Trade Volatility As An Asset Class With Cboe VIX Index Products

For many individuals, a predictable market environment is oftentimes the preferred state of play. However, market uncertainty can be a good thing, as it creates new opportunities for investors to utilize volatility products and capitalize on a momentary market dislocation. Simply put, volatility that arises from market uncertainty can benefit investors and traders with the right tools and strategies in place.

Assessing And Observing Volatility

Within the investment domain, volatility is defined as the rate of change in an asset's price over time and is an indicator of risk. While assessment of the riskiness of individual securities or an asset class can be done from actual historical price changes (i.e., realized volatility), having insight into expected future volatility (i.e., implied volatility) allows investors and traders to take strategic actions regarding their portfolio's positioning, in anticipation of future market movements.

The Cboe Volatility Index, or the VIX, is one of the most well-known indices and the first benchmark index that measures expected future market volatility and provides investors and traders with insight into the broad U.S. stock market. The VIX is essential to understanding market sentiment and measures the market’s expectation of volatility over the next 30 days based on S&P 500 Index options by using the midpoint of real-time S&P 500 Index option bid/ask quotes. Cboe Global Markets, Inc. CBOE, the proprietor of the Cboe Volatility Index, has several VIX-based investment offerings, which allow investors to manage or gain exposure to the S&P 500^® Index, considered the leading indicator of the broad U.S. stock market.

Easily Accessible Volatility Products

While volatility has traditionally been viewed as something to be avoided, contemporary thinking has proven that volatility is an inevitable element in investing. However, arbitrarily seeking out and accepting volatility will not lead to outsized returns. Instead, utilizing specific investment offerings allows investors and traders to gain volatility exposure in a bespoke and measured manner.

For individuals looking for volatility exposure, Cboe has multiple offerings that facilitate this need: VIX Options, VIX Futures, Mini VIX Futures and Options on VIX Futures. Though each offering's intended audience is distinct, the value proposition is consistent.

VIX Index Options are cash-settled, European-style settled derivative instruments with monthly and weekly expirations. Traders and investors can use these investment offerings to hedge against market volatility, speculate on future volatility or increase portfolio diversification.

VIX futures reflect the market’s estimate of the VIX Index’s value on various future expiration dates, enabling traders to speculate on or hedge against future market volatility. Because VIX futures provide exposure to volatility independent of market direction, they facilitate both risk management and alpha-generation volatility strategies.

Mini VIX futures are one-tenth the size of the regular VIX futures contract and reflect the market's estimate of the VIX Index on future expiration dates. However, they are intended to offer more flexibility in managing volatility risk and provide appropriate exposure when allocating among smaller managed accounts.

Options on VIX Futures, Cboe's newest tradable volatility product, provide greater choice for expressing directional views and managing equity market volatility exposure. Options on VIX Futures are contracts that represent the right, not the obligation, to either buy or sell a particular underlying futures contract at a specified price on or before a specified date, the expiration date. These follow a European exercise style, are physically settled and have P.M. settlement; most options on futures expire at the closing of the market on the last trading day.

A primary benefit of Options on VIX Futures is that they provide more "mid-curve style" exposure, facilitating a new and different payout profile. The mid-curve style exposure of Options on VIX Futures will also allow investors to take short-term views on the movement of forward volatility.

Benefitting From Volatility 

The VIX Index plays a pivotal role in financial markets by measuring market sentiment and expected volatility. With the increased frequency of volatility-inducing events, such as unexpected governmental policies or disruptive technologies from foreign countries, ensuring one's portfolio can benefit from or mitigate the impact of these developments is crucial. As such, traders and investors can leverage volatility in managing their portfolios by utilizing the investment solutions designed by Cboe to enact strategies such as volatility arbitrage or portfolio risk hedging.

As investors become more knowledgeable and sophisticated in using derivative instruments, their demand for volatility-based product education can be expected to continue to increase. To facilitate this, Cboe offers The Options Institute, an educational platform providing everyone from beginners to professional traders with a forum to familiarize themselves with foundational knowledge on options or learn new developments taking place within the derivatives landscape. The Options Institute provides comprehensive courses and tools, equipping investors with the knowledge to navigate the complexities of options trading effectively. 

It is important to remember that responsible options trading is based on defining an investment objective and using analysis and informed decision-making to determine the most appropriate trading strategy, not emotions. Understanding how options work and the associated risks, just like any other financial asset, is paramount. 

Featured photo by Tyler Prahm on Unsplash.

This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.