Betting on Volatility? Cboe Plans to Launch Options on VIX Futures

What better way to celebrate last week’s record-setting VIX spike than adding on another derivative? 

The Chicago Board Options Exchange is launching new options trades on its futures contracts for the highly popular Volatility Index, which itself is built on options placed on the S&P 500. (Deep breath, everyone.) The VIX, also known as Wall Street’s fear gauge, measures broad investor sentiment by tracking options. Since those options are often used to hedge positions, more contracts mean more investor uncertainty — and that usually spells a rollercoaster ride for the markets. 

Attaching options to futures contracts adds another layer of sophistication, but the exchange says it can also help protect investments against market turbulence. It’s one of the most meta ways to invest in the world’s most recognizable index.

Failure Is Not an Option

While the product seems like something out of “Black Mirror,” it adds to a slew of new and upcoming Cboe derivative investments that are attempting to tap into record levels of options trades worldwide. The total volume of global trading reached 137.3 billion contracts in 2023, up 64% from the previous year, according to data from the Futures Industry Association.

“There are several compelling reasons to invest,” said Brian Andrew, CIO at Merit Financial Advisors. “Due to the VIX’s historical negative correlation to the equity markets, these options can be used as a diversification tool.” While the funds will likely gain the most traction with investor that are already using Cboe’s futures marketplace, it also allows everyday investors to speculate on market sentiment, economic data, and geopolitical events, he said.

Another advantage is that traditional VIX options are traded in securities accounts overseen by the Securities and Exchange Commission, while the options being placed on future contracts are regulated by the Commodity Futures Trading Commission, according to a company release. That may open up the products to new investors.

At the Money. Investors just love to keep their options open. Last year marked the sixth consecutive year of record-setting trading activity in the global listed derivatives markets, according to FIA’s research. North America was the one of the most-active region globally:

• Interest rate futures and options volume rose 18% globally to 6.1 billion contracts, according to the study.
• Open interest, which measures the number of outstanding contracts, hit a record 1.25 billion contracts, up 15% from 2022.