New Trading Opportunity: Options on VIX Futures
New Trading Opportunity: Options on VIX Futures
The Cboe offering is arriving at the right moment because the popularity of volatility trading is increasing
The Cboe plans to launch options on VIX futures in October.
CFTC-regulated product will open access to more traders.
The offering comes amid increased popularity for volatility trading.
Cboe Global Markets (CBOE) has announced plans to offer options on the Cboe Volatility Index (VIX) futures (/VX).
The VIX futures are scheduled to start trading on the Cboe Futures Exchange (CFE) on Oct. 14, pending regulatory approval.
What are options on VIX futures?
Options on VIX futures will physically settle into the front-month VIX futures contract (/VX), which is also the underlying. As a European-style option, traders won’t be able to exercise before expiration.
The underlying VIX futures is a derivative of the Volatility Index (VIX), an S&P 500-based measure of constant 30-day expected volatility. It is widely regarded as the S&P 500’s “fear gauge.”
VIX futures started trading in 2004 on the CFE and gave traders the ability to express their view on volatility in the future, with the Cboe offering weekly and monthly expirations.
The Cboe launched options on the VIX in 2006, and they are heavily used by market participants today. VIX options broadened the ability to speculate or hedge volatility risk based on future predictions of volatility.
Options on VIX futures to expand market access
The VIX, VIX futures and options on the VIX have become extremely popular over the years, and options on VIX futures will enable active investors to fine-tune their hedging strategies and risk management.
Because these are options on futures that physically settle, the offering opens the door to a broader base of traders who can’t access options on the VIX. The product will be regulated by the Commodity Futures Trading Commission (CFTC).
Catherine Clay, head of global derivatives at Cboe, said, “We expect options on VIX futures will complement our existing product suite, appealing to a broad group of users, including Commodity Trading Advisors, customers of Futures Commission Merchants, and market participants currently active in VIX exchange-traded products and in Cboe's SPX option and VIX product ecosystems.”
Thomas Westwater,a tastylive financial writer and analyst, has eight years of markets and trading experience.@fxwestwater
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