Interview: John Hiatt, Director, Research at CBOE, on the New Options on Volatility Indexes and the CBOE Crude Oil ETF

Mar 30, 2011

The Chicago Board Options Exchange recently announced a slew of new derivative products on its volatility indexes, as well as record trading in its VIX options. The exchange proposed new options on the CBOE Crude Oil ETF Volatility Index as well as options on five volatility indexes that track individual stocks. In addition, the CBOE Futures Exchange launched security futures trading on the popular CBOE Gold ETF Volatility Index (GVZ) on March 25. And Tuesday, March 15 marked the first time in CBOE’s history that VIX options volume passed the one-million-contract mark in a single trading session, with 1,038,002 contracts changing hands.

JLN Options editor Sarah Rudolph spoke with John Hiatt, Director, Research, at the CBOE about the proposed new options on the volatility indexes and the use of volatility products.

Q: Why are volatility derivative products in such demand now?
A: Clearly, there has been an increase in the number and types of users that employ CBOE’s volatility products. One of the factors that has helped increase volumes in VIX derivatives is the creation of exchange-traded notes tied to CBOE VIX products. This began in 2009 when Barclays Capital began offering two exchange traded notes – the VXX and VXZ. A number of other issuers followed Barclays in creating similar structured products, and at last count, assets under management pegged to CBOE VIX were about $2.3 billion.

Barclays and other issuers then use our VIX futures and options to hedge those structured products. That’s one factor in the demand for our products.

Second, derivative products generally tend to trade more when there is high volatility. For example, the average daily volume in the SPX options has risen because of recent events. Given what has been happening in Japan and Libya, we’ve seen increased volatility in the VIX itself, so you would expect volume in products based on the VIX to go up as well.

Q: What was the impetus behind the recent announcement that you’re filing to launch options on the CBOE Crude Oil ETF Volatility Index?

Equities are just one type of financial asset. Most financial assets have options on them, or more specifically, options on ETFs that represent a particular asset. The volatility of an asset is important, especially when there is an option involved. What we’re doing is applying the same calculations we use to measure volatility in the equity markets to another asset.

Not every volatility product will behave the same way the VIX on the S&P 500 Index does. For example, crude oil volatility can behave very differently from volatility in the S&P 500. It’s usually not a drop in the price of oil that people worry about; rather it’s a large spike up in price. With oil, the correlation between the underlying and volatility is often positive, whereas the correlation between the VIX and the S&P 500 generally is negative. We think there is enough differentiation in crude oil volatility that it makes sense for us to offer a separate product on it. That is also true with our CBOE Gold ETF Volatility Index, which launched March 25. Gold tends to behave somewhat like oil. The volatility will behave differently from the VIX. [Ed. note: GVZ info at]

Q: How can the new options on single stock volatility be used?

It’s the same argument you’d use for trading derivatives on the VIX itself – you’re just doing it with a different underlying asset.

Q: What was behind the huge record volumes in the VIX options and VIX futures at the CBOE last week?

A: Last week, on one day we traded over a million CBOE VIX options and just under 100,000 VIX futures. An important factor in those records was that the events taking place in Japan and Libya happened at the same time as the settlement of our March contracts. The volume records happened last Tuesday, and the contracts settled on the open on Wednesday. That volatility in the Japanese market the day preceding our settlement was significant. The following day was almost as active as that record Tuesday.

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