Straight From The Source: Matt Moran

June 23, 2008 speaks with CBOE Vice President Matt Moran. assistant editor Heather Bell recently spoke with Chicago Board Options Exchange Vice President Matt Moran about options on ETFs and indexes, BuyWrite strategies, the VIX and more.


Index Universe (IU): What's driving the huge growth in ETF options and index options right now?

Matt Moran (Moran): There are several factors involved in the growth of these products. One would be growth of customers: There's been tremendous growth in hedge funds and hedge fund assets, and more and more of them are using these types of products.

Over the past year, volatility has grown quite a bit, as well. Fourteen months ago or so, VIX was around 12 or so, and then it rose to the twenties and thirties in recent months. I think a lot of people assume that higher volatility always leads to higher volume, which is not necessarily the case. If we look at the past couple decades, there is another factor, as well. Often we see tremendous growth in the index-based options, particularly when the markets aren't doing that well. For instance, in the late 1990s when the markets were doing very well on the up side, we saw huge growth in our equity options as the markets grew 30-40% per year. When the markets are taking a pause - and we have seen some down markets in the past few months - you see more investors focusing on their overall portfolios and risk management versus picking stocks, which is hard to do in a tough market environment. ETF and index options can help them do that very well.

The growth in the cash ETFs can also help grow the options because there is a synergistic relationship between the two. As the cash ETFs become more recognized, people might say, "Hey, I have an interest in some of these products. I'd like to see what I can do with them." Options in actuality give you more flexibility and more power if you have a market outlook on an ETF or your stock.

IU: How important are ETF options and index options to CBOE's business?

Moran: Of the 944.5 million contracts traded at CBOE in 2007, 53% were in equity options, 24% in the cash-settled indexes, and 23% in ETF options. Institutional investors often are most interested in those products with large notional values to manage the risk in their portfolios. The biggest contract by far in terms of notional value is the S&P 500 index options contract. Last year, the average daily volume on that was over $90 billion a day, which accounted for more than half of our volume. The S&P 500 contract is very important for those people managing the size or risk of their portfolios, and the contract has been growing at about 40% or 50% annually in recent years. Last year, volume in options on the S&P 500 at CBOE was up 52%.

Among other CBOE index options contracts, VIX options volume was up 363% over last year, and the Russell 2000 grew by 277%. So a number of our products are experiencing very strong, record-setting growth.

IU: What do people use ETF options for?

Moran: It's interesting. If you look at the size of the NASDAQ-based products, you have the options on the QQQs, the MNX - which is the mini NASDAQ - and then you have the full-sized NASDAQ, the NDX. The full-sized NASDAQ is 40 times the notional size of the QQQ, so at least in theory the two products are geared for very different audiences. The Qs are probably more geared for smaller retail investors, whereas the big NDX product is geared toward the bigger institutions who can handle that size.

Interestingly enough, though, it's my understanding that because the QQQs are so liquid, institutions will use all three of the products: the full-sized NDX, the medium-sized MNX, and the QQQ as the small size. With the QQQ, the institutions realize they might not be getting a huge-sized product necessarily, but they like the huge volume and liquidity.

IU: Is the size of the product mainly what investors look at when choosing between similar contracts?

Moran: That's one of the factors, but other factors will be the volume, liquidity and open interest.

IU: How big of a growth area is options on ETFs for the CBOE right now? There are far more options on ETFs than on indexes.

Moran: On the one hand, the cash-settled index options - mainly because of the S&P 500 product - are our biggest-sized products, and for larger institutional investors, those are very important. On the other hand, if you look at the growth rate in ETF options for the first five months of this year, it was 73% above the same period a year ago. By comparison, the growth rate for the equity options was 22% and the growth rate for the cash-settled index options was 10%. So the ETF options are certainly CBOE's fastest-growing product line right now.

IU: How are people using VIX options?


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