Tuesday, September 23, 2008

CBOE Adds Puts to VIX Binary Option Choices

As I discussed earlier this month in VIX Binary Options, the CBOE is now offering binary options on the VIX. The first out of the gate was VIX binary calls, which were launched in July. Starting today, there are now VIX binary puts.

The CBOE noted the following about their new binary options:

"CBOE's binary options have experienced impressive volume early on, reaching as much as 10,000 to 12,000 contracts on some days and averaging 2,500 contracts daily during September. CBOE has seen strong institutional use of these contracts. Based on customer feedback, we fully expect the addition of puts to spur more brokers-dealers to come on-line to handle binaries, thus enabling more individual investors to access these products.

The Designated Primary Market Maker (DPM) for binary options on the S&P 500 Index (ticker symbol BSZ) is Chicago Trading Company; the DPM for binary options on the CBOE Volatility Index (ticker symbol BVZ) is Group One Trading, L.P.

I feel obliged to add that so far the success of the binary options has been more the result of the SPX options than the VIX options, but if you are one of those who does not expect to see a VIX in 30s for very long, VIX binary puts might be something to investigate. I can only hope that the bid-ask spreads are low enough to make these viable trading instruments.


Anonymous said...

Spread is certainly an issue. Hard to "price" the VIX, but much easier to take a binary stand, exicting development. Thanks for the heads up.

Anonymous said...

How accesible to the public are these binary options. can the ordinary investor with buy Vix binary options or is this the big boys game?

Anonymous said...

Have we put in a base for the vix above 30? This recent jump in vol may change how people view the vix as a gauge if we are going through a paradigm shift as we speak. Thoughts?

Bill Luby said...

In some respects, binary options are tailor made for the little guy. They are relatively uncomplicated, with maximum upside and downside always being in advance. I heard someone call them "options on training wheels" and that description makes some sense.

The volumes for the binaries continue to be low and the spreads are relatively high, which are hurting these instruments. That and a lack of leverage probably makes them less attractive to large players.

Regarding a VIX above 30, I count five separate instances (clusters) of the VIX hitting 40 since 1990. In only one of those (1997) did the VIX not hit 40 again shortly thereafter. For the other four, we saw 5, 7, 13, and 21 subsequent days in which the VIX made it into the 40s again. Given the magnitude of the current difficulties, I would be surprised if we do not see at least one more spike into the 40s.

As for a new floor in the VIX, 30 is on the high side, but not unprecedented. We have had several instances in the past where the VIX spent two full months almost exclusively at 30 or above.

On the other hand, if the country can get behind a bailout plan that shows some creativity and potential, then I would not be surprised to see volatility to slip back to the mid-20s shortly thereafter.

...at least until we dive into the housing, jobs, and consumer spending can of worms.



Anonymous said...

Bill, thank you for your insights re: vix above 30. A popular topic, but one in which stats like those you've shared are not often quoted. The depth of your analysis is what keeps me coming back to the blog! Cheers.

Anonymous said...


Just want to know if there is a lots of trader who are short call vix oct k 35 ?

Anonymous said...

...please where can I buy a unicorn?

Bill Luby said...

I am partial to Unicorns Я Us, but you might be able to get one cheap on eBay (but be sure to watch out for fake unicorns there!)

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