Cboe Democratizes Volatility Products For Retail Traders

The myth that retail traders are not sophisticated enough to use options strategies is rapidly being debunked. The Options Clearing Corporation (OCC) reported that the total volume of options contracts in 2024 was over 12 billion, approximately 10.6% higher than in 2023. While the general increase in options usage is well known, its adoption by retail investors has recently piqued the attention of industry stakeholders. In September 2024, Fred Tomczyk, CEO of Cboe Global Markets CBOE – the world’s leading derivatives and securities exchange network – published an op-ed titled, Empowering Retail Investors Creates Powerful Impact, which acknowledged the increasing options trading sophistication of retail investors and highlighted their importance in maintaining and growing a healthy investment ecosystem at a time when retail investor participation hit an all-time high.

Retail traders are leveling up the sophistication of their strategies, and volatility products that were once primarily considered the domain of institutional investors are being embraced more by retail investors. Cboe is helping this democratization by offering easily accessible volatility products available during Cboe's Global Trading Hours. 

Retail Investors Are Capitalizing More On Volatility

Against the backdrop of growing macroeconomic uncertainty, retail investors have begun to utilize options-based investment solutions to capitalize on market volatility. As detailed in an October 2024 Bloomberg article, retail investors are gravitating toward volatility ETFs, many of which are linked to the Cboe Volatility Index, or the VIX^®, one of the most well-known indices globally for assessing and observing future market volatility. The value proposition of these volatility ETFs is simple: they reward unitholders when a sharp market downturn occurs, which usually coincides with the VIX Index rising. Market uncertainty stemming from events such as Russia's invasion of Ukraine to the momentary anxiety induced by the Japanese carry trade are recent instances when the VIX rose, benefiting volatility ETF holders.

With geopolitical risk rising due to tariff threats and the economic implications that could manifest in the future, many investors are now considering utilizing volatility-based investment solutions to mitigate risk or maximize profit within their portfolios.  

Utilizing Cboe's Volatility Strategies

Cboe offers investment products and solutions that facilitate volatility exposure and allow investors to tailor their exposure as needed – making them distinctly different from most other volatility ETFs. Though each offering's intended audience is distinct, its value proposition is consistent.

VIX Index Options enable traders and investors to hedge against market volatility, speculate on future volatility and increase portfolio diversification. VIX Options are cash-settled, European-style derivative instruments with monthly and weekly expirations.

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.

Cboe's Mini VIX Futures are one-tenth the size of the regular VIX futures contract, offering flexibility in managing volatility risk and providing appropriate exposure when allocating among smaller managed accounts.

Cboe's 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. They also provide greater choice for expressing directional views and managing equity market volatility exposure. These follow a European exercise style, are physically settled and have P.M. settlement.

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 can also enable investors to take short-term views on the movement of forward volatility.

Cboe, Facilitating Retail Access Through Their Solutions

In October 2024, Cboe announced that its index options would be available on Robinhood Markets Inc.’s HOOD platform in keeping with the expanded retail investor interest Cboe is seeing. Through this agreement, Robinhood customers will have access to Cboe's index options – such as  VIX Index options – when managing their portfolio.

In speaking about this development, Dave Howson, Global President at Cboe Global Markets, stated, "Retail traders have expanded their financial knowledge and trading experience in recent years to become much more sophisticated, and now, they are seeking new opportunities to further elevate their trading strategies. Cboe’s proprietary index options are among some of the world’s most popular, liquid and actively traded options products, which we believe will be a welcome addition to the retail trader’s toolkit. Cboe’s index options have long been used by institutional investors to manage risk and build wealth. Now, with Robinhood offering index options to its growing user base, we are excited even more investors may access the utility of our products."

Taking Action With Cboe

The VIX Index plays a pivotal role in the financial markets by measuring market sentiment and expected volatility. With macroeconomic uncertainty rising and having the potential to increase market volatility, retail 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 to hedge portfolio risk.

For retail investors beginning to familiarize themselves with options, Cboe's  The Options Institute offers everyone from beginners to experienced traders a forum to familiarize themselves with foundational knowledge on options or learn new developments taking place within the derivatives landscape. The Options Institute makes options trading more accessible as it provides comprehensive courses and tools, equipping investors with the knowledge needed to navigate the complexities of options trading effectively. 

It is important to remember that responsible trading is based on defining an investment objective and using analysis and informed decision-making to determine the most appropriate trading strategy, not emotions. Volatility products offer the potential for higher profits for those who are comfortable with the risk that comes with them and who are looking for significant price movements through products with low correlation to other assets. Understanding how such products work and the associated risks, just like any other financial asset, is paramount. 

To learn more about how Cboe can empower you as a retail investor, visit the Cboe website by clicking here.

Featured photo by Stephen Dawson on Unsplash.

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