In February 2014, the CBOE Futures Exchange began listing contracts on the short term volatility index (VXST) – a 9-day variant of its flagship 30-day VIX futures. In an interview with John Lothian News Editor-At-Large Doug Ashburn, CFE’s Jay Caauwe discusses the launch of VXST, the rationale behind the listing of VXST futures and which participants and strategies will be prevalent.
“There are volatility moments where the 30-day product does not get you the action or return you are looking for,” says Caauwe. “If we look at August 2011, when S&P downgraded the U.S., VXST spiked to the neighborhood of 80.” VIX also rose on the news, but topped out at around 50. Similar differences in price action between the products routinely occur around economic releases, corporate actions and other news events. In other words, VXST may be a more appropriate way to hedge single-event risk.
In terms of liquidity, Caauwe reminds participants that the index is “backstopped” by deep and liquid markets in the SPX options that underlie the index, and that, like all CFE products, VXST’s designated primary market maker (DPM) is there to ensure a liquid and orderly marketplace. Finally, Caauwe said that options on VXST futures are forthcoming, but no date has been set. The addition of options is expected to further deepen liquidity in the futures product.
Is volatility an asset class? While the debate rages on, in a sense the argument boils down to semantics. The VIX has emerged as the place to hedge broad-based equity risk. VIX futures on the CFE set new volume and open interest records all through 2013 and early 2014. Market participants invest in volatility products for portfolio protection and diversification. Whether that makes volatility an asset class or an insurance product is irrelevant. VIX, and now VXST, have become critical tools for risk management, and recent volume increases speak to the growing recognition of their importance.