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VX option is the next slide to launch on Monday, as I mentioned. Joining us today to speak about VIX Options on VIX Futures, we have Rob Hocking, who is the Global Head of Product Innovation here at Cboe, and he is the head of our Cboe Labs team, which is the team behind the creation of options on VIX futures. We also have Jacob Kavner, who is a trader at the market maker IMC. Lawrence Chen, who is Founding Partner and CEO of Golden Horse Fund Management, an investment management firm based in Singapore, and Megan Miller, Senior PM, Head of Systematic Edge Options and Co-head of Custom SMA at Allspring Global Investments, which is a global asset management firm in the U.S. Rob is going to kick us off with an overview of the product we are launching with on Monday.
After that, we will move into a moderated Q&A with our panelists, and after our prepared Q&A, we will have time to take audience questions. So please do submit your questions over the course of the presentation via the Q&A button or icon, within your Zoom toolbar, either at the bottom or the top, and we will get to those questions at the end of the session. In terms of timing, this will be a 30-minute webinar, so we will wrap right around 9:00 A.M. Eastern Time.
And one quick housekeeping item: all information and commentary from this webinar is considered on background and not to be used for direct attribution to the speakers or their respective affiliations. Compliance with these terms is mandatory for all media, personnel, and entities in attendance. Please reach out to cboecommunications.com if you have any questions. With that, I'll pass it over to Rob.
Excellent. Thank you, Natalie, and good morning, everyone. As Natalie said, please keep the questions coming in. You know, this is for you, and we wanna make sure we hit all the topics that are of interest. And so, you know, whether your outlook on the market is bullish, bearish, somewhat in between, investors turn to VIX to better understand, you know, what volatility the market is pricing in. That's why Cboe is extremely excited to expand our franchise of tradable VIX products, coming this Monday, October fourteenth, like Natalie mentioned, with the introduction of options on VIX futures.
Our suite of tradable VIX futures, cash-settled options, variance futures, and now physically delivered options on VIX futures, I know that's all a handful to keep straight, can provide market participants with the flexibility to hedge a portfolio or really to employ strategies to generate returns from differences in broad-based market volatility, which you'll hear more from our guests on this webinar. So by adding a mid-curve style option, mid-curve in the sense that these options expire before the future that they settle into, VX options will allow us to, you know, better answer the demand that we're hearing from customers. Mid-curve style options are already a well-known tool and available in many other asset classes, but when utilized as part of the VIX product suite, they can really provide a whole host of benefits.
A few of them, just weekly listings of options on a very liquid front-month VIX future. We can answer the growing demand for shorter-dated options by listing daily VIX option expiries, providing more granularity and really smaller premiums to trade. More data points on the vol- of- vol term structure and price discovery, leading to really better risk management for users. And then, you know, VIX options will be PM settlement as opposed to the cash version AM settlement of our existing VIX options products. And then really the possibility, as I mentioned, it's more granular short-term view on forward volatility, which is a lot of the demand that we've been hearing from the market. And so moving to the next slide.
With futures as the underlying asset, these options will be CFTC-regulated, enabling a new, you know, wide variety of market participants that are restricted from accessing US security-based options today. It'll provide them, you know, a product to express their views on equity market volatility, and as you can see from the slide, the initial listing schedule, we intend to offer daily expirations. That's probably the biggest change with regards to VIX options and what these will allow us to offer. We'll begin with the front five daily contracts, with the addition of the following two Fridays for users looking for a little additional optionality a bit farther out on the curve, and it might be good to highlight, you know, we get a lot of questions on what's the difference between your existing VIX options and the VX options that you're listing?
And some of the bigger ones, as I've mentioned, settlement is a big one. VIX options today, the cash-settled version, are AM-settled. The VX options, as you'll hear us refer to, are PM-settled, so they will settle using the daily VWAP process that we settle each and every day, the VIX futures too. The settlement type on VIX options is cash-settled. The VX option will be physically delivered, so another very big distinction. You will actually get delivered at expiration, the underlying VIX future that it's tied to. The exercise style is the same. They're both European. And then the expiration date, some nuances there. Cash-settled VIX options are obviously the same as the future. They both settle on the same date with our opening settlement process in SPX.
VX options, as I mentioned, will settle directly into the futures, and they will do that on a daily basis. So with the VWAP, at the end of each day, the one that's also utilized as part of TAS, you will be able to settle directly into the futures. On the next slide, I want to dig a little bit deeper into the contract specs and really wanted to stress that VX options will never expire on the same day as the final settlement date of the underlying futures. So every VX option will expire into the front month futures at the time of expiration. Although when the VX option is listed, depending on the time of month, it may be listed at—I, it's kind of confusing to say.
It may be listed into the second month future, but as it comes closer to expiry, it will expire into what is then the front month future, and hopefully, if there's questions on that, we can get into that in Q&A, but I wanted to highlight that they will always settle into the front month future. Also, strike increments. This is a common question that we get. The initial strike listings, you can see 0.5-point intervals between 10 and 20, 1-point intervals between 21 to 40, and then 2.5-point intervals above that. We think that gives enough granularity for people to trade and what they've been asking us for, without, you know, putting added requirements on our market-making community to quote, you know, strikes in every 0.5-point increment.
Now, I will add that the exchange has the ability to add, you know, more strikes as we go along. So as demand builds, hopefully, in these, if we get requests in to have different strikes listed, it is something that we can do. But we will kind of turn to the market and listen to them on what needs to be listed. On the next slide or our final slide, we have a resource hub online. It's the work of an amazing Cboe team. They've, you know, collectively constructed FAQs, additional information on contract specs, and these resources are being added to in real time. So we expect a few more to go up even today in preparation for Monday's launch. So really, please check it out. It's an incredible resource.
This is something new that we've been trying to do with every product launch. It was very successful in the launch of our variance futures that we had on September 23rd , and now we're turning to options on VIX futures to make sure all that information is there in one easy place to consume. And so, you know, please frequent that page and dig through there if you have questions, and if you can't find the information, then obviously reach out to the Cboe team and we can get you answers to your questions. And so with that, I really wanted to jump into the Q&A portion, and Natalie, I'll turn it back over to you.
Great. Thank you very much. So Megan, I would like to kick off Q&A with you. I would like if you could please just give us a quick overview of your firm and how your firm utilizes options strategies in its portfolios.
Yeah, happy to. Hi, everyone. Thank you, Cboe, for having me today. I'm excited to be here and help celebrate the launch of your new product. So Allspring is a global asset manager, and we have over $500 billion in assets under management, and our platform covers equity, fixed income, alternatives, which include our option-based strategies. So our option origins go back to the seventies, and then we started writing covered calls on single names. Fast forward to today, we're still doing that, and we see a big demand from our retail clients looking to write calls on single names.
Now, because we're talking about VIX, we also have a lot of institutional and other retail clients that are interested in VIX strategies, protection-based strategies, and so that's where we focus our VIX solution set, and so we're active managers, but we follow a systematic process, and that systematic process is very rules-based, transparent, and we do that to make sure that we are transparent with what we're doing, and so we're excited about this new offering because it helps us be. It helps us follow that rules-based approach better, specifically when utilizing VIX.
Great. Jacob, I want to move on to you from the market making perspective. How do you, how would you describe the liquidity profile in VIX futures and VIX options today?
Yeah, I think, both VIX futures and VIX options are overall in a pretty healthy spot from a liquidity perspective. You know, VIX, VIX futures are one of the most liquid volatility products in the world. The ability to have constant volatility exposure without the need to roll strikes, I think is pretty powerful. VIX options I also think are in a pretty healthy spot from a liquidity perspective. I think that the penny tick size introduction to the option screens has overall tightened the markets a little bit and made them more liquid. You know, as always, the VIX option pit is healthy and alive as well.
Glad to hear that. Lawrence, you are based overseas in Singapore. Thank you so much for joining our webinar. I know it's late for you there. We really wanted to have someone from APAC region on, because part of the reason why we are bringing these options on futures to the futures exchange, to CFE, is to give access to our global clients who maybe are unable to connect to the securities and options exchange for whatever reason, and have an easier time facilitating trades on the futures exchange. So I wanted you to explain a little bit about how your firm accesses volatility trading today, and how Cboe's new options on VIX futures product will facilitate access to trading volatility for the APAC region.
Okay. Thank you, Natalie, for having us, having me. Good morning to everyone, and good evening to Asia. Golden Horse Fund Management, we've been around for the past 10 years. We have two funds, which is Global Macro and the Bullet Proof Fund. We look at two spectrum of the tail risk, which mainly from equities to bonds... to commodities and to FX. To us, being able to have a instrument like a VIX VX futures options to hedge the two end of the tail risk, the tailness of it, is quite important to our traders. As we are trading on a medium frequency, we do not need to be able to settle on a daily basis.
So the long bias to us, which the VX options futures that's going to be launched should be an instrument that is quite interesting to us. So, that's something that we are quite, quite excited to understand more.
Yeah, definitely. And Rob, I wanna bring it back to product design a little bit. You talked through all of the integral product specs that we've been engaging with clients on to try to bring the best option, you know, to market on the fourteenth. In terms of product design with listing the front five days and the two weekly Fridays, what has client feedback been on those being the expiries at launch, and how did we land on launching with those expiries?
Yeah, it's a great question. And really, this was to answer the customer demand. Obviously, short-dated option trading has really hit the market in full storm over the last few years. With daily expiries in SPX, you could see the logical progression. People started asking for daily expiries in VIX. When we launched the one-day VIX, that was kind of in response to this, capturing the movement of kind of that daily move in the form of an index. But people said, "Hey, can you list a future on the one-day VIX?" That wasn't really possible, just due to how the VIX is calculated, the nuances of it. Listing a future on that wouldn't have been good for the market, in my opinion.
With the ability to launch a physically delivered option, it gave us the ability to launch a daily contract. That was really the onus around the first five days. Let's start with the first five days. That's where the majority of the volume trades in SPX. I think right now, you know, we're still hovering around 47%-48% of SPX options trading on the day of expiration. By offering this kind of five days a week, we, once again, the burden on liquidity providers was small. It's only five days, and we wanted the additional two Fridays just to give some longer-dated options in case somebody wanted to trade a little bit longer-dated. But really focusing on that front five, it was just answering the customer demand of shorter-dated trading.
Definitely. And I think the feedback that we've gotten is that granularity helps our clients be a lot more surgical in their approach to trading volatility, which, as you mentioned, was something that we were seeing in SPX options already.
Yeah. It also helps with, you know, it's a new kind of risk characteristic on the term. You're not cannibalizing something that already exists.
Right.
You know, it's slightly different in many nuances to the actual VIX options that we have, but now you have a shorter-dated product. You have the traditional VIX options, where we have a lot of liquidity in it, as Jacob was talking. You have the futures side. Like, it really rounded out the product suite well.
Good. Megan, you spoke a little bit about how your fund utilizes options, strategies in your portfolios. Can you explain how your strategies could utilize this new options on VIX futures products, and why having access to new listed products like this one is important to you and your funds?
Yeah. So we, I expect to utilize these new products in our institutional accounts and mainly for our protection-based strategies. So we run a number of strategies, income focused, protection, tail risk focused. And for any of those strategies, it's important for us to be able to deliver performance that the clients expect, especially in the institutional space, mainly because we have, you know, boards that we're reporting to and clients that really demand that the strategy performs as we've shared and as they expect. And so one of the reasons and one of the ways that we do that is mitigating the risks associated with nonlinear strategies.
And mainly, what's important for us to measure is the granularity of the and structure the granularity of the product such that it performs as we expect and as we intend it to do. And so for us, it's important to create a portfolio that has the exact granularity that we're seeking, and so this new product helps us get there. We're also excited that the VIX options on futures are on futures and not on the index. And so we have found success with options on futures. It's a new area that clients have been leaning towards and for a number of reasons. But the fact that these options settle on the future is exciting and what I particularly like is the PM settlement.
A number of our options expire in the PM, and so it was always a difficult conversation to have. You know, our VIX option expired in the morning, and, you know, then the VIX spiked, and then we didn't capture it. And so now with everything settling in the PM, in our portfolios, it just helps, again, form those expectations so that we could be, you know, deliberate and experience for our clients that's what we intended and expected to be.
Yeah, and I love your comments regarding the fact that these are options on futures, because we have really been leaning into with variance futures that launched in September and a couple of products that we're bringing in 2025 , really, building out our futures products on our CFE, the Cboe Futures Exchange, leaning into that client demand for more futures-based strategies. So I'm glad that you mentioned that. Jacob, getting back to you, how do you anticipate the new options on VIX Futures products will help to further round out your volatility toolkit, so to speak? And specifically, what new benefits do you see this product providing that the existing products in the market, maybe some of the ones that Rob touched on and what you had mentioned comparing and contrasting liquidity, don't currently offer now?
Yeah. So while I think that the VIX options market is in a healthy spot from a liquidity perspective, I think that there are a couple of chinks in the armor, and I think that the new VX options are really, I think, partially designed to address those. So I think, like, the two really intriguing features to me about the VX options are, as been mentioned by Rob and Megan, the physical settlement, and then also the price- time nature of quoting. So from the physical settlement side of things, you know, the fact that these options are gonna be expiring into the quite liquid monthly VIX futures, I think is really quite important.
You know, we already have the weekly VIX options that exist already, and, you know, they expire at the same time as the weekly VIX futures. But, you know, quite frankly, the weekly VIX futures are just not that liquid right now. And I think, as a result, as an options market maker, when your primary delta hedging instrument is pretty illiquid, what you have to do to account for that risk, is you have to widen out your options markets. And, I think that's sort of what we're seeing with the already existing weekly VIX options. And, yeah, I think that the fact that the VX options are gonna be expiring into the monthly VIX futures will just make it easier for options market makers to trade it.
From the price-time quoting, I think that. Yeah, like, market makers, I think, can be more incentivized to tighten on price-time quoting expiries. You know, there are definitely benefits to pro-rata quoting as well. You know, market makers are just more incentivized to put more size in the bid and the ask. But I think it's really nice when a fund like VIX can have certain expiries that are price-time, and then certain expiries that are pro-rata as well. So similar to how in S&P 500 you have SPXW and SPX price-time and pro-rata, I think that just, you know, the different styles of quoting will just, you know, enable VIX to satisfy the needs of more customers.
You know, what exactly this new VX instrument is going to be introducing, you know, as Rob mentioned, it's gonna be a lot more targeted towards gamma. I think that, you know, giving customers and market makers the ability to really isolate that exposure is important. You know, the monthly VIX options that, you know, sometime in the month, they are pretty gamma intensive, but also for a good amount of the month, they're not. And, you know, there are a lot of other factors that can really dictate the PNL of some of those longer duration options, that's not gamma. So yeah, I think that it's gonna be really nice to be able to just, more clearly isolate that exposure consistently.
Yeah, for sure. Lawrence, by bringing options on VIX futures to CFE, as I mentioned, Cboe Futures Exchange, how do you see the VIX liquidity pool and accessibility further expanding into the APAC region, and what opportunities do you see this providing as we move forward?
Okay. So I think the increased liquidity is definitely making it easier to trade. I think that's one of the main factors that we are quite keen to look at it. And the other one is the smaller bid-ask spread and the faster execution of the trades will make it conducive for us, despite that we are medium frequency. I think the faster execution, the tighter bid-ask spread, I think that's quite key. And last but not least, the trading of the VIX option allows investors that are based in Asia, like ourselves, to have an indirect long and short the market, especially if you look at the VIX since August fifth has been on the high side.
With the higher expectation of the risk, I think that is something that we would like to have better access to if we are having more exposure in our equities as US-based.
Rob, I wanna finish my prepared Q&A with asking you a final question. Assuming we have a successful launch on Monday, which we are all hoping for and anticipating, what further iterations of the product might we see coming down the road?
Yeah, I love these questions, and I love the successful product launch part as well. I think we always listen to the market. You know, that's how we respond with product development. Whatever the market wants, we do our best to deliver. And so if further iterations of this, whether it's you know, an option on the mini product, whether it's additional strikes, additional expiries, we'll answer that as the demand comes in. I think you wanna start small. Like I said, you don't wanna burden your liquidity providers out of the gate as people are feeling out a new product and seeing how it works. And so, you know, we kind of went with that streamlined approach with this launch. But we have the ability to expand the product set.
And so, you know, we'd be excited to expand the product set because the demand is there. We'll wait and listen to the market as we go.
Great, love that. Always engaging with our clients. So to move into some Q&A from the audience, and please do utilize that Q&A button at the bottom of your Zoom toolbar if you wanna ask a question, Rob. Some of these are really based on what we have existing already. One question is: Are weekly VIX futures going to be delisted? So let's please clear that up.
Yeah, I don't think there's any plans to do that right now. I think what Jacob highlighted was a very important one, that hasn't been where the liquidity formation has been as of late, so they are a little less liquid. We understand that. We're always trying to round out the product suite, hence, you know, bringing the options forward on the actual, you know, front month future and physically delivered. I think Jacob did a great job of highlighting all the reasons why, and so no plans to delist them right now. You know, once we get these out there, maybe having these options trading will build liquidity in the weekly VIX futures, maybe it won't, but we'll continue to evaluate that over time.
And then maybe you can clarify, too, when the daily options will be listed. There seems to be confusion around, on the go-forward basis after.
Oh, sure. Yeah, great question. And so as, as we highlighted, we're listing with obviously the week of the 21st, 21st, 22nd, 23rd, 24th, 25th on the 14th . However, this was a new product at OCC, so they asked us to have effectively a week of seasoning of the option before we hit our first expiration. It just makes it easy operationally for them. And so starting on the 21st , that morning, we will list the 28th , and then that evening, the 21st option will expire. When we move to the 22nd , that morning, we will list the 29th , and then that evening, the 22nd will expire, and so forth and so on as we move through the, the term structure. That will be how, how we do it to start.
Like I said, we've already had some inquiries on, "Could you list two weeks?" We may do that, and so in that situation, if it were on the 21st , we would be listing the fourth instead of the 28th , 'cause that would already be out there. But we're gonna wait till that morning of expiration to list the next option and then continue from there.=
Megan, maybe you could take this one. How do these options on VIX futures fit into a systematic framework, and how can they be used to generate alpha?
So we structure our portfolio such that we have expiries that go across the term structure. So how I expect to utilize the VIX options on futures is striking and making sure our maturities are evenly split out between that term structure. And so it's just part of our rules-based, systematic approach, and really that's just to ensure that we have coverage, again, across the term structure and also across the skew. So that's how we actually use an optimizer to make sure that we're meeting all of the constraints in those portfolios, and it's again to capture that skew and or the term structure and the skew of any of the products that we're writing.
Specifically when it comes to VIX, we want to make sure that we are covering our right side and our left side of that tail.
Rob, maybe a couple of quick hitters. Will these trade in Global Trading Hours or only Regular Trading Hours? And will these be cash-settled in the future?
We'll see how things goes. No, no plans for cash settled in the future. I think that was a heavily debated thing, cash settled versus future. And I would say the customer demand out won out on the physical deliver side. With regards to GTH, yes, we're working towards getting those listed in GTH. It was an OCC limitation and a rule-filing limitation, so we are going through that process with OCC, and as soon as we can get the proper regulatory framework in place, I think we have plans to list them in the Global Trading Hour session.
Will options be rolled out on Mini VIX futures?
Yeah, as I mentioned, that will be customer demand. So if we have the ability to, I don't think you wanna oversaturate the market to start a new product, and so we picked obviously options on the very, very liquid front month VIX future first, but it's something we can definitely expand into.
What else do we have? This is, like, a good one: Why do we not have daily VIX index options already?
It has to do with generally the settlement process. You know, we run an auction in SPX every Wednesday or roughly every Wednesday, depending on how the calendar days fall, to settle the contract. And so it's a strip of SPX options that all go off as part of an auction, and the weighted price of those options gives you your settlement value in SPX in VIX. Because that is a very, very, you know, I would say, robust process, doing that on a daily basis didn't really fit the bill for having a daily contract. It was really too taxing for the market, and that's why we think this is a great, you know, offering. It solved many problems. It gets a product offered to customers that can't trade security options today.
It takes advantage of a very liquid front-month future, and once again, gives us a little bit different, I would say, contract exposure relative to what the product suite has.
Thank you everyone so much. It is 9 A.M. We do have other questions that we will try to answer individually, so look out for those in your inbox if you did submit a question that did not get answered. We will hopefully have a replay of this webinar posted on the resource hub that Rob mentioned. If you were joined late or you have colleagues who were unable to join, there will be a replay of this. Please do check out the resource hub. We have just posted use case scenarios and historical pricing models on that hub about 10 minutes ago, so we do have lots for you to consume over the weekend to prepare for trading on Monday.
And please do reach out to me or anyone else at Cboe who represents you if you have any questions on options on VIX futures. Have a great rest of your day. Goodbye!