The financial wizards on Wall Street have come up with what may be the most dazzling product yet. The Chicago Board Options Exchange (Cboe) is preparing to launch options on futures on an index that itself is based on index options.
The exchange plans to issue options linked to Cboe Volatility Index (VIX) futures, which in turn are tied to the S&P 500 index options.
The new contract is set to be listed for trading on October 14, pending regulatory review. As trading volumes of complex derivatives soar to record levels, Cboe is rolling out a series of structured products.
Even though industry professionals acknowledge that the product is overly complex, Cboe sees a viable use case. Currently, VIX index options are settled in cash and traded through securities accounts, making them off-limits to some investors due to licensing or regulatory constraints.
In contrast, futures options can be physically settled and traded in futures accounts.
Cboe stated in an announcement, "Such index futures options will be regulated by the CFTC, providing investors with access to VIX options products. By combining Cboe's popular VIX futures with options capabilities, this product will offer market participants an effective way to hedge market volatility and establish unique volatility risk exposure."
As investors increasingly use derivatives to boost returns, make short-term bets, or hedge rising market risks, Cboe has been striving to meet the growing demand for derivatives. Last month, the exchange announced that the revamped S&P 500 index variance futures would begin trading in September.