more of a
necessity when the VIX heads higher,” he said. “If the VIX
gets to 18 or 20, these become quite a proprietary trading tool
and perhaps useful for short-term hedging.”


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