CBOE Thrives on Volatility

Chicago Board Options Exchange chairman and chief executive officer Bill Brodsky and president and chief operating officer Ed Tilly broke bread with the New York City press corps in January in order to update the scribes on the exchange operator’s initiatives. Traders Magazine presents a slice of the Q&A session.

Media: Which players are you targeting in the institutional arena?

Tilly: The insurance industry, for one. Consider a customized policy. You may open one today. It has S&P 500 exposure. The natural hedge to offset that exposure would be a contract that expires in 365 days from today. That’s the most pure vanilla. The other is long-term exposure to the S&P 500 for longer dated insurance. And that can be years-10 to15 years. For longer-dated options, on C2, we are able to list the SPXpm settlement, which is the convention. Electronically accessible contracts for a much longer duration for which we don’t necessarily need to rely on the traditional market maker on the floor of the CBOE.

So we have a number of solutions that are at the ready for the insurance sector. Also, for the last two years we have had a dedicated insurance industry track at our annual risk management conference. This year will be our third year that we are actively pursuing the insurance industry.  

Media: Volume in volatility products is soaring. Who trades these Vix-related options? Retail? Hedge funds?

Tilly: Both. But the big, big uptick if you look at the Vix options chart is from the Barclays effect. I can’t stress that enough. Barclays [Bank] was the first mover in creating an exchange-traded note that tries to replicate the exposure of a futures contract. You have the VXX [iPath S&P 500 VIX Short Term Futures ETN]. You have the VXX options.

Media: So Barclays trades options?

Tilly: At the end of the day, Barclays needs to go in to CBOE options and futures to hedge their exposure.

Media: And others followed Barclays?

Tilly: Yes. It’s been a race to the marketplace. Each major institution wanted to have their own product. But at the end of day, they must be able to trade futures at the CBOE Futures Exchange or options at CBOE. They have to be able to hedge that exposure so they can deliver that to ETN noteholders, that same experience. So that was a big, big move.


Media: Besides the note issuers, hedge funds are the bigger traders?

Tilly: Yes. 

Brodsky: Still, in the early days we didn’t expect any retail. We were shocked. The options customers are the most sophisticated individual customers of brokerage firms. We were surprised by the level of involvement by pure retail individuals.  


Media: Did you work with the retail brokers?

Tilly: We spent a great deal of time educating the online brokers. The concept of parity [between the VIX and the futures] was an extremely difficult one to grasp. You have to look at the futures contract, not a spot VIX. It’s a big difference if you are a securities trader and you own the underlying and sell a call.


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