On Tuesday afternoon a presentation about the Design and Trading of VIX and Other Listed Volatility Derivatives was given by Bill Speth of CBOE and Dominic Salvino from Group 1.
Dominic Salvino noted that volume in VXX options for non-standard expiration dates is very similar to VXX standard expiration volume. This can be taken as an indication of there being an appetite for shorter dated volatility index options as well. The result of this expected demand has been introduction of the CBOE Short Term Volatility Index (VXST) along with VXST futures and the pending listing of options on VXST. Salvino expects that when options launch (scheduled for April 10 pending regulatory approval) that this will drive VXST futures volume to higher levels.
It was pointed out that near month VIX option volatility has historically been much higher than back month volatility. The expectation is that VXST options will have very high implied volatility as they will expire weekly and usually only be listed for a few weeks. He showed how VXST and VIX respond to nervousness by talking about VXST and VIX price changes on Friday (going into the Crimea vote this past weekend) and then VXST and VIX changes on Monday after the fear had subsided.
Bill Speth followed up talking about the VIX settlement process which is the same process that is being used for VXST settlement. The first point that Speth makes is that VIX is calculated using mid-point pricing while the VIX settlement level is determined by opening trades. The SPX trading prices often differ from the mid-point pricing. In order for an opening price to be used in the VIX settlement calculation there needs to be a non-zero bid for the option. Also, once there are two consecutive non-zero bids the following option contracts are truncated from the settlement pricing process.
On VIX settlement day the opening process is called the HOSS Auction process will find a single clearing price that maximizes the number of contracts traded within an allowable price range. Each option series is a separate auction which currently does not allow any spread trades. Finally, orders are accepted right up to the open and no option series will open with an imbalance.
There is a timeline associated with the VIX settlement process. The day before VIX settlement, after the market closes, there is a list published of the “VIX Likely Series” after the close. This is a list of SPX options that were actively quoted that day. At 7:00 am the CBOE Order Book opens and begins accepting orders. At 8:15 am there is a cutoff time for strategy orders then at 8:30 am the SPX series that have no imbalances will open. Generally between 8:45 am and 9:15 am the VIX settlement value is typically disseminated. The last step is after 9:15 am a VIX Settlement Series file is posted to the CBOE Futures Exchange website.
The presentation discussing VIX settlement closed with Bill Speth mentioning that with VXST settlement occurring every week there are now 64 opportunities to participate in trading the opening in SPX options on settlement days.
Dominic Salvino then took the stage again and discussed other CBOE Volatility products such as Variance Futures (VA), the Interest Rate Swap Volatility Index (SRVX), and the CBOE/CBOT 10-year US Treasury Note Volatility Index (VXTYN).