January Blues Boost VIX Futures

February 06, 2008

VIX futures are seeing volumes increase in the face of market uncertainty.

January was a pretty unpleasant month for U.S. markets, but for the VIX futures contracts trading on the CBOE Futures Exchange (CFE) it was an entirely different story: The contract volume was up 91% from January 2007, with 85,731 contracts trading hands for the month. That's about 89% of the CFE's total contract volume for January.

VIX futures contracts, not surprisingly, have been doing well in the increasingly volatile market environment. January wasn't even the highest-volume month in recent history. In November 2007, one of the more volatile months of the year, a total of 173,864 VIX futures contracts were traded, a 303% increase over November 2006. August 2007 was another fairly volatile month that saw a dramatic increase in the number of VIX futures contracts traded.

"What we're seeing a lot of are hedge funds using VIX futures as a hedge against spikes in implied volatility because of the inverse correlation to the S&P 500," says CBOE Director of Business Development Michael Mollet. And while hedge funds are by far the primary users of the contracts, others include VIX options traders looking to hedge their positions, SPX market makers, and mutual funds, he added.

The increased volatility in recent months has played a huge role in the volume increases, Mollet said.

"I think there was so much volatility in the markets last summer, it's become more common for people to look to the VIX futures," he commented. Prior to July 2007, it was an entirely different environment with regard to volatility, with VIX futures contract volumes seeing spikes mainly whenever volatility spiked.

"Now that volatility is at a higher level, investors are much more likely to turn to VIX futures contracts," Mollet added. The constant exposure resulting from the VIX being quoted every day in the media has also helped to drive investor interest.

VIX futures contracts were launched in March 2004, while options on the VIX were launched in February 2006. The VIX itself measures the price of short-term options on the S&P 500. Generally, the more investors are willing to pay for options on the S&P 500 to hedge their exposure, the higher the VIX level and the greater the uncertainty in the markets. Not surprisingly, this means that the VIX tends to have an inverse correlation to the S&P 500 itself.

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