Friday, August 8, 2008

Increasing Options Volume in Double Inverse ETFs Crowding Out VIX Options?

One year ago this month, VIX options peaked in popularity. As the graphic below from shows, VIX options continue to trade at impressive volumes of about 100,000 contracts per day, but this number is about 30% below the levels from August-November of last year.

Part of the reason for this change in trading patterns is that some of the portfolio hedging trades formerly conducted with VIX options are now being redirected to options on double inverse ETFs. Back in February, in Interest in VIX Waning? I spoke about how the new trend seemed to favor QID options over VIX options. Six months later, the popularity of QID and SDS options persists, with QID + SDS options now accounting for approximately one third of the volume in VIX options.

More recently, the rise of double inverse sector ETF options has translated into more choices for investors and lower market share for the VIX. While sector options are more likely than VIX options to be used for speculative purposes than as portfolio hedges, the surge in options volume for double inverse sector ETFs is worth highlighting here, with the SKF (double inverse sector ETF for financials) and DUG (double inverse sector ETF for oil and gas) receiving the most interest.

The rise of inverse and double inverse ETFs raises a number of questions about the VIX and poses some challenges for the index as a portfolio hedging tool and as a sentiment indicator. I will delve into these two subjects in more detail in the coming weeks and months.


Anonymous said...


Interesting thing happened today, i was speaking with three lady traders at the coffee shop this A.M., conversation got around to shorting the market,,their thought was the ETF were easier and safer to use,,than options and no longer went that way, they are using all pert. ETF's, i know it is not a gender thing but i wonder how many think as they do??


Jim said...

This should not negate the value of the vix as a market timing tool. The vix/vxv still seems to be performing well especially callingthe recent bottom on July 14.

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