Sunday, July 6, 2014

VIX and the business of risk trading

The trading of VIX futures and options has exploded and this shows how investors are changing their views on how to hedge risk. The average volume of options on the VIX is now 700,000 contracts a day and futures trading is 186,000 contracts a day. Futures trading has increased by a factor of 10 since 2010 and options have increased by a factor of three over the same period. This explosion in growth has come while the markets have been calm and the trend direction has been lower. 

Trading hours has been extended and the VIX complex is the revenue and growth engine of the CBOE. The index may now be international "fear gauge" standard and we have not even seen a major spike in volatility. The new macro standard for risk hedging may be holding some VIX in a portfolio. This is a different form of hedging.

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