What's Behind The 40% Rise In VIX Options Contracts?

In a recent article, Cboe Global Markets Inc. CBOE reported on the growth in VIX options trading in the past few years. In 2023, this growth has surged – VIX® volatility index options trading has averaged over 740,000 contracts daily this year. This represents a notable 40% increase compared to recent years when volumes remained around the 500,000 average daily volume (ADV) mark.
What’s Behind The Increase In VIX Trading Volume?
Cboe notes that the uptick in VIX options activity is primarily driven by an increase in call options, which are up 54% (compared to a 16% increase in put options). This surge in call options is approaching the all-time high ADV observed in 2017.

Image by CBOE Global Markets

Examining customer activity and specific strategies, two areas have experienced notable growth: first, calls and call spreads have increased by 54% compared to 2022, suggesting a rising demand for tail hedges. Second, combos have seen a remarkable 237% increase compared to 2022, indicating increased activity among relative value volatility accounts, which typically trade VIX options delta-neutral.

This surge in VIX options activity reflects a resurgence in using these options for hedging purposes, particularly as the VIX option skew has steepened. VIX 2M skew (25-delta call/put ratio) has reached near a 5-year high, driven by demand for VIX upside calls. This contrasts with SPX's skew, which still trades below its long-term average.

It's important to note that while SPX options are often used for protecting portfolios against typical market declines, VIX options are typically employed for safeguarding against extreme, unforeseen events (e.g., black swan events). The appeal of VIX options lies in the potential for significant volatility spikes in a short timeframe, which is harder to achieve when the VIX Index is at lower levels.

Additionally, the rise in VIX options can be attributed to market dynamics, including improved macroeconomic outlook, lower realized volatility and rapid portfolio adjustments. Investors have re-risked their portfolios, and leverage has increased, leading to greater demand for VIX options as a hedge against unexpected events.

This increased activity has also attracted the relative value volatility community, leading to a significant rise in delta-hedged VIX option trades (with a 237% YoY increase in combos volume). This community capitalizes on VIX convexity without directional exposure to the underlying asset, contributing to the diversity of market participants and use cases within the VIX options ecosystem.

The surge in VIX options activity in 2023 indicates a growing appetite for unconventional hedges and risk management strategies in a changing market landscape. This trend underscores the adaptability of market participants and the evolving role of VIX options in modern portfolio management.

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