FIA Expo 2007 Update: Volatility is Good for the CBOE

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Although the FIA Expo in Boca Raton is primarily a futures industry event, there are a number of options firms and exchanges represented at the Expo. The CBOE has always used the Expo as a venue for announcing intriguing new initiatives, and 2007 is no exception.

DID SOMEONE SAY VIX?
These days, it's impossible to mention the CBOE without mentioning the VIX in the same breath. In fact, creating the VIX 17 years ago (and then updating the index to its present form) was a masterstroke of marketing. It assures that the CBOE's name will be mentioned in countless front page stories whenever the market turns south.

The recent downturns in the market are perfect evidence of this fact. Articles from Stockholm to Shanghai touted the VIX (a.k.a the Fear Index) as a bellwether of market sentiment. The Options Insider even got into the act with our recent Comment Letter on the absurdity of the upswing in the VIX.

With all this talk of the VIX as an indicator, it may surprise some to know that the VIX is actually a tradeable product. The CBOE currently offers the VIX in two flavors: plain vanilla futures and exotic chocolate options. While the former are still struggling to find an audience, the latter has traded over 5 million contracts since February 2006 and is the most successful new product in CBOE history.

What is even more surprising is that VIX options have achieved significant penetration in the retail sector of the market. Everyone expected institutional traders to embrace these products. After all, a perfect hedge for volatility risk is the holy grail for any professional options trader. However, the fact that retail investors are now trading these options proves the power of the VIX as a marketing tool.

BEYOND THE VIX
Realizing that they've captured lightning in a bottle, the CBOE is looking to expand their volatility offerings even further. Starting this Friday, they will begin publishing a new benchmark index known as VARB-X (VTY). This new index is aimed squarely at the institutional market, particularly volatility arbitrageurs.




VTY tracks the difference between the real and implied volatility of SPX options. Hopefully, VTY will enjoy more success than some of the CBOE's other esoteric volatility products (three-month & twelve-month variance futures, etc.) which have captivated academics but failed to find traction with institutional or retail traders.

While VIX is calculated continuously throughout the day, VTY will only be calculated at the close of the trading day. Currently, there are no VTY products scheduled for release.

TIGHTENING THE STREET
The strategic partnership between HedgeStreet and the CBOE is one of the more interesting derivatives alliances to emerge in recent years. The combination of an event futures pioneer and a leading options exchange holds great potential for creating innovative new derivatives products.

However, this promise has largely gone unfulfilled, primarily due to a lack of liquidity in HedgeStreet's product line. Traders looking to participate in the event derivatives market are confronted by bid/ask spreads that are prohibitively wide.

In order to rectify this problem, CBOE & HedgeStreet have added Susquehanna and several other specialist firms to their strategic partnership. The hope is that the presence of experienced and dedicated liquidity providers will tighten the spreads in HedgeStreet's event derivatives and make their products more appealing to traders.
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